Earnings Off to Weak Start as Banks Fill Rainy Day Funds

Earnings Off to Weak Start as Banks Fill Rainy Day Funds

Earnings season began on a weak note as major banks set aside billions for credit defaults after coronavirus shut down the U.S. economy.

JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) took more than $19 billion of combined loan-loss reserves in the first quarter. It was an increase of several hundred percent, a response to millions of Americans losing their jobs.

Bank stocks were already down sharply in anticipation of the bad news. They fell immediately after the reports but held their March lows. While Covid-19 has hurt the U.S. economy more than expected, most banks entered the crisis well capitalized. They also trade at or below book value.

If the economy reopens sooner than feared, some of the loan-loss provisions could be added back to net income. This could make JPM, BAC and C go-to symbols after the crisis. They also trade hundreds of thousands of options contracts per day, creating the potential for leveraging moves.

JPMorgan Chase (JPM), daily chart, with 50- and 200-day moving averages.

Roku’s Covid Boost

WFC is in a different boat because regulators have restricted its asset growth following its fake-account scandal in 2016.

A handful of financials benefited as higher volatility boosts trading or fee revenue. Those included Goldman Sachs (GS), Morgan Stanley (MS) and Bank of New York Mellon (BK). Investors often look past these surges, which often disappear in subsequent quarters.

As Market Insights has reported, companies like Amazon.com (AMZN) are flourishing as coronavirus keeps millions of people cooped up at home. One of them is Roku (ROKU). The digital-media innovator preannounced a 49 percent increase in streaming hours during the first quarter.

While the economic lockdown hit advertising revenue, investors focused on its widening market share. That spurred confidence that ROKU is thriving in the face of competition. The stock is up more than 600 percent since late 2017. Complete earnings are due on May 7.

Roku (ROKU), daily chart, with 50- and 200-day moving averages.
Roku (ROKU), daily chart, with 50- and 200-day moving averages.

Taiwan Semi Beats Again

Taiwan Semiconductor (TSM), the world’s No. 3 chipmaker behind Samsung and Intel (INTC), reported another strong quarter. Earnings, revenue and guidance all beat estimates despite coronavirus weighing on demand for consumer electronics.

The positives for TSM are the spread of 5G networking and high-performance computing like artificial intelligence. While the economic slowdown has some impact on chip demand, analysts have seen little threat to the longer-term positives. If anything, the crisis may be help semiconductors. That’s especially true as video games, remote work and cloud-computing grow.

Teledoc (TDOC), whose platform lets physicians meet with patients online, is also benefiting. On Tuesday afternoon the healthcare-technology company hiked its revenue guidance following “an unprecedented surge in demand for its services.”

TDOC has roughly doubled this year. Its complete results are expected around April 28, but official timing hasn’t been provided yet.

One final company to watch may be Bed Bath & Beyond (BBBY). Like most traditional retailers, it’s crumbled in the face of online competition and now social distancing. Still, it rallied after beating estimates and showing growth in digital offerings like in-store pickup.

BBBY trades at less than half of book value, with short interest accounting for more than 80 percent of its float. That may create the potential for a squeeze higher if the turnaround continues.

In conclusion, coronavirus is already forcing the banks to prepare for credit losses. However semiconductors seem to be weathering the storm as other companies like ROKU and TDOC benefit.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.