We’re in the middle of earnings season and today Google and Microsoft were among the many who reported. Many of the companies reporting don’t even make the back page of the financial publications. As you can imagine, Google and Microsoft not only make the news, they move the market. If you didn’t read yesterday’s article about quarterly earnings reports, take a minute to read before reading any further.
One of the traditional rules that investors live by is that 50% of a stock’s movement is based on its sector. What kind of clubs are you in? Maybe you are on a basketball team, swim team, investing club, or a Barak Obama fan club. What happens if your team loses a basketball game? You all lose. What happens if your investing club buys a stock that goes up? You all win. When the team wins or loses, all of the team’s participants do as well. Think of a sector as a club or team. Sectors, just like stocks, go in and out of style just like clothes or music. Right now, the banking sector is Wall Street’s black sheep. That means that all banking stocks, regardless of their fundamentals (positive or negative traits) are not doing well.
Google and Microsoft are both in the technology sector. (Although anybody with investing knowledge knows that Google doesn’t belong in technology but instead in media and advertising since this is where the bulk of their income comes from.)
So with your newfound knowledge of sectors, you probably want to know what Wall Street thinks of the technology sector. This is largely a matter of opinion but in my personal experience of late, as soon as we make a little bit of headway, we come crashing down. This is largely because technology tends to be discretionary and in a recession, discretionary stocks (those that sell luxury items) are not generally held in good regard.
So how did Google and Microsoft do today? First, Microsoft. Forecasters were looking for EPS of 49 cents per share. Microsoft reported .47 cents. As we said yesterday, it only takes a penny of miss to punish the stock. Microsoft’s stock dropped 11% today and announced that 5,000 jobs would be cut. Let’s look at Google. Forecasters looked for $4.95 per share. Google delivered an EPS of $5.10. What do you think happened with the stock? It was announced after the market closed today so we’ll see tomorrow but as of now, the stock is up 3%. Google was the big winner today.
This brings up one more question. If stocks normally trade with their sector, why did two stocks in the same sector report such different earnings? Because the technology sector is misleading. It’s so large and vast that many would like to break the sector up. Google and Microsoft are two very different companies and although on paper they are in the same sector, most investors don’t see it that way. Their earnings prove that.
The lesson for us in this report: You can’t just read the textbooks like many investors do. You have to understand the market. You have to understand how people think, and learn to think like Wall St. A book or article will only take you so far. One more thing. Companies are often strong because of their CEO. Why is Google as strong as it is? Do some reading about Eric Schmidt and you’ll read about one of the brilliant business minds of our day.