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Expectations, Great and Otherwise, Rule the Market
Posted at 4:14 p.m. EDT on Wednesday, July 29, 2015
When I got into this business the only thing I knew about “Great Expectations” was that I had to read that Charles Dickens tome in seventh grade and hated it.
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But once I got schooled in the way stocks go up and down, I realized that Great Expectations or Poor Expectations, for that matter, often determine where a stock or even a whole market can go, as we saw today.
Let me give you some classic examples. Almost everyone knows or has eaten at a Panera Bread (PNRA – Get Report) or a Buffalo Wild Wings (BWLD). Oftentimes that inspires buying shares in the stocks. I can’t blame anyone for doing that. I like the Asian Chicken salad at my Panera, low calories even as I sneak that big chunk of bread along with it. Every year I try to catch an NFL game at a Buffalo Wild Wings. We even threw a terrific staff party there not that long ago and are due for another one, although I put the real blow-torch sauce on the wings I got last time, which was too hot. It didn’t matter, though, because I had a lot of those wings that are the tiny kind, so you didn’t need a fire extinguisher to put the conflagration that raged in mouth for the next 36 hours.
But buying shares of a stock are different for you or me than it is for the big institutions that need to buy hundreds of thousands if not millions of shares of stock. They don’t just like the sandwich or the wings and say, “Let me buy 100 shares.”
They check to see what the company has been saying. Maybe they even meet with the company. They read all the research from all the different firms on the street. And they assess the expectations.
So, let me just say point blank that the expectations for these two stocks were about as low as you could get. Indeed, there was lots of talk about how things had gotten worse at both companies and that sales would fall short. The stocks seemed inflated given worries about food inflation. Panera had screwed up a bunch of times and there had been a loss of faith. Buffalo Wild Wings had to lap some really big sports events and wing prices have gone sky high.
So, when Panera today reported a number that really wasn’t all that good but said that its new rollout of Panera 2.0 is going well, suddenly the people who paid attention to the expectations and were negative on Panera had their eyes opened and decided they had to own it. Just on that one line. Plus 10% of the stock was sold short, and the short sellers who were betting on a real big shortfall didn’t get it. That’s a combustible combination, and it’s how a stock can jump as much as it did. Yeah, it wasn’t a brand-new Thai Chicken Wrap and a better-tasting roll. It was the expectations.
Buffalo Wild Wings was even wilder. Here’s a situation where the big accounts, the ones that want a restaurant company with profitable growth, didn’t care about BDubs at all. Meanwhile, 13% of the stock was sold short largely because there had been an expectation that rising wing prices would kill profitability. Plus, the last quarter was terrible and, yes, the chart was hideous. There were simply no reasons to own this one at all.
So, when the company reported and, get this, the number wasn’t even that good, you figured it would give up the gains it has made since that last bad quarter and then some. Nope. Because the comparable- store sales are getting ever so slightly better — something that wasn’t in the Poor Expectations script at all — the stock rocked.
Now, I don’t think either of these two moves would have occurred if Chipotle CMG hadn’t run some 120 points from the bottom and gotten all sorts of love on the way up after its last quarter. Some of these institutions know that some of the negative analysts on Buffalo Wild Wings and Panera will have to go positive, and that could give you a terrific second-day boost. Yes, that’s how low expectations really were. Watch analysts upgrade it tomorrow.
Oh, and it didn’t hurt the short bash cause that Shake Shack (SHAK) soared more than 12% today on the insider lock-up expiration. Here there were tremendous expectations that many insiders would sell and the stock would come down on it. Guess what — I think there were fewer sellers than you see at lunch time at a typical Shack. They gave a sell party and almost nobody showed up. Sure, the stock is overvalued versus the others in its cohort. Nevertheless, those who bet against the stock were not rewarded with lots of insiders bailing. You could call it a good short spoiled.
We saw this same poor expectations phenomenon yesterday when United Parcel Service (UPS) and Norfolk Southern (NSC) both reported numbers that, a year ago, would have been incredibly disappointing, but had gotten ever-so-slightly better after repeated estimate revisions downward. They are up again.
Now let’s talk Great Expectations. One of the fastest-growing companies on earth, Tableau Software (DATA), a company that offers business analytics for companies trying to plot strategies, saw its stock obliterated today on what looked like a monster good quarter, one that showed a revenue increase of an astounding 65%, topping expectations by $9 million on a $141 million basis. Holy moly, that’s fabulous. So, how in heck could this stock be down 15%?
Because all of the analysts I know who love this company — and they do love it — were hoping for even more. They wanted to see 70% growth. They wanted to see at least a $15 million revenue beat. Maybe more. They were totally deflated. Now, every single analyst said to use the weakness to buy. Nobody broke ranks. They raised estimates as they had to. However, the fabulous “better than expected” story is now out of gas because the stock sold at 67x earnings, among the most expensive stocks in the universe.
It was the best of times for Panera and Buffalo Wild Wings and it was the worst of times for Tableau Software even as Panera and BWLD have been disappointing and Tableau has been a standout.
Now we have great and poor expectations being set on more than just stocks. There were poor expectations about the Fed’s statements today, people betting that the Fed would get tough on rates. The Fed did same old same old and the poor expectations were unrealized.
There were poor expectations for the oil market, and yet in the afternoon we got a wire story that the Saudis, who are pumping like mad, will cut back on supply at the end of the summer. That’s exactly what Core Labs (CLB) CEO David Demshur told us had to happen because its wells would soon be spoiled by water floods. Demshur, who runs a company known as the best at finding oil and understanding the way oil pumping works, knew exactly what he was talking about, and I wouldn’t be surprised if this story is proven true — that the poor expectations for oil turn out to be too poor and oil starts going back and taking the stocks back with them.
Yep, it is all about expectations, and as long as you know what they are you can understand what would otherwise be stupendously counterintuitive moves. Panera and Buffalo Wild Wings didn’t deliver fabulous quarters — they were simply not bad enough to bring out sellers. Tableau Software reported an amazing quarter. Sadly for Tableau shareholders, it just wasn’t amazing enough.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the stocks mentioned.
Posted at 7:06 a.m. EDT on Wednesday, July 20, 2015
Yes, both Twitter (TWTR – Get Report) and Yelp (YELP) were disappointing. Yes, I found myself thinking, oh man, are these two companies in trouble. Indeed, I think the conference calls were horrendous with one, Yelp, in total denial about what’s going wrong and two, Twitter, just throwing itself on its own funeral pyre and begging you to light its fire — which is what will happen in today’s trading.
I hesitate to lump these two together. One seems to be in total secular decline — Yelp, where the competition is getting thick, the algorithms deadly (Google (GOOGL) seems to have made it so that its own hodgepodge of reviews takes hegemony) — and the value proposition for advertisers no more than what some wags would deem a protection racket against bad reviews.
The other, Twitter, seems to be in existential decline. The executives went from embracing what previous CEO Dick Costolo was working on — remember that fabled interview with David Faber on CNBC where interim CEO Jack Dorsey said he liked everything that was being done by Costolo? — to a total repudiation of Costolo and everything that he was trying to do to boost user engagement.
Yelp’s actually doing badly, missing numbers, not growing, getting out of advertising campaigns and going the way of Myspace. Twitter’s actually NOT doing badly, at least financially, but if you listened to the call all you could think of is “these guys are telling me to sell and telling me to sell ahead of the massive stock grants no doubt destined for insider selling that they are giving everyone and his brother, $750 million to $790 million vs. capital expenditures of $450 to $550 million.”
Yelp made you feel that Jeremy Stoppelman is desperate for a banker to put some lipstick on this pig, to hark back to the bad old days. He’s got no game domestically and less game internationally, giving away a free service that he wants advertisers to pony up for who don’t need it and can’t possibly demonstrate a rate of return for their investment.
Twitter, on the other hand, is monetizing like mad, but it is doing so for a smaller growing audience that at this rate could be shrinking by this quarter. If I could see them face to face, I would say as a portfolio manager I like General Mills (GIS) more than you guys, because it is growing faster, the value proposition is simpler and I get a good dividend.
Now let me be clear; for the two, I see little hope that Yelp can turn around without massive layoffs and much cheaper ad rates, plus something that’s far more pro-user than just constantly slotting whoever is paying up for their reviews. I think the model of advertising in order to mitigate bad reviews isn’t paying off anymore, because there are too many reviews everywhere anyway.
Twitter, however, still has a shot because there are so many big tweeters who want to keep it alive to build their brands. But it is a hopeless sea of confusion if you just want to follow people or topics, and they’ve done nothing to improve that.
Twitter just needs to be more like the old Time Magazine, People Magazine, and Sports Illustrated, with some enthusiast publications for menus, guns, gardening, etc thrown in. It’s got to be organized the way the readers want it, not the way the computer science guys who obviously have no real lives want it.
They can figure that out, but they have to hit a major reset. It’s almost as if they should shut it for renovations and re-open it anew six months from now with some Blue Light specials to draw you back in. Not hopeless. But not something you would think of paying $23 billion for.
I think both these companies blew it. They were big companies that became small. They were companies that could have grown into their monster market capitalizations the way salesforce.com (CRM) or Netflix (NFLX) or Google did, had they kept inventing and thinking about value propositions.
Neither did. They deserved what they were selling for, and then they didn’t, and it’s their own darned fault. Credit Twitter management for repudiating what it said just a few months ago about no need to change. But dismiss them as the ones that can possibly change it. They are too down on themselves, too miserable, too unwitting, and too un-TV, un-journalism, un-thinking to figure it out. Give it to Starbucks (SBUX), give it to ESPN, give it to someone who knows how to stimulate and keep demand.
But not to these guys .They are too angry and too defeated to figure it out.
Article source: http://www.thestreet.com/story/13240543/1/pnra-bwld-twtr-yelp-jim-cramers-views.html