Although news of SEC charges against Goldman Sachs became the dominant story on Wall Street on Friday, the focus on investors for much of the past week was on the handful of companies that kicked off another critical earnings season. With the market recovering much of the ground lost during the recent recession, many investors were anxious to see how improved economic data had translated to profitability at industry bellwethers. The first week of earnings season was a mixed bag, with some big names reporting stellar results and outlooks and others falling short of expectations. While earnings reports are company-specific developments, they can often provide insight into macro economic trends and the outlook for an industry.
Below, we highlight five sectors that were especially volatile this past week, including two clear winners, two clear losers, and a mixed sector on which the jury is still out.
Winners: Semiconductors and Transportation
Semiconductor stocks got a big boost this past week after a strong report from the biggest name in the industry, Intel. INTC beat Street estimates by 5 cents, posting earnings of 43 cents a share. Revenues also increased substantially as the company produced a gain of 44% over the previous quarter. In addition, the firm reported gross margins of 63.4%, at the high end of analyst expectations. More importantly, however, were comments from Intel management; CEO Paul Otellini declared the industry “nearly fully recovered” (see Semiconductors Soar On Intel’s Bullish Outlook). One ETF that surged in the wake of Intel’s report was the iShares S&P North American Semiconductors Index Fund (IGW). The ETF allocates 8.4% of its holdings to Intel, and was up more than 6% before Friday’s Goldman-related pullback.
Another early earnings seasons winner is the transportation sector, which was bolstered by a strong earnings report from package delivery giant UPS. The company soared higher as revenues surged thanks to growth in international volume; revenues were 7% higher than a year ago. Analysts were expecting earnings of 57 cents a share, but UPS “delivered” 71 cents a share for the first quarter of 2010. This news, in addition to a bullish report out of railroad operator CSX–which reported a 22% rise in profits–helped to boost the sector. The Shares Dow Jones Transportation Average Index Fund (IYT), which makes big allocations to both UPS (8.2% of assets) and CSX (6.5% of assets), had a big week, climbing nearly 5% through Thursday.
Mixed Bag: Banks
The banking sector started off the week very well, as JP Morgan reported solid earnings on high trading revenue; net income came in at $3.3 billion, a 55% increase from the first quarter of 2009. However, all of this early week gains were erased by bad reports out of Bank of America and Goldman Sachs on Friday. In Friday midday trading, BAC was off roughly 4.3% while Goldman sunk more than 10%. Although Bank of America returned to profit, the big catalyst of the day’s trading was from Goldman Sachs, which sent the markets into a tailspin. The firm has been accused of civil fraud by the SEC regarding its role in the subprime mortgage crisis. The SEC alleges that the company failed to disclose to investors that a major hedge fund had bet against securities that Goldman was marketing. The Financials Select Sector SPDR (XLF) was off more than 4.5% in Friday trading, as the news weighed on the sector. The fund allocates roughly 10% to both Bank of America and JP Morgan while it maintains a 5.2% allocation to Goldman (see a recent article on the crisis at Goldman).
Losers: Technology and Hard Assets Producers
Broad technology ETFs also finished the week on a sour note, as Google shares sunk close to 7% in Friday trading. This came despite net income rising from $1.42 billion to $1.96 billion in the first quarter. Google’s results “were consistent with our expectations,” said Kaufman Brothers Chairman and Chief Executive Benny Lorenzo. Yet he noted that the company’s costs grew significantly in the quarter. “That’s probably why the shares are selling off a bit,” Lorenzo said. This was largely evident in the average cost per click numbers, which dipped slightly and was a large driver of bearishness on the stock. The S&P North American Technology Sector Fund (IGM), shed roughly 1% in Friday trading and it is up just 6.3% this year, compared to a broad market return of about 7%. In addition to large holdings in Apple and Microsoft, the company allocates 5.9% to Google.
Another loser was Van Eck Hard Assets Producers ETF (HAP), which lost nearly 3% on the week. HAP first hit a rocky patch last week after Monsanto reported disappointing earnings, and the road didn’t get any smoother this week. Aluminum giant Alcoa gave a disappointing report on Monday, suggesting that asset producing equities may have endured a tough first quarter. Alcoa narrowed its loss thanks to higher aluminum prices, but sales came in well below expectations.
There are a number of big reports due out next week, so expect more big movements on Wall Street.
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Disclosure: No positions at time of writing.