Everybody “knows” that first quarter earnings growth for U.S. stocks will be anemic this year. The projection for year-to-year earnings growth on the Standard & Poor’s 500 stocks is just 0.93%, according to Standard & Poor’s Capital IQ. That compares to 19.68% earnings growth in the first quarter of 2011.

Logically this means stocks are headed for a correction as companies report their first quarter results beginning with Alcoa (AA).

“Logically,” that is, for most realms outside the stock market. In the logic of the stock market, however, the result is by no means so certain. What everyone knows is frequently discounted in share prices. But sometimes what everyone knows in his or her head isn’t really believed by investors. Intellectually, investors may know that projections for first quarter earnings growth are extremely low, but in their heart—and in their investment actions–they may remain much more optimistic. And, anyway, the earnings results of last quarter are history. For stock prices going forward, the important numbers are companies’ projections—guidance–for the second quarter and the rest of 2012. It’s expectations for future growth that make investors buy or sell.

So what will it be—Up? or Down?—for the market this earnings season?

And what strategy do I recommend? Read more

Sell Middleby (MIDD)

I’ve owned Middleby (MIDD) in my Jubak’s Picks portfolio since May 20, 2008 and I think it’s now time to take some profits.

Nothing unusual about these shares. And that’s exactly the point. At this stage of the rally I’d like to keep close watch on valuations and sell individual stocks when a specific price seems to be getting out of line. I’d rather leave a few dollars on the table now than risk a major loss.

So how do you tell if a stock is a sell now rather than a rocket with more gains ahead? I’d suggest taking a look at historical valuations. Read more

Update Middleby (MIDD)

Given the mood of the market right now, Middleby’s (MIDD) May 12 earnings report was a perfect storm of bad news. The company missed Wall Street earnings estimates for the first quarter by 8 cents a share and revenue fell by 11.5% from the first quarter of 2009.

And nobody wanted to hear a word of explanation. The stock fell on the news by 6.4% on May 13.

In its conference call the company explained the revenue decline. The first quarter of 2009 saw an unusually large lump order from a customer rushing to roll out a new menu. Subtract that lump and revenue actually climbed by 8.6% year to year. Nobody cared.

The quarter was difficult, said CEO Selim Bassoul, but the company started to see improvement in sales and orders. The Food Processing Group saw a big increase in sales as orders deferred in 2009 were finally placed with Middleby as customers increased their capital spending plans for 2010. Order trends for the Commercial Foodservice Group turned positive in the second half of the quarter. Nobody cared.

 Why did nobody care?

 That’s what happens when a stock climbs by 49% from the February 8 low to the May 12, the day of the earnings announcement. A lot of good news—like improving sales—is baked into the stock and all investors want to hear is the company say that things are even better than they expected.

 And that’s what investors didn’t hear in the report or the conference call. Instead the headline takeaway by Reuters was the company’s worry over rising steel costs. The company said it thought it could address the problem by gains in efficiency in its supply chain. But (ready?) Nobody cared.

 I’ve been impressed that Middleby has just kept on with its strategy of growing market share in a fragmented sector even during the worst of the Great Recession. On May 4, for example, Middleby acquired PerfectFry, an Alberta maker of ventless countertop frying units from the commercial foodservice industry with about $4 million in annual sales. I’m also impressed with the improvements in operating margins and on the balance sheet.

 Given the stock’s huge run off the February 8 bottom, I don’t think the sell off on earnings is especially troubling. I think this is another stock, like Jubak’s Picks Cummins (CMI), Intel (INTC), and Cisco Systems (CSCO), that is set to benefit as customers put in orders to make up for spending that they deferred during the recession. (For more on why you want to own stocks like these now see my post http://jubakpicks.com/2010/04/20/go-for-the-growth-and-where-to-find-it-at-a-reasonable-price/ )

 I’m raising my target price just a tad to $67 by November 2010 from the previous $65 by November.

 Full disclosure: I own shares of Cisco Systems, Cummins, and Middleby in my personal portfolio.

Update Middleby (MIDD)

Has Middleby (MIDD) finally moved off the back burner?

Middleby’s shares were up 29% from February 8 through March 5, and the relative strength on the stock has moved to 72 for the last three months from 56 over the last six months. (Relative strength measures how a stock’s price performance compares to all other stocks on the market in the period. A relative strength of 72, for example, means the stock has outperformed 72% of all stock during the period.)

The market was anticipating that orders from the commercial food service industry—everything from fast food restaurants to school lunchroom kitchens—will finally first stabilize and then turn upward in 2010.

The company’s earnings report on March 3 vindicated that anticipation. Read more

Update Middleby (MIDD)

On November 10 Middleby (MIDD) reported third quarter earnings of 83 cents a share, four cents a share better than Wall Street projections, but still 19% down from the third quarter of 2008. Revenue fell 7.5% from the third quarter of 2008. At $154 million revenue was about $10 million below the Wall Street consensus.

If you used a magnifying glass, you could find signs of improvement in the revenue number. In the second quarter of 2009 revenue was down 8.6% from the second quarter of 2008. In the third quarter of 2009 the year-to-year decline was just 7.2%.

And in the earnings number too. Gross margin climbed to 40.3% in the quarter from 38.9% in the third quarter of 2008.

Middleby continues to do what it has always done. Read more