Today's 3 Stock Picks: FDX, NSM, AZO

A profit warning from FedEx (FDX) sent shares plunging Tuesday after the global shipper said the second half of its fiscal year will be much worse than expected.

After preannouncing better-than-expected second-quarter earnings, the Memphis company said it now expects to earn $3.50 to $4.75 a share for the fiscal year ending in May, down from its prior target of $4.75 to $5.25 a share. FedEx said demand for its services would drop over the next six months because of the slumping global economy. The company also said it needs to cut costs by about $500 million.

Alan Graf, the company's chief financial officer, said FedEx was helped by plunging oil prices, which have dipped below $50 a barrel after a summer high of $147 a barrel. However, that benefit will soon be more than offset by a drop-off in customer activity.

"Second-quarter results benefited from rapidly declining fuel prices and continued cost management," Graf said in a prepared statement. "However, demand for our services weakened sequentially throughout the quarter and global economic trends continue to worsen, substantially reducing our second half outlook.”

As goes FedEx, so goes the economy, say many market observers. Donald Broughton, an analyst at Avondale partners, says FedEx's woes will be felt broadly.

“We expect the shares of FedEx to trade markedly lower as the full ramifications of dramatically reduced expectations is digested by investors,” the analyst wrote Tuesday. “We expect the shares of most asset based transports to trade lower based on this news and would not be surprised to see weakness extended to retailers (e-tailers in particular).”

There's no denying FedEx's announcement is bad news, particularly with the demise of competitor DHL's domestic shipping business, Broughton wrote. DHL, part of Germany's Deutsche Post postal service, said in November that it would cease its U.S. operations.

“Given the drop in fuel costs and the abandonment of market share by DHL (we estimate 4% of the U.S. domestic parcel and express market), FedEx's preannouncement should be viewed as very bearish for the economy,” Broughton wrote.

Bottom Line: Hold
This is a bellwether stock, and its decline presages an uncomfortable stretch for investors tempted to sell into weakness, but the alternative will only compound losses that won't be recovered by bailing out.

Brutal earnings from National Semiconductor (NSM) worsened the outlook for the chip sector, but the numbers were better than expected, touching off a short squeeze that sent shares soaring Tuesday.

As of Nov. 11, about 15.6 million shares, or 8%, of the Santa Clara, Calif.-based company's public float was held short, meaning investors borrowed the stock at a certain price in anticipation it would go down. Short sellers then return the stock to the lender, usually a brokerage, and pocket the difference. The market's short position in National Semi grew by about a third from the previous month.

Doug Freedman, an analyst at American Technology Research, said the stock has lost nearly half its value for the year to date, and many short sellers may have decided to unwind their positions, creating a classic short squeeze that drives up share prices.

“I think you have a bit of a short covering rally where the bad news is now in there,” Freedman says.

There's plenty of bad news to go around, largely because of broader economic troubles, wrote Tore Svanberg, an analyst at Thomas Weisel Partners.

“Business conditions have deteriorated materially on sharp and deep pull-back in consumer spending," the analyst wrote. "The demand picture may be quite discouraging and National is responding with headcount reductions, fabrication consolidation, and other cost cutting measures."

American Technology Research's Freedman sees one potentially positive aspect to the chip sector's fortunes, despite similarly weak recent results from Texas Instruments (TXN) and Broadcom (BRCM). Investors may be overselling, despite the grim backdrop.

“We see every revenue cut that's deeper than expected, and we're closer to a bottom,” Freedman says. “Historical trading multiples are no longer valid. The question is whether we've sort of overshot the correction.”

Bottom Line: Hold
The short squeeze will dissipate and shares should drop again, but shareholders who unload now will still be selling losing positions. Hunting for a bottom is always risky, so act with caution.

Thrift and elbow grease motored up shares of AutoZone (AZO), the country's largest auto parts seller, which rose on an unexpectedly strong quarter, as cash-strapped car owners increasingly did their own repairs.

The bad news hovering over the nation's auto makers, now anxiously awaiting news of a federal rescue plan, has been fairly good news for AutoZone and other aftermarket parts makers, a trend that looks likely to continue as the recession prompts drivers to defer new car purchases.

Gabelli & Co. analyst William Giles, writing in a Nov. 26 sector review, says coaxing another year out of the old truck or sagging wagon will help the Memphis car-parts retailer.

“Autozone believes the rising age of vehicles on the road coupled with lower new car sales bodes well for the company in the long-term because as existing vehicles are driven longer, the age of these vehicles approaches the aftermarket ‘sweet spot' of 7-plus years as their warranties expire,” Giles wrote.

Brian Postol, an analyst at Jesup & Lamont, wrote Dec. 3 that although AutoZone is not recession-proof, it is well positioned for bad times.

“At a time of consumer instability, [AutoZone] provides investors a retailer with stable/defensive operations, stable cash flows, and an investment grade credit rating,” the analyst wrote. "We contend that the issues facing consumers today, the realization that consumers may be forced to repair an older car over buying new is a positive for automotive aftermarket sales over the coming months/quarters.”

Bottom Line: Buy
Even if sales slow amid even further belt-tightening, AutoZone fills a need when times are tough. Its market leading position will serve it well defensively, and once recovery arrives.