Earnings season can bring out the best and worst in investors. The penchant for overreacting to both earnings and forward guidance is the reason it’s often called the “silly season” on Wall Street. Some stocks rise 30% while others plunge 20% based on one quarter’s worth of data and an outlook that is, at best, for the next 12-months. Lost in the near hysterical overreactions can be nuance and efforts by management to provide context for their earnings and guidance.
Warren Buffett, arguably the most famous long-term investor of all-time, famously encourages people to ignore short-term earnings and Wall Street pundits, and focus instead on the fundamentals of a business and a company’s long-term prospects. This is sound advice as earnings overreactions often lead to poor buy and sell decisions that investors could come to regret. Here is earnings overreaction: three stocks ready to rally when investors realize their mistake.
Broadcom (AVGO)
Broadcom’s (NASDAQ:AVGO) stock fell 1% after the microchip and semiconductor company issued strong fourth quarter 2023 results that beat Wall Street targets, and the shares have traded sideways since the print was delivered in early March. Analysts say AVGO stock has gotten knocked lower because the company’s forward guidance failed to impress. But the shares are also being punished because Broadcom’s growth was not as impressive as rival Nvidia (NASDAQ:NVDA).
Broadcom reported earnings per share (EPS) of $10.99, beating Wall Street estimates of $10.40 a share. Revenue totaled $11.96 billion, which topped estimates of $11.80 billion. The company was conservative and reiterated its previous full-year revenue guidance of $50 billion, which is inline with Wall Street forecasts. However, analysts apparently wanted to see more from the company and have moved away from AVGO stock.
It likely won’t be long until the bulls rediscover AVGO stock. After all, Broadcom’s management team has been pounding the table on the fact that they continue to see strong demand for their chips in artificial intelligence (AI) data centers.
Lululemon (LULU)
Executives at sports apparel company Lululemon (NASDAQ:LULU) have been clear that they’re focusing on international expansion. The company’s latest financial results proved that the international growth strategy is exceeding expectations. So why did everyone choose to focus instead on the fact that North American sales have slowed and basically toss LULU stock down an open elevator shaft, sending the shares down 16%?
Lululemon’s Q4 2023 financial results beat Wall Street forecasts on the top and bottom lines. International sales in 2023 grew an astounding 54% year-over-year, with sales in the critical market of China up 78% from 2022 levels. While it is true that sales in North America slowed, they were still up nearly 10% year-over-year. The company’s full year guidance was basically in line with Wall Street forecasts.
Not only have investors overlooked the huge international sales growth at Lululemon, but they’re also not factoring in that the company is expanding its sales further by pushing into men’s athletic apparel and sneakers, a huge potential market for the company. LULU stock is down 23% on the year. Buy the dip.
Apple (AAPL)
Yes, iPhone sales are slowing. But that’s no reason to toss the baby out with the bath water, which is what looks to be happening with Apple‘s (NASDAQ:AAPL) stock. So far in 2024, AAPL stock is down 8% and one of the worst performers in the S&P 500 index. Most of the decline can be attributed to a slowdown in sales of the iPhone. However, almost all of that slowdown is occurring in China. And a new market forecast sees smartphone sales rising this year and names Apple as a top beneficiary of the growth.
According to Counterpoint Research, smartphone shipments worldwide should rise 3% this year as declining inflation, demand recovery, and AI features attract buyers. The premium segment of smartphones priced between $600 and $799 is expected to grow 17% this year. Counterpoint says that Apple is likely to emerge as the winner in the premium smartphone market worldwide, and adds that growing demand for iPhones in emerging markets should also benefit Apple.
There are media reports say that Apple is in talks to build the Gemini AI engine into its iPhones, a move that could increase demand for the devices. Investors should also remember that Apple continues to surpass Wall Street’s earnings forecasts and that the company’s services business is offsetting declines in sales of its consumer electronics.
On the date of publication, Joel Baglole held long positions in NVDA and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
