Early in Round Two, Old Economy Stocks Get Some Shots In

Last week I wrote an article about how “old economy” stocks seemed to be issuing disappointing earnings results while “new economy” stocks were posting positive earnings results. I mentioned that it was early in the earnings season, but I pointed out how companies like 3M, Caterpillar, and UPS had all dropped sharply after earnings while companies like Facebook, Twitter, and eBay have all jumped after their earnings reports.

Apparently those stocks represented the first round of the fight and this week represents round two. And so far in round two, old economy stocks have made a comeback while new economy stocks took one on the chin.

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On Tuesday morning, General Electric (NYSE: GE) posted better numbers than expected and that caused the stock to jump over 3%. More importantly, it moved the stock back above the $10 mark and back above its 50-day moving average. The stock had dropped below both of these levels in early April and had been languishing there. GE still has a long way to go to get back to where it was trading a few years ago, but the earnings report was a start.

GE wasn’t the only old economy stock to impress investors either. Drug maker Pfizer (NYSE: PFE) also jumped over 3% after posting earnings and revenue numbers that were above analysts forecast. Like most healthcare stocks, Pfizer fell for a few weeks in early April. The stock did bounce back last week and the jump after earnings has moved the stock even more. It is currently sitting right at its 52-week moving average. If  the stock can move back above that trend line, it could be set to run back up to the mid-$40 price range.

Representing the new economy brands was Google (Nasdaq: GOOGL), also known as Alphabet these days. The company reported earnings on Monday night, and it beat its EPS estimate, but came up short on the revenue estimate. The stock dropped 8% on Tuesday after hitting a new all-time high on Monday ahead of the earnings report.

The stock nearly reached the $1,300 level on Monday, but the revenue miss sent the stock down below $1,200.

While I have broken these companies down into “old economy” and “new economy,” there is another difference between them as well—expectations. If you look at a few of the sentiment indicators for the three stocks mentioned above, the sentiment toward Google was far more bullish than it was for GE or Pfizer.

If we look at the analysts’ ratings for the three, 41 out of 43 analysts rate Google as a “buy” while the other two rate it as a “hold.” GE has 20 analysts following it with 11 “buy” ratings, seven “hold” ratings, and two “sell” ratings. Pfizer has 22 analysts following it with 12 “buy” ratings, nine “hold” ratings, and one “sell” rating.

The short interest ratios for the companies tell a similar story with one exception. The short interest ratio for Google is only 1.5, a low reading compared to other companies and that is higher than usual for this stock. The short interest ratio for Pfizer was at 3.9 as of April 15. That isn’t a really high reading, but it is slightly above average. The exception here is GE. The short interest ratio for GE is only at 1.8, but when a stock gets down around the $10 level, it generally becomes harder to borrow for short selling purposes.

Overall what we see is that the sentiment toward Google was far more bullish than the sentiment toward GE and Pfizer. When the sentiment toward a stock is extremely skewed to one side or the other, the greater the chance of a surprise. If everyone is bullish on the stock, the greater the chance of a downside move. If everyone is bearish on a stock or is sleeping on a stock, the better the chance of an upside move.

The lesson here seems to be that you have to be prepared for anything. Old economy, new economy—it doesn’t seem to matter. The reaction by investors is the only thing that matters and the best way to prepare for a company’s earnings report is to look at the sentiment indicators and then be prepared to react accordingly.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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