Finding the Market Focus
In yoga, “drishti” means where your eyes focus. Depending on how you’re contorted, your drishti (pronounced drish-dee) could be your inner knee, or it could be the horizon. The idea is that by focusing on a single point you are able to harness your energy and “see” the world more clearly.
As we enter the zany and entertaining earnings report season, it’s important to think about where investors focus their gaze. While the short-term numbers are important, especially with earnings surprises, they are the drishti equivalent of contemplating your inner knee—a very circumscribed view.
But it’s easy to forget during earnings season that the stock market’s drishti is always on the horizon. Company guidance about its future commands the gaze of serious investors, and stocks are typically priced based on future.
I’ve read several articles over the weekend confirming the market’s shift in focus from first or even second quarter earnings out toward the second half of the year. Market seers note that by mid-2016 we will enter a period where the dollar will be weaker than it was the previous year. The dollar, which strengthened versus almost all our trading partners in 2015, put a crimp in the profits of multinational companies last year. As we cycle over that period the pressure from foreign exchange will lessen.
While most of Profit Catalyst Alert stocks have little international exposure, the idea that investors must always be looking out toward future growth is important. As we enter the second half of 2016, valuations will start to emphasize growth in 2017 and even prospects for 2018. I’ll be on heightened watch for forward guidance from the companies I’ve recommended.
It will be a busy season for sure. Below I discuss a positive regulatory event for SolarEdge and dig into the possible cause for recent weakness in Vera Bradley. During earnings season do not be surprised to see an update alert issued if significant news is reported on one of our stocks. These alerts will not always require trading action will keep you in the loop.
SolarEdge: As a company whose customers’ profits are tied directly to utilities, SolarEdge is exposed to a heap of government regulation. Last week Governor Baker of Massachusetts agreed to extend a cap on net metering that some companies were bumping up against earlier this year.
Net metering is an agreement between a utility and a customer where the utility pays customers for the excess energy produced by their solar panels. The utilities then sell that excess energy to other customers. The cap, which is calculated as a percentage of the peak energy load of each utility, is the amount of energy utilities must agree to buy back from customers generating solar energy.
This recent regulatory change will re-open the spigot of demand for solar panels that was at risk of shrinking due to the decline in net metering requirements. Despite winters that seem to last until May, Massachusetts is the sixth largest state for solar generation in the country.
The caps for private and public net metering were increased from 4% for private facilities and 5% for public facilities up to 7% and 8% respectively. While these sound like small increases, they increase the amount of power required to be repurchased via net metering by 67%.
As I will discuss in my monthly issue next week, these regulatory hurdles can be cumbersome but are part of the landscape for solar stocks. The overwhelming trend for solar expansion is overwhelmingly positive.
Solar Edge has a $67 Target
Vera Bradley: After soaring 20% in March, Vera Bradley is suffering this month. Specifically the stock dropped almost 11% on April 7, the same day management presented at the Cowen analysts’ conference.
I take note when a stock moves a notable amount coincident with an event like this and listened carefully to the presentation (twice if you must know, as a written transcript is not available). I then compared the content and tone to CEO Rob Wallstrom’s previous presentation on March 23 at a different conference.
My best guess is that investors did not like that CEO Wallstrom noted he was not updating or confirming guidance at the conference but repeating previous guidance from the year end conference call.
This is most likely because the company is in its quiet period, the period of time near quarter end when a public company must be ultra careful about information shared with investors. Vera Bradley’s quarter ends in April. Seeing that the conference coincided with the last month of its quarter, management wisely chose to be crystal clear that it was not offering any updated guidance.
I think the sell off is overdone. The assumptions necessary to reach consensus estimates look quite reasonable. I don’t expect the clearance sale on Vera’s shares to last long and reiterate my $24 target.