Move over, earnings; what investors really want to see these days is robust sales.
According to Bespoke Investment Group, more than 1,000 U.S. companies have reported their third quarter results so far this season. For companies that have beaten earnings expectations, their share prices have risen an average of 1.6 per cent on their report day. But for companies that have beaten sales expectations, their shares prices have risen an average of 2 per cent.
That's a substantial difference. Bespoke attributes it to the fact that beating sales expectations is a rarer event: According to their numbers, 60 per cent of companies have beaten earnings expectations, while the "beat rate" for sales is in the low 50s.
But is there something else going on here as well? Companies can drive earnings higher through cost-cutting and other efficiencies that have little to do with the strength of their underlying business. This occurred a lot in the early stages of the economic recovery. On the other hand, sales often reflect growing operations and a thriving underlying business – which could be taking on rising importance as companies run out of cost-cutting moves and the economy continues to expand at a very sluggish pace.
Earnings still attract a lot of attention, but if you're looking for a stock-booster, revenues are doing most of the heavy lifting right now.
David Berman