National Post (National Edition)
Earnings could provide clues to virus impact
Some companies will be reporting next week
Investors cautiously began to buy back into the market on Tuesday, knowing that they may face further risk as soon as companies begin to report on the extent of the damage that the coronavirus has had on business.
A vicious three-week selloff has obliterated both the S&P/TSX Composite Index and the Dow Jones Industrial Average. On Monday, both sank below 30 per cent from the highs they reached only in February. But much of that action has been fuelled by fear.
Most major Canadian and American companies have not reported earnings since the virus outbreak shut down a huge swathe of the Chinese economy and then began its spread in North America. Retailers have shut their doors, supply chains have been disrupted and energy companies are reeling from an oil price shock. In the midst of this, investors still have no sense just how severely revenues will be impacted or how long companies will need to dig themselves out.
“I think any guidance that was given at the end of last quarter is pretty well meaningless,” said Christine Poole, CEO of GlobeInvest Capital Management Inc. “I don’t expect companies to meet them at this point. There’s no number out there that reflects the (coronavirus outbreak and the global oil price war)."
Historically, past bear markets have bottomed out in the 35 to 37 per cent range, Poole said. And while markets bounced on Tuesday, the outpouring of company data expected in the next two months has the potential to fuel another downward leg in the market.
Investors will get their first opportunity to hear about the micro impact of the coronavirus next week when Nike Inc. will become the first of the 30 companies in the Dow to report earnings since the outbreak reached North America. Poole doesn’t own Nike but will play close attention to the call for this reason.
While investors still won’t get a sense of the virus’ effects on revenue, given that the call is for the three quarters ending in February, they should be treated to some guidance about what to expect for the rest of the year. Should Nike see their supply chains being restored to health in short order, that could hint reboot expectations for the markets as a whole. The opposite could signal a slower recovery for other retailers that have deep exposures to China.
Portfolio Management Corp. managing director Norman Levine will be watching the FAANG stocks when they report earnings between the end of April and early May. Growth stocks outperformed value during the expansion and have so far held up better in the selloff. Names like Amazon. com Inc. and Netflix Inc. have only lost 17 and 18 per cent from their respective highs and are still outpacing the market.
These companies still have the highest expectations among investors and any disappointment during their earnings calls could results in losses that no longer see them outpace the market.
“If some of these growth and technology stocks come out with worse numbers, that will spook (the markets)," Levine said. “They’re the guys that have held up the best here. If any of them surprise on the downside, there’s a lot of air below them.”
Blue chip stocks like the FAANGS will almost certainly report negative earnings, Richardson GMP portfolio manager Chris Kerlow said, because it’s unlikely they’ll resort to any kind of downsizing to offset the coronavirus’ impact. With a bar that’s been set so low, it might actually be difficult to disappoint investors unless it’s through poor guidance.
As a reflection of what might be in store for Canada’s economy, Kerlow will be watching when energy companies begin to hold earnings calls because he’s most concerned with their health during this downturn. Husky Energy Inc. and Imperial Oil Ltd. kick things off in late April before Suncor Energy Inc. follows in May.
There’s reason for unease in the short-term, Goodreid Investment Council portfolio manager Brian Madden said. The story, especially when it related to the energy sector, is different in the long-term, he said.
“These are not long-term prices we see on our screens,” said Madden. “We have a tsunami of destruction occurring with the economy shutting down and essentially rebooting.”