All we've been hearing about lately are Fed rate increases and inflation. This has, in turn, cast a cloud over the market as many traders head to the sidelines. But, from my perspective, the recent pullback in the market has created some unbelievable opportunities in beaten-down stocks. Case in point: KB Home (KBH), which reported its earnings last week.
As you can see, KBH has struggled to gain any traction since its May 10, 2021 high. And this makes sense, right? A homebuilder faced with spiraling material costs, with fear of rising rates, doesn't seem like a good bet. But lo and behold, when the company reported its earnings last Wednesday, the stock rose 16% as it painted a very rosy picture for the future. And it points out that, when everything is said and done, nothing matters more than earnings. At the moment, the market is betting that earnings will be weak when in fact we might see -- as we did with KBH -- that this is not always the case.
One stock I am keeping an eye on is Netflix (NFLX), which reports its numbers this Thursday. (Full disclosure: I picked up some shares on the pullback at the end of the week.) The stock has pulled back over 25% since its most recent high and, as you can see in the chart below, is technically oversold, with an RSI that was in in the teens at the start of the day and stochastics in single digits.
I bring up NFLX since, as one of the FANG stocks, it will be one of the first highly-visible companies to report its earnings, and the reaction to its numbers could help set the stage for what is about to come. And while an earning's miss and or weak forecast could hit the stock further, just the opposite could occur if they surprise to the upside. So, from my perspective, at this beaten-down level, it's a decent reward-to-risk trade.
The list of stocks that have been hammered is endless, from Zoom (ZM), which is down 70% from its all-time-high, to SNAP, down over 50%, to Shopify (SHOP), which has lost 40% of its value in just two months. Trade Desk (TTD) is almost 40% off of its high. I bring these companies up since traders could not get enough of them at one point -- at much higher prices -- but now just won't touch them. I should also point out that the weakness in tech stocks just ahead of earnings includes the NASDAQ testing its 200-day moving average for the second time in a week. As you can see in the chart below, it held the first time around and, if it holds again, might give traders a reason to put some money to work.
We might find that current worries are justified. For example, if interest rates rise and it costs more for companies to borrow, it's likely to have an impact on earnings. Ditto on inflationary costs. But, as KB Homes pointed out in its conference call, the demand for housing is so strong that they are able to pass on supply cost increases to home buyers while increasing their margins. The same thing applies to automobiles; demand is so strong that the auto companies can't keep up with demand.
We won't have to wait much longer to see how earnings season plays out. And, given the market reaction of late, there seems to be a lot of doom and gloom. To that end, our Chief Market Strategist Tom Bowley will be conducting a FREE webinar this Monday, "Q4 Earnings Sneak Preview", where he will look ahead to upcoming earnings to identify companies that might report blowout or weaker-than-expected numbers. A great way to prepare for what might be about to come. Just click on this link to learn more about this event as well as a few other key webinars that will take place over the next week. Very timely!
At your service,
John Hopkins
EarningsBeats.com
