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Why earnings disappoint
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January 13, 1998: 12:38 p.m. ET
Analyst blames restructuring, Asian turmoil for weak corporate profits
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NEW YORK (CNNfn) - The fear that corporate earnings will not meet expectations weighs heavily on Wall Street. At least one analyst believes the Dow industrials could close the year lower because of disappointment about those earnings.
David Beard, portfolio manager at Morgans, Waterfall, Vintiadis, appeared on CNNfn's "In the Game" with his financial forecast and reasons why corporate profits may not be up as much as many people think.
Following is a partial transcript.
DEBORAH MARCHINI, CNNfn ANCHOR, IN THE GAME: You're looking for a gain in earnings of just about 5 percent. That seems to be less than the Wall Street consensus of maybe 8 percent or more?
DAVID BEARD, PORTFOLIO MANAGER, MORGANS, WATERFALL VINTIADIS: Yes. It's sort of the time of a "bottoms up" stock picker. But I think some of the forecasts have been coming down, and I think there's probably more room on the downside for people in terms of overall corporate profit.
MARCHINI: What makes you a little more pessimistic on corporate profits? What do you see as the major negatives?
BEARD: Asia is the big driver. We've also finished a lot of restructurings in the U.S., and the labor market is tight. So it's harder for people to grow unit volume.
MARCHINI: All right. A question for you. First of all, what about Asia? Because it doesn't really hit that many companies, it doesn't affect the service industry really at all.
BEARD: I think you actually have to look at where the growth is coming from. And although a third of someone's sales, or even 10 or 15 percent of their sales, came from Asia, they're experiencing three or four times the growth rate.
MARCHINI: I see.
BEARD: And so what will happen is the growth rate and units will slow down from Asia, and that will back up in terms of flat utilization and fixed overhead. And that will just hurt the bottom line for companies, more than people expect.
MARCHINI: That being the case, what do you expect reaction of investors to be? We've gotten used to double-digit earnings growth now for the last three years.
BEARD: We have, and there's never been a year, except for the past three years, where you've had a double-digit, much less 20 percent, growth. I think the market will trend lower through the year as people fight through these profit expectations, and say "how can my favorite blue chip stock be reporting no growth, or a down quarter?" And the market will go down and rally, as it may, yesterday, today for the next couple of days, and then start to drift lower. It's going to be a tough market.
MARCHINI: Do you see it as the start, maybe, a cautious start to a bear market, or as just a sort of treading water holding period?
BEARD: I think it's treading water and maybe drifting slightly lower from the close, because we had a pretty strong yield last year. I really think you need a recession or a slowdown in the U.S., and I don't see that on the forecast.
MARCHINI: Asia's impact will not be severe enough to cause that in the U.S. or elsewhere?
BEARD: Right.
MARCHINI: OK. That being the case, what do I do with money? Keep it out of the stock market altogether? Or are their various sectors where I might profitably employ it?
BEARD: Right now, in the fund that I manage, we are pretty cautious. We have, you know, 20 percent in cash.
MARCHINI: That's a lot for a funds manager.
BEARD: Well, it's actually a partnership or a hedge fund, so we do try to keep positions conservatively. It's a preservation on capital vehicle. We also have some short positions so we can make money if the market declines. We've looked for good businesses that tend to be mispriced -- mid-cap stocks that are overlooked. In terms of some of the sectors we like, we still like the radio and TV broadcasting business. It's 100 percent domestic. It's showing pretty strong unit volume in terms of price increases, being up 10 percent year over year. And then we have a couple of other sectors which we think are pretty attractive.
MARCHINI: Such as?
BEARD: One company we like now is International Multifoods (IMC). They distribute vending candy, as well as pizza products -- mostly dough and cheese to the pizza restaurants. They also have some business in Venezuela, which is losing money, which we expect to turn around. The stock is at about 25. We think the downside's maybe the 23 area, and the upside of 38 in 12 months.
MARCHINI: All right. You're looking at 7,000 on the Dow from almost 7,700 right now. That's a pretty substantial decline, the most substantial decline we've seen in years.
BEARD: It is. I think in percentage terms, the drop really isn't that much, especially if you look over a long period of time
MARCHINI: But it's coming on the heels of a pretty significant drop already, from record levels. So, overall, that would amount to a pretty sizable correction.
BEARD: I think when you look at what constitutes a bear market, you do have to have a 20 percent decline, or at least a 10 percent decline to even count as a correction. So maybe from the close of the year we could be down 10 percent, but that's not a lot. But if we do move into a recession, you know, you could see a pretty substantial hit. But I don't expect that at this point.
MARCHINI: Would you place any bets on the bond market?
BEARD: Well, I'm an equities manager, and rates continue to lower -- my gut feeling is that a significant portion of the buying has been a flight to quality, and you'll probably see that stop or reverse for a little bit over time. So I wouldn't chase right now, but I do think the trend is lower.
MARCHINI: Final very quick question. Not only are stock prices going lower, but you think the volatility is here to stay with us for a while?
BEARD: I think it definitely will. In fact, it may even increase for the third year. 
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