Guidance. When most of us hear that word, we think of someone who gives advice or counseling to another to help resolve a problem or come to a solution. In the investment world, guidance carries a whole different meaning. For publicly traded companies, guidance is information that a company provides as an indication or estimate of its future earnings. In the current market environment, everyone is focusing on the outlook rather than the current strength of companies.
So far guidance has been coming in mixed. In early 2010, most corporations were increasing guidance since they figured it could not get much worse than 2009. Corporations were improving their balance sheets by cutting jobs and costs. Now the tough test of organic growth lies ahead. Can companies grow the top line now that there is no more “cutting the fat” to be done. Several companies have reported record earnings for the current quarter but have given weak/mixed guidance (Cummins, Amazon, Texas Instruments & Ford to name a few) while others have increased guidance for next year (for example, Corning & EMC). The biggest wild card is still Europe. Corporations are taking the cautious approach and tempering expectations because if they go in with high hopes and Europe comes to a grinding halt, their stock prices will come under enormous pressure the following quarter when they fall short.
One thing to keep in mind is that earnings guidance is an educated guess of where a corporation thinks they are headed in the near term based on numerous variables. It is not an exact science and quite often a company will end up coming in significantly higher or lower. There are too many unknowns in the near term that can cause major shifts. But, if you hear weak guidance being issued repeatedly from corporations in the same sector (i.e. Technology or Industrials for example) this gives you a good hint of areas you may want to avoid in the short term.
When looking at your investment mix you should look at a corporation’s guidance along with many other factors in making a decision. Typically, the technology (growth sector) sector has higher expectations and in times of low economic growth it is more difficult for it to grow compared to consumer staples (Coke, Pepsi, McDonald’s). Staples tend to do well as their growth expectations are not as high and pay attractive dividends. The market is very volatile right now and making emotional or quick decisions is not advised. One quarter is not a make or break for a company or sector. If you see repeated quarters of lowered guidance, then that could be a fundamental problem and is worth addressing.