Stock-Market Tango of Price, Earnings Has Two Left Feet

There’s a mystery brewing in the stock market that Robbert Van Batenburg would like to tell you about.

Van Batenburg, director of market strategy at brokerage Newedge Group SA in New York, has discovered several companies whose stock prices haven’t followed large decreases in their earnings estimates. That’s not the way it’s meant to work in these efficient markets of ours, where the P and the E are supposed to move together like a well-choreographed pair of dancers.

Here’s an example: The average earnings estimates for News Corp.’s fiscal third quarter ended in March have fallen about 50 percent over the last three months while its stock price is about the same. (The mystery of why some companies call the January-March period the “third quarter” will have to wait for another day.).

Here’s one that is even more pronounced. First Solar Inc.’s first-quarter earnings estimates have declined by about a third since January while its stock price has grown by a third.

Motorola Solutions Inc., Urban Outfitters Inc. and MeadWestvaco Corp. are others that have seen significant reductions in earnings estimates without commensurate declines in the share prices.

For some companies, the opposite is true, according to Van Batenburg. Shares in E*Trade Financial Corp. and H&R Block Inc. have declined while analysts have raised earnings-per-share estimates for the companies significantly.

Lower Estimates

Those are the exceptions, however. The strategist said the number of S&P 500 companies that have lowered their quarterly forecasts is at an all-time high, according to his model.

Indeed, the entire S&P 500 meets Van Batenburg’s criteria. While the benchmark index was up about 1 percent for the year at today’s open, estimates for growth in its companies’ first-quarter earnings have fallen to 1 percent from 6.6 percent at the beginning of the year. While declines in earnings estimates like that are not unusual, these reductions bring the projected growth rate dangerously close to zero. (Also, it could be argued, to a level that’s easily beaten.)

The brutal winter in the U.S. is the prime suspect for what is projected to be a lackluster earnings season, and ergo for why some investors may be blowing off reduced earnings estimates. Van Batenburg is not buying that it’s the only reason.

“Our list shows that the EPS estimates declines have been indiscriminate and across sectors, which may indicate that the weather is certainly not the only factor that is behind the decline,” he wrote in an e-mail.

According to his model, Cliffs Natural Resources Inc., a mining company, and Carnival Corp., a cruise-ship operator, have shown the biggest declines in earnings estimates.

It doesn’t snow in mines. Or on tropical cruises, for that matter.

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