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The Marketplace Buzz: Looking At Q2 Earnings


The Marketplace Buzz is a new weekly newsletter to feature Seeking Alpha's Marketplace/Premium authors.

With Q2 earnings winding down, and mixed signals across the board, we asked our authors how they're interpreting the news. Like the news, the views are mixed.

We also ask a couple new marketplace authors a few questions on what they're looking to do on the site for readers.

A few interesting ideas - GEO, CHKP, GIFI, and more - come up, and lots of different approaches are reflected in these answers.

Welcome to the Marketplace Buzz*, a new weekly newsletter to highlight Seeking Alpha's Premium service/Marketplace authors! Each week, we'll share interviews, round table discussions on market themes, and various insights from these authors. If you're interested in getting a sense of what these authors or the marketplace is all about, follow this account or sign up for the free newsletter (at the bottom of the article).

*The name is provisional. Suggestions welcome!

Q2 Earnings Round Table

Q2 earnings season has been, on the surface, somewhat mixed - companies have generally beaten low expectations, but earnings have still declined. The U.S. stock market seems unflustered by this dissonance, sitting just off of all-time highs. A confusing batch of macro data and an eventful political season ahead of us also add to the confusion. With earnings season almost over, we thought it worth checking in with Marketplace authors with three questions about their thoughts on earnings.

1. Earnings are mostly over. With mixed macro data - GDP low, jobs up, e.g. - what is your view on the market or current opportunities? What are you telling your readers coming out of this round of reports?

Maj Soueidan of The GeoTeam, author of GeoInvesting Prime: We are mainly bullish on Microcaps and are constantly looking for the best undervalued plays that are misinterpreted by investors. For the first time since the Great Recession, we feel that investors are finally coming back to the microcap space. The global uncertainty caused by things such as volatility in oil prices, currency games by China and Brexit are bringing focus back to homegrown U.S. microcap companies.

In general, we feel that the macro picture is less correlated to the stocks we cover. We are focusing a lot of our effort on information arbitrage (InfoArb) that over the last year has given us the highest rate of return since these are either event driven or situational opportunities hidden in SEC filings, conference call transcripts and management interviews. These opportunities also arise when stock prices fall on misunderstood company developments. InfoArb is most prevalent in microcaps.

William Koldus, author of The Contrarian: After six consecutive quarters of declines in the as-reported earnings of the S&P 500 Index, the earnings downturn appears to be over, after this quarter's results. Thus, while I feel that the stock market is one of the most overvalued stock markets in history, surpassing 2007's valuations, and even surpassing 2000's valuations in some respects, and the broader stock market is priced to deliver negative returns for the next decade, the bubble could actually expand before it bursts as earnings growth returns to the stock market.

Chris Lau, author of Value Stocks for DIY Investors: Fed has no reason to raise rates in September in light of macro data.

Esekla, author of Esekla's Short Side (w/Crowdwisers): Unlike many pundits, I spent the recent months saying that the market would NOT crash. So, I've been telling subscribers to pay attention to the math and be patient, but not fearful. The nature of outlooks is that they change with new data; it's no coincidence that my short side was just recently introduced. The jobs reports are not what they seem on the surface. Italy and the combination of FOMC policy with U.S. elections are the next most likely big problems. Fortunately, the latter is mitigated by the tendency of candidates to not keep their promises. China is a time bomb, but nobody knows how long the fuse is. In the meantime, the mixed data makes this a stock picker's paradise!

Alexander Poulos, author of Undervalued Gems: I remain impressed with the market's recent advance. The move above the old highs on the S&P 500, Nasdaq and Dow 30 is bullish and bodes well for further gains as the year comes to an end. The portfolio remains skewed towards more growth-oriented names versus defensive companies such as utilities and telecom. As long as interest rates remain accommodative, the bull market is alive and well.

James Sands, author of Transports by James Sands: My market view moving into 2017 is conservatively positive, as I expect a tightening truck market to possibly provide some relief for transports. Additionally, rail stocks should get a boost through next year based on a low comparable during 2016. The upcoming Christmas and Thanksgiving season will hopefully shed some light on consumer demand and inventory levels. If demand picks up, even moderately, transports could witness a better performance next year.

Ranjit Thomas, author of Stock Scanner: The market has been rising on multiple expansion. It is rich by historical standards, but not when you consider the current low rate environment. With the 10-year Treasury yielding 1.5%, a 4 to 5% free cash flow yield on stocks is a good alternative. TINA!!

J Mintzmyer, author of Value Investor's Edge: The stock market is surging to new highs while both macro economic data and micro company-specific data is very mixed. Years of quantitative easing have clearly skewed equity market valuations and overall I'm very nervous about having much exposure to the broad markets.

Our research focuses on deep value plays, specifically in the shipping sector. This is one of the few areas where numerous profitable opportunities remain and the majority of stocks trade with horrendous expectations versus the lofty pricing in the broad market.

Fred Piard, author of Global Household Index: Based on historical median valuation factors, the S&P 500 is overpriced by about 24%. It is a lot, but not extreme. There are great differences between sectors and industries. I would put a red flag on Utilities and Energy. On the other hand, a few industries like Automobiles look like a bargain, and other ones like Biotechnology are fairly valued.

George Schneider, author of Retirement: One Dividend At A Time: Though macro data is mixed at this point, with both Chinese exports and imports contracting, and Japan still stuck in a rut despite various attempt to reflate their economy, our U.S. economy is coming through this earnings season better than expected. Though earnings continue to come in lower, they have been coming in better than expected. This is just enough to keep this Goldilocks economy on track and stock prices to resume their upward climb to new highs.

Damon Verial, author of Exposing Earnings: This quarter showed earnings growth that was slightly negative but can be considered flat. This marks the fifth consecutive flat quarter for earnings. Nevertheless, 69% of companies actually beat on EPS, meaning that earnings trades have not changed, fundamentally.

Richard Berger, author of Income From Covered Option Writing: We saw no surprises that would cause us to change our valuations of our target investment tickers which are all high-quality dividend income equities. I still am expecting a net flat market to slightly down over the next 12 months as it rises slowly pumped by congressional pork and stimulus in an election cycle and then fades after the November elections. The I.F.C.O.W. focus on harvesting dividends and boosting with covered option writing remains unchanged with an outlook for 8% to 12% boosted income earnings for the coming 12 months.

Bret Jensen, author of The Biotech Forum: As usual, second quarter earnings slightly beat the consensus going into the quarter. Expectations were for a 5.3% drop in profits within the S&P 500, instead we got a slightly lesser decline of "only" 3.5%. Still the market has been locked in a "profit recession" now since early 2015. With oil back down in the low $40s, the dollar continuing to be strong and with global economic activity at 2009 levels; it is hard to be sanguine around the overall market which is almost selling at 20 times forward earnings.

Value Digger, author of A Fundamental Investor's Stock Club: S&P stands at its all-time high and investors should exercise extreme caution when it comes to picking stocks. Furthermore, they must focus on fundamentals and they must avoid the speculative plays.

Elazar Advisors, author of Your Trading Team: There are a ton of risks out there. Even if everybody knows risk still exist. That said our latest model reads that markets should hold in the very near term. We want to see action around the upcoming options expiration, which will be key.

Richard LeJeune, author of Panick Value Research Report: The high yield sector seems over-bought. I have left some picks vacant and have been advising caution.

Ruerd Heeg, author of Trading Global Deep Value Stocks: I only discuss earnings of individual companies. I do not predict future earnings. I think the market as a whole is much overvalued, also based on the Schiller PE. I have warned for a downwards correction of the general market. I keep my readers posted of the short bets in my own portfolio.

The Traveling Investor, author of The V20 Portfolio: Equities are attractive, though they always have been. Over the past year the economy has always delivered acceptable results, fluctuations in the stock market reflected investors' emotions rather than any fundamental deterioration in the economy. A slowing GDP growth rate is quite different from negative GDP growth. Sometimes GDP growth slows, sometimes GDP growth accelerates. The economy grows exponentially, but growth doesn't. As for sector specific views, I believe that despite the bullishness among energy investors, the sector remains a death trap for investors hoping for a quick rebound. Companies are showing sufficient cash results at the expense of future growth, one will have to give eventually.

The Value Pendulum, author of Asia/U.S. Deep-Value Wide-Moat Stocks: A HSBC research report titled "Asia's 2Q16 earnings season: Little downside risk" dated August 11, 2016, compared the actual 2Q16 results of companies in the MSCI Asia ex Japan Index) against that of consensus estimates. Across the different markets in Asia, the Philippines and Thailand have been outperformers, as approximately 80% and 42% of the countries' companies in the MSCI Asia ex Japan Index beat the Street's numbers by at least 5%. Singapore is the most significant underperformer in Asia with more than 60% of its companies reporting 2Q16 results below consensus estimates. From a sectorial perspective, the Industrials and Consumer Discretionary sectors have the largest share of disappointments, with 56% and 33% of companies missing earnings estimates respectively. In contrast, roughly 67%, 56% and 55% of companies in the Utilities, Energy and Materials sectors have trumped analyst expectations by more than 5%. Note that this is an incomplete picture, as approximately two-thirds of MSCI Asia ex Japan Index constituent companies have yet to report results.

Consensus estimates reflect market expectations, so earnings beats and surprises tell us "what is not in the price" and offer buying opportunities. On that note, I stand by my earlier comment to subscribers that Singapore is the most attractive Asian market for deep-value bargain hunters, as it has the highest proportion of companies trading below book value, even exceeding other familiar hunting grounds for cigar-butts such as Hong Kong and Korea. With more Singapore-listed companies failing to deliver on earnings expectations, there would be opportunities for investors to "buy on assets" now and "sell on earnings" later. The Philippines remains one of the most promising growth stories in Asia with the country's working-age population accounting for two-thirds of the total population, a ratio that is expected to grow to 70% by 2030, putting it in the demographic sweet spot which is in stark contrast to its neighbors facing headwinds from an ageing population. The only question is price as the Philippines stock market is generally rich in terms of valuations; patient value investors should keep a watchlist of potential growth-at-reasonable-price (GARP) investment candidates. Sector-wise, the Materials sector is the most interesting for me, as depressed commodity prices have largely been priced in, with re-rating catalysts in the form of improved supply-side dynamics resulting from favorable government policies to reduce overcapacity for specific industries e.g. steel. I would avoid a majority of Consumer Discretionary stocks, as these are potentially value traps facing challenges such as shifting customer preferences, the trading down to good-enough, lower-priced products and technological/business model disruption.

2. What was the biggest surprise in your portfolio or coverage area, positive or negative? (Can be stock specific or thematic). How are you planning to act based on that surprise?

James Sands, Transports by James Sands: Based on the first half of the year, I would have to say that the biggest surprise is the...