Second Quarter Earnings: Marching Toward a Strong Recovery

By: Frank Holmes | Mon, Jul 28, 2014
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It's earnings season once again, and though only a quarter of the Russell 1000 has reported so far, the news is just north of positive. All signs indicate that the market has dusted itself off and is back to its cheerful self after a ho-hum first quarter, which was negatively affected by harsh winter weather.

In the chart below, you can see that 73 percent of the companies that have reported as of this writing exceed their earnings per share (EPS) beat rate. The beat rate, as you might know, is the rate at which companies surpass market analysts' published estimates. The revenue beat rate, meanwhile, sits at 67 percent, a positive surprise above the long-term median of 63 percent.

Included in these figures are a few of the top-performing companies that we own in our All American Equity (GBTFX) and Holmes Macro Trends Funds (MEGAX), such as Facebook, Apple and Biogen Idec. We'll discuss these companies later.

So to what do we attribute these welcome tidings?

Two notable indicators are the significant drop in initial unemployment claims and the jump in U.S. and global consumer confidence.


Americans are heading back to work

According to last week's data reports, initial unemployment claims fell to their lowest level since 2006, before the Great Recession brought the country to its knees.

US Initial Unemployement claims at lowest level since 2006

Couple this news with the constructive U.S. jobs report, and we're looking at a return to pre-recession labor-market strength. The U.S. Bureau of Labor Statistics reported that 288,000 nonfarm payroll positions were added in June alone, bringing the country's unemployment rate to a five-year low of 6.1 percent. Data for July is expected next Friday.


Feeling good about letting go of their dough

Another sign that the economy promises a strong continued recovery is the modest boost in domestic and global consumer confidence levels.

Information and insights company Nielsen announced that its global confidence index has inched up an overall 1 point to close at 97, the highest it's been since 2007. A 100 mark indicates exceptionally strong consumer optimism.

According to Nielsen, the U.S jumped 4 points from the previous year to close at 104 points, making it come in at 8th place worldwide. India leads all other nations at 128 points, possibly attributable to the recent election of its new prime minister Narendra Modi. At 48 points, Portugal trails the pack.

As you can see in the chart below, there's a 17 percent increase from the same time a year ago in American respondents who feel that now is a good time to spend their money on necessary and discretionary goods and services.

Americans willing to buy

The results of the Michigan Consumer Sentiment Index echoes the buoyancy of the domestic economy. At 81.3, the index is finally stabilizing at pre-recession levels.

Consumer Confidence is Rising to Pre-recession levels

Following are some of the top-performing holdings in our funds.


Facebook

facebook logo

Facebook continues to defy expectations. The social media titan had a robust second quarter, reporting revenue of $2.91 billion, an increase of 61 percent from the same time last year. More than $2.6 billion was derived from advertising alone. Mobile ads specifically represented about 62 percent of advertising revenue, indicating that an increasingly greater number of users are moving away from traditional portals such as desktops and laptops.

The second quarter, in fact, has seen a 7.3 percent increase from the first quarter of mobile daily Facebook users, from 609 million to 654 million.

"We had a good second quarter," founder and CEO Mark Zuckerberg said. "Our community has continued to grow, and we see a lot of opportunity ahead as we connect the rest of the world."


Apple

The tech giant reported that its quarterly profits rose 12 percent to $7.75 billion, bolstered by its iPhone and Mac sales. Anticipation of a next-generation iPhone, expected to arrive in late September, as well as the tentatively-named iTime smart watch, have also excited consumers both domestically and internationally.

In China, the world's largest mobile market, Apple products unexpectedly outperformed Samsung Electronics, the popular South Korean smartphone maker.

"China, honestly, was surprising to us," Apple CEO Tim Cook said. "We thought it would be strong, but it went well past what we thought. The unit growth was really off the charts across the board."

Apple's exceptional performance contrasts dramatically with Amazon.com's report that it lost $126 million in the second quarter. The retail leader has sunk a staggering pile of cash into developing its Fire Phone, made available for purchase last Friday, which has so far received mixed reviews from tech experts, analysts and bloggers.

Apple Fire Phone

Partially as a result of the Fire Phone's dubious receipt, Amazon has posted its most disappointing quarterly loss since 2012. The company, in fact, forecast that its operating losses this quarter will fall within the $410 to $810 million range.


Biogen Idec

The Cambridge, Massachusetts-based biotechnology company Biogen, a leader in developing treatments for neurological and autoimmune disorders such as multiple sclerosis (MS), reported revenue of $2.4 billion, a 40 percent increase from this time a year ago.

bigen idec

Its blockbuster medication Tecifidera, used to defend against relapsing MS, has generated a jaw-dropping $700 million in 2014 alone--$585 million domestically, $115 overseas.

Other runaway Biogen products include Avonex and Tysabri.


Looking forward to a stronger third quarter

Good news such as this has been a long time coming.

Although many economic experts and pundits hesitate to admit that the U.S. economy has recovered to pre-recession levels, the second quarter has presented the most convincing signals thus far that we're closer than ever. A greater number of Americans are finding quality employment. Initial unemployment claims are tapering off. Consumer confidence is growing year after year. And with powerful American companies such as Facebook, Apple and Biogen leading the charge, the U.S. has a bright future in store.

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

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