Investors were taken on a pretty wild ride in April. Earnings for major companies came in all over the map, causing fairly dramatic price swings not just in individual stocks but for the overall market, as well. The S&P 500, for example, swung from 1,890.9 on April 2 to 1,815.69 on April 11, only to rebound to 1,883.95 on April 30. The index closed the month up about 1.4 percent. For its part, the Dow Jones Industrial Average managed to gain about 1.6 percent for the month. The Nasdaq, weighed down by disappointing earnings at some major components, was down about 1 percent for the period.
Despite the mild performance, more investors are optimistic than pessimistic about the market. According to the latest AAII Sentiment Survey, bullish sentiment among investors increased by 7.3 percentage points at the end of April, to 34.5 percent. This is the biggest increase since February. However, optimism is still below its historical average of 39 percent and has been for six consecutive weeks. Bearish sentiment, meanwhile, fell 8.2 percentage points to 26 percent, below its historic average of 30.5 percent.
But the point of an index is to aggregate, and the headline number masks major swings in individual components. Some companies performed exceptionally well in April – Apple (NASDAQ:AAPL) stock climbed more than 10 percent — while others did exceptionally poorly. Many tech companies in particular faced selling pressure as investors and traders grew slightly more suspicious of high valuations.
Here’s a look at a few major companies that performed poorly in April.
1. Chipotle Mexican Grill Inc. (NYSE:CMG)
Shares of Chipotle Mexican Grill, Wall Street’s premier burrito investment opportunity, fell more than 12 percent in April. The big catalyst this month was the company’s first-quarter earnings report — the good news from which was that sales rose 24 percent on the year, to $904.2 million, higher than the mean analyst estimate of $873.5 million. Sales at stores open at least 13 months were also impressive, jumping 13.4 percent, while analysts estimated an 8.8 percent increase.
However, Chipotle’s profit figure wasn’t so favorable, on account of higher food and operational costs limiting its profit gains. First-quarter net income increased 8.5 percent to $83.1 million, or $2.64 per share, from $76.6 million, or $2.45 per share, a year ago. Analysts estimated $2.87 per share.
Chipotle earned a significant degree of media attention in the first three months of 2014 as it expanded its tofu offering, shared concerns over rising operational costs, and fielded questions about a possible guacamole drought. The Denver-based chain has witnessed inflationary pressures in beef, avocados, and cheese prices, and that was reflected in its first-quarter cost picture. Food, beverage, and packaging costs rose 30 percent for the first quarter, and food costs accounted for 34.5 percent of total revenue, up from 33 percent in the year-ago quarter. Those increased costs hurt Chipotle’s overall profit, and as a result the company announced that it would be passing on some of those costs to consumers.
2. Netflix Inc. (NASDAQ:NFLX)
Shares of Netflix stock fell more than 10 percent in April and closed the month at a price level of about $317, approximately 120 times trailing 12-month earnings. Earlier in the month, Wedbush Securities analyst Michael Pachter noted that even with strong subscriber growth and margin improvement in the first quarter, this valuation seemed high.
“We continue to believe that Netflix’s high valuation is somewhat unwarranted given the potential for slowing domestic growth as competition ramps up, coupled with increasing content costs,” Pachter wrote in a research note. Wedbush Securities maintains an Underperform rating on the stock, with a price target of $215. “Our price target reflects a sum-of-the-parts that values domestic streaming at $150 per share (up from $140 previously), international streaming at $50 per share (up from $17 previously), and domestic DVD at $15 per share (down from $18 previously due to declining subs and profitability),” Pachter said.
One of the headwinds facing the company is the rising cost of obtaining and delivering content. Netflix announced that it plans to increase its monthly subscription fee for video streaming sometime this spring. The price hike will add an extra dollar or two per month, bringing the cost to $9 or $10, depending on which country you live in.
3. Twitter Inc. (NYSE:TWTR)
Perhaps the single largest catalyst for Twitter in April came at the end of the month, when the company reported first-quarter earnings. Twitter reported a GAAP loss of $132.36 million, or 23 cents per share, in the first quarter of 2014, compared to $27 million, or 21 cents per share, in the year-ago period. The unadjusted figure includes $126 million in stock-based compensation expenses. Adjusted net income was reported at $183,000, or zero cents per share, which compares against an adjusted loss of $11 million, or 8 cents per share, in the year-ago period. The mean analyst estimate was an adjusted loss of 3 cents per share.
Revenue of $250 million, up 119 percent on the year, beat the mean analyst estimate of $241 million. Advertising revenue clocked in at $226, up 125 percent on the year and accounting for 90.4 percent of total revenues. Mobile ad revenue accounted for 80 percent of total ad revenue.
Where there was weakness — at least, in the eyes of the market – was in user growth. Twitter reported average monthly active users (MAUs) of 255 million, up 25 percent on the year but shy of a mean analyst estimate of 257 million. Twitter’s 255 million MAUs are just a fraction (about 20 percent) of the 1.28 billion MAUs Facebook ended the first quarter with. That’s just a fraction, even, of Facebook’s 802 million daily active users, 1.01 billion mobile MAUs, and 609 million mobile DAUs.
Twitter stock fell nearly 18 percent in April.
4. Bank of America Corp. (NYSE:BAC)
Shares of Bank of America fell nearly 11 percent in April. The decline had two major catalysts behind it: first-quarter earnings and the discovery of an accounting error that superficially inflated the bank’s reported capital ratio.
First, the earnings: Bank of America reported a net loss of $276 million, or 5 cents per share, in the first quarter, thanks in large part to litigation expenses. Litigation expenses of $6 billion include a previously announced settlement with the Federal Housing Finance Agency, as well as additional funds earmarked for legacy mortgage-related issues. The bank reported a net loss attributed to shareholders of $514 million, or 5 cents per share, down from a profit of $1.1 billion last year.
The earnings results drove shares down, and the accounting error drove them lower still. As a result of the error, Bank of America was forced to revise its first-quarter Tier 1 capital ration to 9 percent from 9.3 percent. The revision means another round of stress testing and the likely suspension of plans to increase the dividend and pass a share repurchase plan.
5. Amazon.com Inc. (NASDAQ:AMZN)
Shares of Amazon stock fell more than 10 percent in April. Once again, the big catalyst was earnings. Net sales increased 23 percent on the year to $19.74 billion, above the mean analyst estimate of $19.43 billion. Net income of $108 million, or 23 cents per diluted share, up 27.8 percent on the year, was in line with the mean analyst estimate.
Although net income remained relatively small — Amazon is working with an operating margin that is 0.7 percent of worldwide sales, down from 1.1 percent on the year – the considerable jump in net sales is, well, considerable. Amazon logged 22 percent net sales growth over the trailing 12-month period (Amazon’s financial wizards are partial to the TTM terminology), and worldwide net sales of $78.1 billion over the last year.
The bad news — what helped drive shares down — was that expenses increased at a faster rate than revenue. And within that, growth within Amazon’s highly important media business grew more slowly than it did in the previous quarter. Moreover, second-quarter operating income is expected to come in at a loss between $55 million and $455 million.
Of course, it isn’t all doom and gloom across the stock market. There have been several pockets of opportunities for investors — as we highlighted last week when we listed some of the best performers on the Dow so far this year. Let’s take a look at these names again.
Merck (NYSE:MRK)
Shares of Merck are up 17 percent this year to date. Merck is a major pharmaceutical company that has seen its shares rise largely as a result of its competent management of headwinds. For example, problems with research and development have made it more difficult for Merck to survive the expiration of patents on top-selling drugs. To address the issue, the company announced a fairly radical restructuring program (although it provided few details) that promises to cut costs and rethink the way it approaches its all-important R&D pipeline.
As part of the process, the company hired a new chief of R&D: Roger Perlmutter, who has been tasked with organizing company personnel and refocusing the scope of research and development projects. So far, things have been going pretty well. Merck stock jumped as much as 6.5 percent in January, after the company announced both that the Food and Drug Administration (FDA) had approved a pediatric version of its HIV therapy, called Isentress, and that it was mulling the sale of its consumer and animal health units.
Shortly after that, Merck said it was entering into a partnership with Belgian biotech company Ablynx in order to develop a new kind of cancer drug. Ablynx and Merck already have a neurology partnership stretching back to 2012; the companies’ new partnership will instead pursue an innovative new class of cancer drugs that activate the immune system. Currently, Bristol-Myers Squibb Co. (NYSE:BMY) makes the first drug of that kind in Yervoy, which is being developed to treat melanoma patients.
More good news came in April, when Merck announced that it received approval from the FDA for the first of three allergy medicines in its lineup. The drug, called Grastek, targets grass pollen allergies specifically, and Merck estimates that the potential U.S. market for its new allergy medicine is around 3 million patients, and that it will eventually be worth as much as $1 billion in annual sales.
Caterpillar (NYSE:CAT)
Shares of Caterpillar are up 16.07 percent this year to date. The construction and mining equipment manufacturer suffered a pretty tough 2013 — earnings fell 33.3 percent, from $5.7 billion to $3.8 billion — but 2014 has brought new business. Recent earnings of $1.61 per share beat the mean analyst estimate by 29.8 percent, and growth is expected at 6.2 percent in the current quarter, despite headwinds that are anticipated to erode earnings for competitors.
“We understand we don’t control the economy and have instead focused on what we can improve,” Caterpillar Chairman and CEO Doug Oberhelman said in the company’s first-quarter earnings report. “We’re lowering costs, improving cash flow and driving value for our customers through the continued deployment of our lean manufacturing initiatives. We see the benefits of these actions in our first-quarter results and in improving market position for many of our products.”
Caterpillar is forecasting profit of $5.55 per share in 2014 and is looking for sales of $56 billion. Moreover, Caterpillar still managed to increase its dividend in 2013, and the company could be gearing up to increase it again. Caterpillar has raised its dividend every year for the past five years.
Johnson & Johnson (NYSE:JNJ)
Shares of Johnson & Johnson are up 10.59 percent this year. The performance isn’t nearly as impressive as the dramatic rise experienced by Merck stock, but it’s still strong and reflective of a strong company. Earlier in the month, Johnson & Johnson reported first-quarter earnings that beat analyst expectations.
Sales increased 3.5 percent on the year to $18.1 billion, beating the mean analyst estimate of $18 billion. Adjusted net earnings increased 7.8 percent on the year to $4.4 billion, and diluted earnings increased 6.9 percent on the year to $1.54 per share, beating the mean analyst estimate of $1.48 per share. Worldwide pharmaceutical sales increased 10.8 percent on the year to $7.5 billion in the first quarter, the product of 12.2 percent operation growth and currency headwinds of 1.4 percent. Domestic sales increased increased 7.7 percent, while international sales increased 16.9 percent with a negative currency impact of 2.9 percent.
Johnson & Johnson dominates the global consumer health industry, a leading position supported by both strong pharmaceutical sales and by relatively strong sales of medical and diagnostic devices. Overall sales in this segment were flat on the year, at $7.1 billion, the product of a 1.8 percent operational increase eroded by 1.8 percent currency headwinds. Domestic sales were down 1.6 percent, but international sales were up 1.3 percent, the product of an operational increase of 4.6 percent and a negative currency impact of 3.3 percent.
Microsoft (NASDAQ:MSFT)
Shares of Microsoft are up 7.99 percent this year as newly appointed CEO Satya Nadella — who has been in charge for a little more than two months — begins the process of potentially restoring the technology giant to its former glory. Nadella has been praised by many analysts and appears to have won the trust of investors because of his open attitude and his focus on new strategies. Although he hasn’t necessarily distanced himself from former CEO Steve Ballmer, who left on less-than-favorable terms with yield-seeking investors, he does represent a breath of fresh air at one of the market’s oldest tech companies.
Even though Microsoft has fallen behind its competitors, it is important to remember that the creator of the Windows operating system is still a very profitable company, and its results for the third quarter of fiscal 2014 proved that it is weathering the turmoil of the personal computer industry. Revenue matched forecasts, while profit beat Wall Street’s expectations; sales soared to $20.4 billion last quarter, roughly even with the $20.49 billion generated in year-ago results.
Operating income totaled $6.97 billion and net income came in $5.66 billion, pushing earnings to 68 cents per share. Comparatively, analysts had forecast Microsoft to generate earnings of 63 cents per share, a decline from the 72 cents per share earned in the year-ago quarter.
United Technologies (NYSE:UTX)
Shares of United Technologies are up 3.98 percent this year to date. The technology conglomerate recently reported first-quarter sales of $14.75 billion, up 2 percent on the year and slightly ahead of expectations. Profits declined 4 percent on the year to $1.32 per share, but still beat analyst expectations by 5 cents. Adjusted earnings increased 10 percent on the year, and free cash flow clocked in at $1 billion.
“Continued organic growth and orders strength give us confidence in our sales expectation of $64 billion for 2014,” said Chairman and CEO Louis Chênevert in the earnings release. “Based on visibility to additional restructuring projects with solid returns, we now plan to increase restructuring spending from $300 million to $375 million, which we expect to be offset by one-time gains. The sales outlook together with continued cost reduction positions us to increase the lower end of our earnings per share range. We now expect earnings per share of $6.65 to $6.85, up from $6.55 to $6.85 previously.”
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