The Limits to Bullishness

We remain very bullish on the market but aggressive investors need to be in the right stocks. Clearly, P F Chang’s China Bistro (PFCB) is not one of them.

This is not to deride the company. We’ve followed their conference calls this year and have been impressed. Under difficult conditions the company has managed to churn out impressive profits. This is a very well run company.

To recap, in Q1 the company posted a 23c beat. Today they announced they beat by a dime in Q2. They have posted 37% and 24% year over year EPS increases. This kind of earnings acceleration often accompanies an uptrending stock chart.

But not in this case.

These big beats have been accompanied by flat sales. And the company reiterated today what they said last quarter; that sales would be anemic for the balance of this very challenging year.

The news last quarter was unexpected and gapped up the share price to 52 week highs. Anticipation that things might get better in spite of the company’s caution kept the stock in a tight trading range since. But the market has taken today’s news at face value. The beat was expected and flat sales, with the prospect of flat at best to come, will no longer be sufficient to award the company a 21 PE ratio.

This earnings season the market has been thrilled at evidence that things are on the mend. Improving corporate earnings are usually the earliest sign of economic revival. And those companies that have provided evidence that their market has bottomed and have visibility into a brighter future have seen their share prices rewarded.

But earnings quality is preeminent in the current market environment and growing earnings through cost cutting will only count for so much. Clearly, it won’t count for a higher stock price.