Say Hello to My Little Friend: Volatility!
Shaunak is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm a Scarface fan, probably like a lot of you here. So given a chance, I'll always try to force in Tony Montana quotes here and there. So how does it fit in here though?
Well, that moment when Tony blasts through the door with his Tommy is THE moment when things really get started. It is the make or break moment of the Oliver Stone masterpiece. Similarly, Earnings Season is the make or break time for a company as well. Stocks are at their volatile best during the season and all relies on the report produced by the company. A Good or Bad report will determine the stocks with immediate effect.
Europe and China are the primary dampeners, as concerns over these economies continually affect the stocks in the US. A strong start boosted by the drop in the unemployment rate didn’t even carry through a day as stocks dropped in the intra-day trading.
Here’s a look at a few stocks that I believe will stay good as we enter Earnings Season and beat any major volatility.
Alcoa (NYSE: AA):
About a year ago, Alcoa reported a profit of 15 cents per share while recently, the aluminum giant reports earning of 1 cent per share. This underperformance is mainly attributed to the slump in aluminum prices in August. Although aluminum prices have gone up to hit a six month high, that hasn't really translated into better performance by AA yet.
Alcoa will face challenges from a slowdown in manufacturing in the US as well as China. Europe's debt crisis, having put many countries into recession, hasn’t helped them either. Alcoa produces and provides aluminum for a wide range of sectors, from automobiles to appliance makers. Demand has been mixed from their market and prices have been weaker.
It is evident that Alcoa is highly dependent on the economy and until some progress is expected on that front, AA will remain steady for the time being.
Samsung has definitely come out strong despite its high profile legal battle with Apple. They've been driven by a tremendous response to their high-end smartphones and are expected to report a high-profit quarter yet again for the fourth quarter running.
This might be the peak for Samsung as earnings in the fourth quarter are likely to decline with seasonally weak demand for semiconductors and an increased marketing spend to compete with rival mobile phone makers like Apple, Motorola, Nokia and LG Electronics. With such wide competition in the market it'll be hard to maintain a fat margin on their products as Samsung will need to offer subsidies to boost their sales and attract their customers.
Reduction in margins will not cause Samsung to go down at all and they’ll remain profitable as they have already been.
Yum Brands (NYSE: YUM) :
Last quarter, Yum reported solid Q1 results, posting a profit of 96 cents per share, up from 54 cents per share, last year. Revenue climbed 13% to $2.74 billion which beat industry analyst projection of a 73 cents per share profit on revenue of $2.71 billion.
In the U.S. sales grew 5%, led by a increase at Taco Bell and Pizza Hut.
Amongst emerging markets outside the US, India also looks like it could be a big growth opportunity, and KFC and Pizza Hut have been doing well there as well.
What we need to keep in mind is that a majority of YUM's profits come from China and that has changed now with operating profits falling by 4%. YUM may not continue to produce profits as it has been, but there still is a huge market that needs to be tapped into. I doubt how much they'll be able to capitalize on their growth potential. I like YUM due to their safety and profitability though I don't expect some enormous return on investment.
The Wrap :
This is how I see things unfold this season. YUM, Samsung and AA will be minimally volatile here onwards and are safe stocks as far as I can see. Their shares will change minimally and there should not be any drastic drop or rise in their share prices.
Shaunak88 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.