Earnings have been on a roll lately, with both the first and second quarters posting growth rates around 25%.  But those growth rates are expected to diminish considerably with the third quarter projected to come in at 19% and Q4 likely will slow to 17%, according to FactSet estimates.  In 2019, those numbers are expected to drop further 7.1% and 7.3% for the first two quarters, respectively, and a full-year rate of over 10%.  While that’s still a healthy growth rate, investors need to be attuned to changing expectations and what that might mean for the market.  Some early indications are that those expectations may already be a bit too bullish.   After consecutive quarters of near-record profit growth, companies are starting to lower expectations.  With third-quarter earnings right around the corner, S&P 500 companies are cutting their outlooks at levels not seen since the first quarter of 2016, when corporate America was in a profits recession.  In all, 98 companies have offered guidance — 74 have provided a negative outlook, meaning they expect earnings to come in below Wall Street estimates, while just 24 have been positive, according to FactSet.  The 76% negative-to-positive balance is above the long-term average of 71 percent.  Moreover, it comes at a pivotal moment as the Dow Jones Industrial average and the S&P 500 both hit records recently.Negative EPS Guidance

One stock that has hurt in our portfolios has been Maxar Technologies.  The satellite and space systems manufacturer/operator has fallen over 40% in 2018 despite the successful acquisition of Digital Globe in 2017, which helped to integrate its total satellite orbit offerings.  The biggest problem has been a negative research report by Spruce Point Capital Management, a hedge fund with a track record of launching negative campaigns against North American public companies after taking a short position in their stock.  As it admitted in its report, the hedge fund “stands to realize significant gains” in the event of Maxar’s stock price decline, regardless of “whether or not the statements in the report are accurate”.  Maxar responded by refuting allegations made in the report and pointing out that ‘with continued growth in Imagery and Services the company expects to benefit from strong market demand for imagery and geospatial analytics across its global Government and Commercial customers. New products and capabilities will continue to expand the use cases for the Company’s exclusive high-resolution satellite imagery and provide even more intelligence and insights about our changing planet.’  Investors, though, are clearly in ‘show me’ mode and it will take some quarters of earnings growth to convince the skeptics (and short sellers) that the stock has more upside than downside.  Improvement of free cash flow with a priority to pay down debt is of primary importance.  The Company expects to generate increasing free cash flows through focus on operating cash flow generation and reversing negative free cash flows in the GEO communications satellite business.  The Company is making clear progress toward achieving its strategic objectives, as demonstrated by its first-half 2018 financial results.  The bottom line in our view is that the stock is absurdly cheap and we continue to hold it for this future growth and improving valuation.

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