Microsoft, which posted a second quarter in a row of accelerating revenue growth, gapped up at the open and rallied more than 2% in heavy trade. The stock remains on a strong uptrend.
Microsoft’s solid gain helped push the Dow Jones industrial average up less than 0.1% and offset losses of 1 point or more by IBM (IBM) and Caterpillar (CAT). The latter sold off on news that President Trump is taking another step, proposing an additional $500 billion in import tariffs, to put pressure on China to reform its business practices.
At 3 p.m. ET, the S&P 500 edged fractionally lower. At 2803, it holds a slim weekly gain of less than 0.1%. The large-cap benchmark had advanced 1.5% each in the two prior weeks.
The Nasdaq 100 lost early gains of 0.6% and is barely breakeven, still aiming to snap a two-day selling streak. The Dow Jones transportation average, which soared 2.3% on Wednesday, traded barely higher but is still poised for a big weekly gain of almost 3%.
The Turnaround Continues
Microsoft posted a 7% rise in earnings for the June-ended quarter. While that number by itself is less than savory, keep in mind that it comes on top of a 54% boost in the year-ago quarter. Thus, Microsoft faced a tough year-over-year comparison mathematically.
Trading near 106, Microsoft has now rallied 86% since it cleared a three-month flat base that presented a 56.87 buy point in late July of 2016. The correction within the flat base was a bit more than 15%, the maximum decline allowed for this bullish chart pattern.
The 7% gain is another sign that Microsoft is on the right track to growing the bottom line. Earnings had dropped 5% to 84 cents a share in the fiscal first quarter of FY 2018, ended in September last year, and edged 1% lower to 96 cents in fiscal Q2, before rebounding 16% in Q3.
After-tax margin sank 340 basis points to 29.1%.
Please read this IBD Technology section story giving more details on the giant in business software, cloud computing, gaming hardware, PC peripherals and tablet-style personal computers.
According to IBD Stock Checkup, Microsoft earns the 3rd highest ranking for Composite Rating within IBD’s desktop software industry group. The group, ranked No. 48 among 197 IBD industry groups for six-month relative performance, contains just seven names. The enterprise software group holds 60 companies and ranks within the top 10.
This Shoe Stock Slides Sharply
Shoe marketer and retailer Skechers (SKX) plunged more than 20% following Q2 results. Shares at one point hit their lowest level since May 2017.
Earnings fell 24% to 29 cents a share, badly missing the Street’s consensus view. Sales rose 11%.
Prior to results, Skechers showed a poor Relative Price Strength Rating of 48 on a scale of 1 to 99. When prospecting for growth stocks, focus on those that show an 80 RS rating or higher. An 80 RS means a stock is outperforming 80% of all companies in IBD’s database over the past 12 months. A 90 RS rating or higher truly fits the leadership requirement in IBD’s CAN SLIM criteria for great stocks. The L in CAN SLIM stands for “Leader,” not “Laggard.”
Stocks that sit in very long bases, such as the saucer with handle, may show a lower RS Rating in the 50s to 60s, and still work after the breakout. Keep in mind that the RS Rating tracks 12-month price action. Some saucer or even cup bases can last for multiple months, even up to a year and a half.
The highly volatile action in Skechers in recent months served as key warning sign for prospective investors and traders. Back on April 20, the small-cap firm cratered 27% in massive volume following Q1 results in which earnings rose 13% to 68 cents a share on a 17% revenue jump.
While double-digit increases in earnings and sales are favorable, Skechers’ numbers did not meet the C requirement in IBD’s CAN SLIM seven-point investment system. The best companies in the stock market tend to show consistent quarterly rises of 25% or more in both earnings and sales on a year-over-year basis.
A True Leader In The Shoe Industry
In contrast, Skechers peer Nike (NKE) has continued to sketch higher highs and higher lows since clearing stubborn resistance near 70.
Nike gapped up sharply on a 15% jump in fiscal fourth-quarter earnings to 69 cents a share. While that too does not meet the 25% minimum threshold in the CAN SLIM model, keep in mind that the Beaverton, Ore., company has almost reached megacap status with a market value of $98 billion.
IBD research has found that big-cap companies can show excellent long-term gains in their stock prices and successful breakouts from well-formed bases while showing a consistent record of low double-digit EPS and revenue gains.
Nike’s Q4 sales lifted 13% to $9.79 billion and marked the biggest year-over-year increase in 14 quarters.
Skechers’ total sales in 2017 was $4.16 billion.
Over the past five sessions, the biggest gainers in terms of IBD’s 197 industry groups included hand tools (up 4.6%); apparel makers (up 4.3%); jewelry retail (up 4.1%, boosted by strength in IBD Leaderboard member Tiffany (TIF)); and superregional banks (up 3.6%).
Please follow Saito-Chung on Twitter at @IBD_DChung for more commentary on growth stocks and financial markets.
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