Positive Earnings Announcements

Being in the midst of earnings season, bad earnings news is coming out daily on CNBC. I was left with quite a negative impression upon initially hearing today’s earnings reports, which included unfavorable news from normally defensive Kraft foods (KFT), along with Disney (DIS), and a negative forewarning from Costco (COST). What I notice now at seekingalpha.com, the twenty four major companies that released earnings both before the market opened today and after yesterday’s market close, ten of those companies reported negative quarterly earnings, while twelve reported positive earnings news. Two companies reported neutrally, which is essentially positive news in today’s economic climate. At least one of the companies that reported positive earnings also forewarned of lower earnings for the year.

As we all know, many companies forewarn to avoid excessive negativity when the actual earnings are reported. The forewarning “prepares” investors for what lies ahead. Once the actual earnings announcement is made, it doesn’t seem quite as bad after being forewarned. There is always the uncertainly as to whether it will really be as bad as the forewarning predicts, but nevertheless, pessimistic projected earnings announcements influence the market in a negative way.

All of this leads me to the point that news announcements are often more negatively focused. For example, I was left with a negative impression after hearing the announcements on CNBC, but the reality, after further investigation, is that more companies announced favorably than negatively. Perhaps some of the negative focus is because Disney, Kraft and Costco are household names, unlike positive news announcers such as Ilumina (ILMN) and ITT Industries (ITT). Negative news seems to hit harder when we relate to the company involved. Who wants to see Disney's earnings suffer?

It is interesting to note that Kraft’s earnings were down due to currency effect and pension costs, which were offset by improved performance. While currency effect and pension costs are certainly valid reasons for reduced earnings, it is important to realize that people have not stopped buying cheese and crackers, as may be the initial thought when thinking of Kraft’s earnings being reduced.

We all know that Costco is definitely a higher end warehouse store. I shop there for food and staples, but also for luxury items. Maybe the Calvin Klein jeans, Coach handbag, and Ebel watch sales are slowing down, but folks are still most likely buying food and necessities at Costco. While I am not denying that the luxury item sales are important to the bottom line, I want to make the point that the reduced sales may not be as bleak as one would imagine when they picture consumers discontinuing purchase of cereal and milk.

Perhaps I am the eternal optimist. I hope this to be true, as optimism is certainly healthier than pessimism, as long as it is not outright denial of reality. I do, however, think the media tends to be more biased toward the negative in general, and it is our job as investors to look for pockets of optimism, as therein lay eventual opportunity.