What Should You Do When Your Stock Flames Out After Earnings? Jarvis® Update March 3, 2023

Earnings are winding down and the picture is mixed. How should we respond when a company we own has a bad report? We answer that question and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian.

Great to be back with you again. And before we get started, we'd love to ask you to like and share the video. It does help other investors find it. And if you don't share the video and you consume this on a weekly basis, we're going to track you down and charge you for all the great insights that Nolan gives you on a weekly basis. So definitely take— definitely take a minute to share the video and also hit the bell for notifications and subscribe. That way you find out when each video is out and we're out on a biweekly schedule. These days in 2023. So a quick preview. Markets were mixed this week, slightly negative. We did have almost the end of the earnings season. Two topics we have for you this week, as we usually do around earnings. The first is, are earnings misses macro-driven or business-specific? And then the second topic for you, what should you do when your stock misses? A few announcements before we get started with the bulk of the program. First of all, we produce this show for you, the everyday investor, whether you have a 401(k) or an IRA. If you manage your own money or you work with an advisor, we'd love to be a resource for you. Just a call on the number on the screen below. We'd love to give you a second opinion on what you're doing with your portfolio with a no-cost, no-obligation consultation. Also, if you're an institutional investor, we've got something for you as well. That's our research service, Left Brain Investment Research. We give you 6 to 8 of our investment reports that come out from our analyst team each month, as well as the chosen— that's our favorite stock and bond for each quarter. So check that out. And then all these— either way, we'd love to have you sign up for our mailing list. We come out with our monthly Jarvis newsletter, will be out next week with our March newsletter. And also we put out all of our content for each week. So definitely check that out, get on our mailing list if you wanna follow along with us. So we'll start with the market recap as we normally do. First of all, the S&P was down 0.8% for the last 5 trading days. That's Friday to Thursday. We, we tape these on Thursday night. NASDAQ was down 1.1%. The Russell 2000, that's the small cap index, was down just 0.3%. We have noticed over the last few months the Russell tends to outperform, and we're gonna do some research and see if that's bearing out over the last few months. But that's something we anecdotally have noticed. We closed out February this week with a negative month of trading. S&P was down a little under 3%. And the main reason for that, we saw interest rates making a big move in February. We were down around 3.4% on the US 10-year Treasury at the beginning of the month, and now we stand over 4%. So pretty drastic move there from bottom left to top right. Colin, any thoughts about this week's action? And how are you processing the fact that interest rates are beginning to climb again? In the context of stock investing?

Like most investors, you know, I have trouble with patience. And the fact that we have kind of written off interest rate increases as a thing of the past, the fact that they're coming back into our screens is not a happy feeling. My patience is wearing a little bit thin. I'd be, uh, much more excited if we were on the downslope with interest rates, but it seems like higher rates are going to be with us for a while. Doesn't change the narrative. We've seen peak inflation. The inflation numbers are on the way down. We see it in gas prices, home prices, rents, right across the board. But the data is going to take some while to, to figure through to the official numbers. So we're just going to have to be patient a little while longer. But it also gives investors time, time to go ahead and take a look at their portfolios, take a look at their buyer shopping list, because we've seen this movie every quarter last year. We had 4 to 5 episodes where it's just one data point that looked like peak inflation is near, and the markets have had these huge upside rallies and they typically come out of the blue and they're unexpected. I imagine that's going to continue to happen throughout this year as well.

Nolan, I'm glad you mentioned, you know, it's a time to kind of get things in order. You know, we've talked for the last few months, interest rates are high. We really want to encourage people to think about how can they put fixed rate securities into their portfolios. And take advantage of these high rates because they won't be for here forever. It may feel like it right now. At some point there's going to be another side of this and rates are going to start coming back down. So at that point you're going to really want to have those fixed rate securities where you can lock in 6, 7, 8, 9% in your portfolio because once you do, it's going to be nice when rates do start to fall. With that, we'll jump right into our first topic. So topic 1 is earnings disappointments. Are they macro driven or business specific? So Nolan, things weren't all bad by all means this week and in earnings earnings season. There were a lot of good earnings, but there were some negative earnings as well. This week, for instance, we did hear from Salesforce, that's ticker CRM. They had a really strong report and a strong stock reaction after up around 10-12% on Thursday session. But we did hear from a number of companies that told a similar story this quarter. Sales cycles do seem to be elongating. Enterprises are pulling back on spending, trying to protect their margins and their profits. On Thursday, we had a number of disappointing earnings from companies that we follow. Snowflake, S-N-O-W, one of the companies we've been following for the last few years, and a couple of companies in the storage space, that's Pure Storage, P-S-T-G, and Box, B-O-X. Nolan, we're gonna address a little bit later in the second topic how investors should respond to negative earnings reactions, but can you just speak on what are we seeing through earnings? Are we seeing more of a macroeconomic story? Or is it something more focused on the individual businesses themselves this earnings season?

You know, I wish there was an easy check-the-box answer here to that question, but it doesn't seem to be. You know, there was a lot of companies that reported earnings that really didn't impress us at all, à la Zoom, and the stock reaction was still positive. So maybe the investors were breathing a sigh of relief. And then there was other earnings that came out that seemed to us to be pretty good. And stocks got slammed. Snowflake is one of them. I didn't think the Pure Storage numbers were awful, even though the, the share price was down. And so it's really a mixed bag, and maybe has something to do with positioning or algorithmic hedge funds in there. I just— I'm glad I'm not one of these traders that have to trade on earnings release with just these blurbs and after hours, and then the next day seeing kind of what the investor reaction is. But we do notice that there's a difference between the short-term, 1-2 day stock reaction, which tends to be kind of emotional, and what happens 30, 60, 90 days later. What really matters is the long-term business prospects for a company. You know, if you think about a company, you know, we value it based off of— it's almost a perpetuity. It's the long-term cash flows discounted back to today. And if you think perpetuity and long-term, you're looking at multiple quarters, like thousands of quarters. So any one data point's not going to kill the business. There could be disappointment with investors if they were buying it before earnings thinking something revolutionary was going to happen, they was going to get a quick pop. But for most of us, which are long-term business owners, a lot of times during earnings when there's a one-time disappointment, sharpening your pencil and going in, adding to position to get your normal size can be a profitable strategy.

Excellent. And I like what you said there, Nolan. And it's kind of a segue to what we're going to do in next week's newsletter, which is You know, we've been in the last couple of years in a pretty difficult and challenging market. When that happens and we see a lot of down moves in the market, we tend as investors to start thinking about the short term, what's gonna happen tomorrow and the next month. But you know, we're getting back to this in 2023. That's long-term investing, thinking about what are the long-term fortunes of a business and how's it gonna do for 2, 3, 5, and 10 years and beyond. So that's the theme of the next, of next week's newsletter. Make sure you get on the list so that you can get into that. Next week. Let's move on to topic 2. So topic 2 is what do we do when earnings miss the mark? So, Nolan, we use a little bit more of a colorful expression than miss the mark when these earnings don't do so well. But we're not going to say that on a family show like this one. But it can be very distressing when we see major negative reactions to earnings and events in stocks. We did have the stocks I mentioned above this week that didn't do so well after earnings. That was SNOW, BOX, and PSTG. We also had Teladoc last week, another stock we follow, TDOC. Last week they didn't do so well after earnings.

Moderna.

Moderna is another one, MRNA. You know, we didn't think they were so terrible in terms of what they said, but obviously the market didn't like it. And then we also had the Tesla Investor Day this week. That's TSLA. What we thought was pretty good news coming out of that wasn't so well received. So it made me think, you know, what should investors really do when things like this go on. You know, like we said before, we are refocusing on long-term investing here in 2023 and beyond. So I wanted to ask you this, Nolan. How should investors react when they see a major hit to a stock price they own coming out of earnings or some other event?

Yeah, that's a good question. If you're a client and you have an investment advisor, you really don't have to do anything. Investment advisor is probably on top of the situation. But if you're a do-it-yourselfer and you're out here, you know, buying stocks for your own account, you have to take stock of really what happened. You can't really look at the stock reaction. A lot of times stocks will go up, but their competitive position is more shaky than ever. À la Zoom. We like the platform of Zoom, we think it's really good, but as you mentioned in the office this week, a lot of people are using Teams and standardizing on Teams because it's free. It comes included with Office 365. Even though it's an inferior product, you know, here in the office we use Zoom, we subscribe to it. It's $250 a month for just us 5. But if you're an enterprise and you have to buy thousands of licenses, that adds up. And so even though you have an inferior performance on Microsoft Teams, that may just be good enough to save your bottom line. And so we're not necessarily so certain on the future of Zoom, um, particularly because earnings growth has been very, very challenged. That's a very different situation, as an example, than a Moderna. Which has this huge pipeline. They have technology. The technology that they have with the spike vax has— it's been revolutionary. It literally has saved lives. You know, they went from a lab to spinning out a vaccine for COVID, hundreds of millions of doses around the world, literally saving lives, lives, and allowing us to get from outside of our bedrooms and our homes. And they did that in record-setting time. Now that same technology they're going to use for cancer and for other drugs. Very healthy business. I think it was $18 billion or something is what they have in cash. They're doing a huge buyback. They have huge free cash flow. Forward earnings are 6 times. They do have a pipeline of FDA trials 1, 2, and 3. And so we look for very good things to happen for Moderna in the future. On a day-to-day basis, not much is happening, so the stock price can go anywhere. I'm not so sure why people sold the stock after earnings. I'm not sure what they were looking for, but they've been very consistent in what they've told you about their business model and the potential. So we're just going to have to wait and see. But I think that's what it comes down to, Brian. There's these short-term reactions, and then the investor needs to decide if this business is competitively challenged, where their financial model is broken, or worse yet, their going concern is going to be an issue, à la Bed Bath Beyond. There was a biotech, Novavax, and then Silvergate, which is a crypto company that came out today that issued a going concern warning. Clearly that's problematic. However, if it's just a one quarter— we thought revenues were going to go up 20% and they went up 16% because of a one-off— that could be an opportunity.

Yeah, Nolan, I was going to ask you kind of how we distinguish between I need to sell, hold tight, or buy more. And I guess the answer is probably you got to get down deep and read the earnings call and make sure everything's looking good. So like Nolan said, hopefully your advisor's on top of that. If not, you know, we're happy to talk about your positioning. And, you know, we definitely keep on top of those details from quarter to quarter and follow these businesses because we are fundamental analysts here. And that's the best way to invest in our opinion. So Nolan, thank you for being with us. I want to thank the viewers for being with us once again. Any, uh, parting shots as we, as we bid the viewers adieu this week?

Yes, for all you sports fans, I know you're probably depressed because the NFL is over with the Kansas City Chiefs winning the Super Bowl, but I wanted to remind everybody it's March, so it's March Madness. We got St. Patty's Day coming, we got the NFL Combine. Last night was Kevin Durant's debut with the Suns. So a lot happening in the, in the sports world these days.

Yes, it's all stuff to look forward to. Again, thanks for being with us and we'll see you again next time.