Overall, earnings proved a high point in the first quarter with a number of companies beating analysts’ estimates, particularly in sales. Notable were Apple (AAPL), Netflix (NFLX) and Green Mountain (GMCR).
Although improved sales bode well for a beleaguered economy, JJ Kinahan, chief derivatives strategist at TD Ameritrade, says other factors are beginning to drag on earnings. “We’re seeing steady growth in these companies, but one of the problems we’re seeing in some is margin. They either will have to get out of ventures with very low margin or raise prices,” he says.
Springer says earnings have been the driving force in rising stock prices despite a less-than-stellar U.S. economy. “What we’ve had are decent corporate earnings,” he says. “You can have the worst economic numbers in the world, but if corporations are being efficient, then they can make profits.”
Chris Mayer, managing editor for Agora Financial, says many companies used the 2008 crisis to become more efficient and are reticent about expanding at this time. “We had a similar story in 2011 where earnings were all right while the macro economy seemed so lame. One reason is that the 2008 crisis was very severe and companies got very lean,” Mayer says. “Because they’ve been slow to expand coming out of that, they have the ability to produce some good earnings even if volumes don’t pick up to where they were before.”
Looking ahead to the rest of 2012, Mayer expects small-cap miners and U.S. real estate to outperform the rest of the market. He says miners are “a natural place to look for a rebound because the underlying commodities haven’t fallen as far as the stocks.” One miner he likes is Kronos Worldwide (KRO). In real estate, he says prices have fallen to attractive levels and there are some interesting ways of playing that market. He likes Howard Hughes Corp. (HHC). Conversely, Mayer expects utilities to underperform, saying they had a good year last year, but valuations are starting to get a little high (see “At a glance”).