Friday, April 27, 2007

Large Capitalization Stocks Poised to Move Higher?

Over this past week, a number of large capitalization stocks experienced significant moves higher once earnings were announced. From a performance perspective, the highest quality large cap stocks have been the lagging part of the overall equity market. Analyst have projected that earnings growth for the S&P 500 companies would come in at the low to mid single digit range in the 1st quarter of 2007. Contrary to analyst expectations the large S&P 500/S&P 100 companies have been reporting strong earnings growth.

Donald Luskin, Chief Investment Officer at Trend Macrolytics, and a contributing writer for Smart Money, today noted in an interesting article posted at titled, Once Again, Earnings Prove the Bears Cannot Get It Right:
SIGH. ANOTHER EARNINGS season, another dollar.

Or perhaps I should say another eight billion dollars. Since the end of March, just a few short weeks, that's how much Wall Street has upgraded its appraisal for the S&P 500's earnings over the last year.

If S&P 500 earnings grew at that rate for a whole year, they'd rise 14.4% — an earnings gusher. And don't think it can't happen. Earnings have been growing at that rate or better for most of the last three years.
After these large companies announced earnings this week, the company's stock price action has experienced a significant move higher. Following are charts on just a few of the companies that saw positive stock price movement after the company's earnings announcement: Microsoft (MSFT), 3M (MMM), C.H. Robinson (CHRW) and Apple (AAPL), just to name a few.

(click on charts for larger image)

One reason the large capitalization firms saw the strong upward movement in their stock price is partly attributable to the increased short interest in the company's stock. This increased short interest caused the shorts to cover their positions; thus, contributing to the higher upward movement in the stock.

(click on table for larger image)

The top 10 stocks on the NYSE and NASDAQ with the largest short position are as follows:


Once Again, Earnings Prove the Bears Cannot Get It Right
By: Donald Luskin
Trend Macrolytics
April 27, 2007

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