Trading Places with Tom Bowley

Here Are The Two Most Important Ratios Before Earnings

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As our name would imply at EarningsBeats.com, we focus a lot on quarterly earnings reports. We've studied them every which way possible. As a former practicing CPA, it's in my blood. Yes, I'm a technician that understands the importance of technical analysis. But I also know that earnings and interest rates are the two primary drivers of a company's stock price over time. Solid earnings and earnings growth uncovers the best companies, while technical analysis helps us zero in on entry points and enables us to manage risk. I believe in both fundamentals and technicals, not one or the other individually.

Big banks like JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) kicked off earnings season on Friday. Here are how they reported their revenue and EPS vs. consensus estimates:

Revenues (actual vs. estimate):

  • Wells Fargo (WFC): $20.86 bil vs. $18.73 bil
  • JP Morgan (JPM): $29.26 bil vs. $29.90 bil
  • Citigroup (C): $17.02 bil vs. $17.06 bil

EPS (actual vs. estimate):

  • Wells Fargo (WFC): $1.38 vs. $1.09 (27% beat)
  • JP Morgan (JPM): $3.33 vs. $2.98 (12% beat)
  • Citigroup (C): $1.46 vs. $1.39 (5% beat)

From the numbers above, which of these 3 large banks would you say reported the best results? Call me crazy, but I'm going with Wells Fargo (WFC). They're the only bank to report better-than-expected revenues and their larger % beat on earnings was quite impressive as well. Stronger earnings growth tends to result in higher valuations.

Wall Street Reaction

There are two types of reactions. The first reaction is the "pre-earnings" reaction. Wall Street firms can meet with management teams up until the end of their quarter to find out how things are progressing. The "quiet period" begins after the end of their earnings quarter. So, after Wall Street meets with management, they'll likely be buyers or sellers of the stock. In the case above, if Wall Street prefers one bank over another bank, you'll see it in relative strength. Before we look at the charts, let's look at the numbers. The Dow Jones U.S Banks Index ($DJUSBK) recently bottomed on December 20th. From the close that day of 557.58, the DJUSBK rose to 638.54 at last Thursday's close, just prior to the bank earnings being reported on Friday morning. That represented a climb of 14.52%. To see relative strength, based on the numbers, let's see how this rally in the DJUSBK compares to the individual rallies of the 3 banks mentioned above. Here's how that stacks up:

Performance (December 20-January 13):

  • Wells Fargo (WFC): +19.53%
  • Citigroup (C): +16.30%
  • DJUSBK: +14.52%
  • JP Morgan (JPM): +9.94%

Clearly, Wall Street was betting on a stellar report from WFC, which is exactly what they got. As far as the earnings reaction, here's how that went down on Friday:

Friday Performance:

  • Wells Fargo (WFC): +3.68%
  • Citigroup (C): -1.25%
  • DJUSBK: -1.49%
  • JP Morgan (JPM): -6.15%

Based on all of the above, it was clear to me that Wells Fargo (WFC) was expected to deliver the best results and they did. WFC was the overwhelming leader, as chosen by Wall Street. Need further proof? It's so obvious in this chart:

Wells Fargo has seen its relative strength climbing consistently throughout the last year, while the other two? Not so much. You can focus on fundamentals and all the negative media stories about WFC all you want, but it won't change the fact that Wall Street has been accumulating WFC. We need to be prepared to put all the MBAs on Wall Street to work for us and for our money.

I've always said to invest in leading companies in leading industry groups. Banks exploded higher into earnings season with the rise in treasury yields and WFC was a clear leader. Before you buy a stock, I'd look at (1) the stock's performance relative to its peers, and (2) its industry group relative to the benchmark S&P 500. If both of these ratios are climbing, I'd be very bullish the stock, following Wall Street's cue.

Analyzing Upcoming Earnings Reports

We have created a brand new ChartList at EarningsBeats.com to help us sift through the myriad of earnings reports due out over the next several weeks and lock in on those where Wall Street has already anointed big winners. It's not as difficult as you might think. This afternoon, at 4:30pm ET, I'll be hosting our "Q1 Earnings: Sneak Preview" event where I'll unveil this new ChartList and how to use it, and then highlight my Top 5 and Bottom 5 Earnings Reports for the week ahead. You definitely do not want to miss this. In fact, because of the significance, tonight's event will be FREE to everyone! The room will open at 4:00pm ET and you can join me by simply clicking on this room link:

https://earningsbeats.zoom.us/j/82265033145

Remember, the room won't open until 4pm - hope to see you there!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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