10.26.14: Weekend LinkFest – Others You Should be Reading

October 26, 2014 at 3:27 pm | Posted in Weekend Link Fest | Leave a comment

Haven’t done a LinkFest in a while. Tadas shouldn’t be worried.

Bob Lang, of Explosive Options (@aztecs99) and Suz Smith (@SuzyQ76022), one of Bob’s partners in the chat-room service, came through Chicago Friday night, October 24th, and we had dinner at one of Chicago’s famous steakhouses. I got to collect on a bet from the first Blackhawk’s – LA King’s series in 2012, when the Blackhawk’s went on to win their 2nd Stanley Cup. Unfortunately, I do owe Bob for last year’s Blackhawk’s – LA King’s Western Conference final, where the King’s beat the Hawk’s in overtime to move on to the Stanley Cup. Bob does a lot of writing for TheStreet and is a frequent contributor to Jim Cramer’s Mad Money show in terms of technical analysis, over and above what he does at Explosive Options. I do look forward to paying off on the bet, possibly at Jim Iurio’s restaurant in the northern suburbs of Chicago, when Bob returns to town. Bob has had me on his Southern California radio show a few times to talk SP 500 earnings, and we’ve greatly appreciated the opportunity to talk be on his radio show. Bob does great work for MadMoney and on the Twittersphere.

Ryan Detrick, with his post on the “most bullish 5 days of the year” starting Monday, October 27th. Ryan is out at Stocktoberfest in San Diego, with Josh Brown and a gathering of investing royalty this weekend;

Great post by Norm Conley of JAG Capital in St Louis. SP 500 earnings yield less the Baa corporate bond yield. If you aren’t following Norm at @JAG_Norm) you should be – Normie is as good as Ryan Detrick and Josh Brown in Twittersphere. This graph tells me that SP 500 still relatively undervalued vis-à-vis corporate credit;

Here is another high-quality graph from Norm on the 10-year Treasury yield (CMT). I thought for sure the 10-year Treasury was “broken” at the end of 2013. The yield curve flattening has hurt my balanced account performance for sure in 2014.

From @BobBrinkers blog, a Calculated Risk link on New Home Sales. Here is one article from the TheStreet that details how getting a mortgage should be a little bit easier.

Josh Brown kicks off his new regular Fortune gig, with a great article on the return of the Mom & Pop investor to the stock market, albeit with far greater apathy than in 2007 and the late 1990’s. I continue to think this retail sentiment “tell” is crucial for the bull market in the SP 500 continuing. I graduated from college in May, 1982, and was taking Money & Banking classes in 1980 when Volcker was running the Fed and the 30-year Treasury was trading at 12%, then 20% and back again. It was what ignited my interest in the business and that passion has never left. The point is – like a lot of my generation – I never saw a real bear market in stocks until 2001 – 2002 and the economy (relatively) remained in pretty good shape. It was easy to be bullish in the 1990’s: communism was dead, this new fancy thing called technology was making life simpler and faster and better, and real estate was a sure thing too. Couldn’t lose… The point being that my generation, and really the entire baby-boom generation, had never seen, invested or lived through one nasty bear market, and we saw TWO 50% corrections in the SP 500 from in the 10-year stretch from January 1, 2000, through December 31, 2009. What happened in 2008, was the quintessential 100-year flood, and was the kind of “systemic risk” that I think retail investors will never see again, either in my lifetime, or if I did have kids, in their lifetime. Once again, Josh nails it – reluctance on the part of the retail investor is probably a very good sign these days.

Need to blow my own horn a little bit here: our q3 ’14 earnings prognostications are bearing fruit. Don’t think earnings are or were the issue in this recent 8% correction in the SP 500 despite the nattering nabobs three during September and early October.  Earnings data spouted on financial media is often distorted like economic data: the data is re-packaged to support or validate a guest’s bias or position, rather than viewed objectively and with rigor. Most of what you hear on mainstream financial media is superficial and vacuous. Ed Yardeni does a great job with earnings info and trends, and Id like to think this blog (www.fundamentalis.com) has drilled down and educated readers on SP 500 earnings. There is a lot more to the analysis than what you see in the Financial media.

FundamentalMomentum (@FMInvesting) gives both side of this recent bounce in the SP 500. As I told clients this weekend, the market will provide the final answer. Let the market tell us where it is headed;

Don’t know AcrosstheCurve (@acrossthecurve) but do think he provides some GREAT commentary on all things fixed-income. Here is Friday’s tweet on Spread commentary courtesy of BAML.

So many think the potential bottom for crude oil is $75. This (what I think ) is a decent article from SP Capital IQ on the commodity sector also supports the $75 crude oil level.

The Brazil election tonight, being called a “nail-biter” by the Economist. There will be a very clear choice made between a socialist and a capitalist. More than two  years later, I’m still surprised that Greece’s 2012 election didn’t make a hard-left turn towards more populism, and away from the EU. Sometimes countries can surprise you.

Bespoke and Paul Hickey do fabulous work. Even the 4 pm central “Fast Money” segment with Melissa Lee is carrying more and more of Bespoke’s work. I wish I could link more of the Bespoke charts: those would worth a blog post of their own. Bespoke thinks we are entering a critical week this week, as the SP 500 nears its 50-day moving average at 1,966.94 per our technical software. The SP 500 closed at 1964 and change Friday, it’s best week in 2 years.

Thanks for reading and stopping by our (my) little corner of the world.

Given Ryan Detrick’s work, if the SP 500 can break above 1,966 – 1,975 this week, and we have another strong week of returns for the SP 500, look for a run to the all-time high and a likely move to an all-time high in the SP 500 by year-end.

Appreciate all the comments and emails from readers.

Trinity Asset Management. Inc. by:

Brian Gilmartin, CFA

Portfolio manager


10.25.14: SP 500 Weekly Earnings Update: Energy’s Drag Offset by Industrials, Technology, Health Care Earnings

October 25, 2014 at 3:52 pm | Posted in Basic Materials, Consumer Discretionary, Consumer Staples, Energy sector, Fwd 4-qtr growth rate (SP 500), Industrials, S&P 500, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Thomson Reuters’s TWIE data as of October 24, 2014:

New Forward 4-quarter estimate: $127.54 vs last week’s $129.34

Forward P.E ratio: 15.49(x)

PEG ratio: 1.69(x)

SP 500 Earnings yield: 6.49%

Forward 4-quarter growth rate: +9.11% versus last week’s 9.49%;

Analysis / commentary: the critical question this week to me seems to be how much of a drag is Energy having on the SP 500 earnings growth rate, versus the strength being seen in Industrial’s and Basic Materials ? Greg Harrison of Thomson Reuters notes the strength in Industrial earnings with this week’s missive. The data shows that of the Industrial’s that have reported, 86% of the companies have been above consensus estimates in terms of the EPS, while 5% have matched, and 8% (per T/R) have been below consensus.

Those are good numbers. However, a little less than half the SP 500 companies have reported q3 ’14 earnings, so we get a full slate again this week. Per Thomson’s data 37 of the total of 64 “Industrial” companies within the benchmark have reported q3 ’14 earnings.

For the Energy sector, 12 of the 43 total Energy companies have reported q3 ’14 earnings, and as you can imagine the estimates are coming down sharply.

Here is the change or trend in Energy sector earnings growth for the 3rd quarter and forward, per Thomson, as of Friday, Oct. 24th, and as of October 1:

q3 ’15: +7.9%, +12.7% (480 bp decline)

q2 ’15: -5.6%, +2.9% (850 basis point decline)

q1 ’15: -7.4%, +2.3% (970 basis point decline)

q4 ’14: -4.3%, +6.6% (1090 basis point decline in just 3 weeks)

q3 ’14: +1.7%, +6% (430 basis point decline)

As the reader should quickly discern, it LOOKS like, given the data from this week, Energy sector estimates will start to bottom with the q4 ’14 earnings reports to be released late Jan ’15.

I know how we are going to play the sector for clients over the next months, but for now, we aren’t buying any new Energy positions, and haven’t had any weighting for a few years.

Give this a little time to play out. OPEC plays the long game. You should too.

Now back to Industrials. Here is the change in Industrial sector earnings growth since October 1 ’14:

q3 ’15: +8.8%, +12.1%

q2 ’15: +8.7%, +9.5%

q1 ’15: +12.2%, +13.4%

q4 ’14: +11.6%, +12.4%

q3 ’14: +11.4%, +8.4%

While I’m a little worried about that sharp drop in q3 ’15 sector estimates, Industrial’s are expected to show better relative earnings growth than the SP 500 through q1 ’15.

Here is how the SP 500 as a whole has changed since 10/1/14 for q3 ’14, or the current quarter that is being reported:

Cons Disc: -4.5%, -3.2%

Cons Spls: +3.5%, +2.8%

Energy: +1.7%, +6%

Financials: +15.9%, +10.1%

Health Care: +13.1%, +11.4%

Industrials: +11.4%, +8.4%

Basic Mat: +17.3%, +14.7%

Technology: +8.6%, +6.5%

Telco: +4.1%, +7.5%

Utilities: -1.3%, +1%

SP 500: +7.6%, +6.4%

Here is the change in q4 ’14 sector growth estimates:

Cons Disc: +11.6%, +13.9%

Cons Spls: +2.6%, +4.5%

Energy: -4.3%, +6.6%

Financials: +8.7%, +10.4%

Health Care: +18.6%, +19.4%

Industrials: +11.6%, +12.4%

Basic Mat: +5.6%, +10%

Technology: +9.9%, +10.5%

Telco: +18.8%, +23.8%

Utilities: +8.8%, +7.7% (the only sector to show upward revisions since Oct 1 ’14)

SP 500: +8.8%, +11.2%

Our sector overweights remain Technology, Financials and Industrials, and Basic Mat. As a percentage of the SP 500 by market cap, Tech and Financials is about 35% of the index. Our underweights for some time have been Utilities, Energy, Telco. Im mixed on the Consumer Discretionary and Staples sectors.

This is a critical week for the SP 500. The SP 500 closed Friday at 1,964, while the 50-day moving average is at 1,966.

Listening to some good technicians, this 1,965 to 1,970 is critical to punch through. By the end of this coming week, another 160 of the SP 500 will have reported, for a total of 365, or roughly 73% of the index will have reported q3 ’14 earnings by Halloween morning.

Energy will be a drag on forward earnings, but strength will come from other sectors.

Despite Energy’s drag, I still think the SP 500 will show roughly 9% overall operating EPS growth for q3 ’14, when the q3 ’14 reporting season ends by the end of November ’14.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




10.22.14: Q4 ’14 Earnings: Technology Sector Estimates Moving Higher

October 22, 2014 at 3:21 pm | Posted in Apple (AAPL), IBM, Technology | Leave a comment

We’ll give the Energy sector a break for a few weeks and let the dust settle on the 20% drop in crude oil over the last 2 months,

Since companies are now reporting their 3rd quarter, 2014 and guiding for the 4th quarter, based on an intra-week report update from Thomson Reuters, here is how sector earnings growth expectations have changed for the q4 ’14 and the SP 500 since Oct ‘1 ’14:

First column is the sector, 2nd column is the expected growth as of October 20th, ’14, the 3rd column is the expected growth as of October 1:

Cons Disc: +12%, +13.9%

Cons Spls: +3%, +4.5%

Energy: -1.4%, +6.4% (estimates falling rapidly, hard to say how much is discounted in stock prices);

Financials: +9%, +10.4%

Health Care: +18.7%, +19.3%

Industrials: +12.2%, +12.4%

Basic Mat: +6.5%, +10%

Technology: +10.5%, +10.4%

Telco: +22.1%, +23.5%

Utilities: +7.4%, +7.8%

SP 500: +9.5%, +11%

Despite IBM, and maybe due to Apple, Technology is the ONLY sector with higher expected sector growth from 10/1/14 to 10/20/14.

Good sign.

We’ll have a more complete update this weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


10.19.14: Drilling Down into the Energy Sector

October 19, 2014 at 3:28 pm | Posted in BHI, CVX, Energy sector, Integrated Oil Co's, Oil Services Co's, Sector Earnings Growth Estimates, XOM | Leave a comment

Thanks to Greg Harrison, of ThomsonReuters, this is how the Energy Sector earnings are distributed amongst and between the various companies:

Exxon-Mobil (XOM): 25%

Chevron (CVX): 17%

Occidental (OXY): 4.5%

Hess (HES): 1%

Total Integrated Oil & Gas: 47.5%

Schlumberger (SLB): 6.7%

Halliburton (HAL): 3.25%

NOV and BHI: 3.5%

Total Oil & Gas Equipment & Services: 13.5%

Oil & Gas Exploration & Production: 15.5%

Oil & Gas Refining & Marketing: 10%

 Remainder: 14.5%

Here is the Excel spreadsheet created from the Thomson Reuter’s data, created for your viewing pleasure: FC – Energy Sector (again, data courtesy of Thomson Reuter’s Greg Harrison)

When we have invested in Energy for clients, it has typically been the international, integrated oils, such as Exxon-Mobil (XOM) and Chevron (CVX), or the so-called “oil services” companies like Schlumberger (SLB), Halliburton (HAL) and Baker-Hughes (BHI).

Currently, we have no Energy positions for client accounts, and haven’t had for some time.

However, here are some thought we’ll leave you with as we do more fundamental homework on the sub-sectors in the next few months:

Exxon (XOM) and Chevron (CVX), are 42% of the Energy sector by earnings weight. If you want a low-risk way to play the sector and don’t want to try and time the sector too finely, you can buy either stock or the XLE (SPDR ETF), for which XOM and CVX are 39% of the XLE by market cap. Both these names should be less volatile than the rest of the Energy sector.

Chevron is currently testing its 200-week moving average, on our charts. Well off its $135 high from late July ’14, we often use the 200-week moving average as a low-risk entry point for stocks or sectors where we have been waiting to build positions. XOM’s 200-week moving average is $87 per share;

Our preferred oil services names like Schlumberger (SLB), Halliburton (HAL) and Baker-Hughes (BHI) are more levered to crude oil prices, and have fallen with the price. SLB and BHI reported earnings last week, and both stabilized with the reports, but I suspect that q4 ’14 and q1 ’15 earnings estimates for the group will continue to drop. If you look at our Weekly Earnings Update from yesterday, from the change in the forward estimates, I’m guessing that Energy sector estimates will not bottom until q1 ’15 results started to get reported in mid-April ’15. Given the levered nature of this sector to crude oil and nat gas, I will wait to re-purchase these names;

In the last correction for this group in 2012, BHI bottomed around $40, HAL around $30 and SLB between $60 – $70. North American margins have been driving the recovery in these stocks since then, but I don’t see how they remain unscathed from the 20% drop in crude oil in the last 3 months, particularly if OPEC is serious about curbing new supply. I thought I read on a Twitter post this week that Chevron has already curtailed one project announced last week, given the drop in crude;

No question the Energy sector is a “return to global growth play” which has been a theme of ours for some time. However, given what is happening in Developed Europe and South America, synchronized global growth seems to get delayed more and more;

Sector earnings estimates are not a timing tool: the forecasts I’ve seen for crude oil prices have been $75 per barrel, $80 per barrel, $63 per barrel and I even heard one forecast for $35. What I will be looking for over the next few months is for crude oil to stabilize for a period of time, and then I’ll be periodically updating readers on the Energy sector estimates, as I start to do more homework on the Exploration and Production names, which is one Energy sub-sector for which we have no coverage;

It is strictly my own opinion, but I think this drop in crude and Energy stocks will take some time to play out. Earnings estimates are NOT a timing tool, but there is no question we will be alert for stabilization in sub-sectors and individual companies. Look for divergences in sectors and sub-sectors and companies (sector estimates declining, company estimates improving) to drive fundamental homework.

Thanks for reading and stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager







10.18.14: SP 500 Earnings Update: Forward Growth Rate Nears 2014 High, Despite Energy Drag on Earnings

October 18, 2014 at 3:29 pm | Posted in Energy sector, Fwd 4-qtr growth rate (SP 500), Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuter’s “This Week in Earnings”, the forward 4-quarter estimate for the SP 500 slipped to $129.34 this week, from last week’s $130.02.

The p.e ratio on the forward estimate 14.5(x), as of Friday’s market close.

The PEG ratio is now 1.54(x), the lowest PEG ratio of 2014, and below the August 1 ’14 PEG of 1.58(x).

The “earnings yield” on the SP 500 after this week’s -1.02% drop in the SP 500 is 6.86%, higher than August 1st’s yield of 6.60% and the highest yield since exactly 52 weeks ago or mid-October ’13’s, 6.81%.

More importantly, the year-over-year (y/y) growth rate of the forward estimate rose for the 2nd week in a row to 9.49%, from last week’s 9.32% and the highest since the early August ’14 peak of 9.58%.

I think there is a real chance we get to a “y/y growth rate” of the forward estimate that hits a new multi-year high in the next few weeks, particularly as Industrial and Technology sectors report their third quarters.

Analysis / Commentary: The bottom callers were out in force this week, which is a pastime I prefer not to practice, but this week’s relative valuation metrics for the SP 500 as denoted by the p.e ratio, the PEG, the earnings yield, and more importantly the resumption  of the forward estimate growth rate to close to 2014 highs, tells me that Wednesday’s low could be the end of this somewhat-different correction. Since 2011, SP 500 corrections have typically lasted 4 – 5 weeks, and have been less than 5% in terms of intensity, while this correction is longer in both duration and severity. There was real, tangible fear in the US stock and Treasury markets Wednesday morning, for the first time in many moons.

We really don’t know though until the SP 500 makes a new high, or exceeds the September ’14 high at the Alibaba IPO of 2,109.26.

A separate post is being prepared on the Energy sector to be published tonight or tomorrow, which I think readers will enjoy, but here is the change in the Energy sector estimates by forward quarter, over the last three weeks: (First column is the week ended October 17th, the 2nd column is the week ended October 10th, and the 3rd column is as of October 1).

Full-year 2015: +4.5%, +5.9%, +6.9%;

Full-year 2014: +5.4%, +6.8%, +7.3%

q3 ’15: +11.3%, +12.0%, +12.7%;

q2 ’15: -2.4%, +1.8%, +2.9%;

q1 ’15: -3.7%, +1.3%, +2.3%

q4 ’14: +0.1%, +4.6%. +6.6%

q3 ’14:  +2.4%, +5.3%, +6.0%

Source: Thomson Reuters “TWIE” weekly missive

What readers should draw from this is the absolute level of the estimate relative to the SP 500, and the rate of change up or down. This is the first time I’ve marked out the data so I am looking at this along with readers, and q1 ’15 has had a 500 basis point (bp) negative swing in its growth rate, and I’m guess the downward revisions will continue through the calendar 4th quarter, particularly as we hear from management’s on q3 ’14 earnings.

We’ve been underweight Energy for two years, but now is the time to do the fundamental homework and prepare for the sector’s outperformance. As John Wooden used to say, “Be quick, but Don’t Hurry”.

Here is one company example: Baker-Hughes (BHI), reported q3 ’14 earnings on Thursday, missing on both the consensus revenue and EPS estimates for q3 ’14 materially, for the first time since the 3rd quarter, 2012. BHI’s full year 2015 consensus EPS estimate as of the July ’14 earnings report was $5.55, after Thursday’s report the full-year 2015 consensus EPS estimate was reduced to $5.10, or a 10% reduction in just the last 3 months.

I actually like BHI as well as HAL and SLB, but the oil service companies are “leveraged” plays on crude. We’ll have more on a separate post on Energy coming tonight or tomorrow.

To conclude this Weekly Earnings Update, while the mainstream financial media loves to talk Ebola, the bigger issue could be Europe. John Butters of Factset, published a very interesting table this week, with Factset’s weekly earnings analysis: of the 68 SP 500 companies that reported q3 ’14 earnings this week, 44 of the 68 cited “Europe” as an issue during the quarterly conference calls. 38 of the 68 cited “forex” or likely US dollar strength, while 25 companies cited “China” as an issue this quarter, just 7 were specifically negative, and only 6 companies cited Ebola.

The point for Fundamentalis readers is that despite what is in the headlines, it is “attribution” that is more important. I would also add that what management’s say in terms of “color” on the conference calls, isn’t necessarily what the analyst’s “attribute” upside and misses to, when gauging how individual companies performed relative to their models. E.g. a individual company misses on consensus revenues but beats on consensus EPS, and the analyst reports that are published post-conference call, note that “currency” drove the 2% revenue miss, but a lower-than-expected tax rate, or a higher than expected operating margin thanks to SG&A reductions drove the EPS upside.

Greg Harrison of Thomson Reuters and John Butters of Factset (John used to do Greg’s job at Thomson Reuters, and now does the same work at Factset) do great work in providing readers with earnings commentary. These reports are free too by the way. All readers have to do is sign up. The work that I do is to model the data over long periods of time that T/R and Factset provide and try to provide additional color and analysis. Doing this work, keeps me focused on earnings for clients and ultimately has an impact on investing decisions. You have to roll up your sleeves and do the work, though.

125 – 130 more companies report q3 ’14 earnings this week. I am staying with our original forecast that outside of Energy, I think the SP 500 earnings will come in at a high-single-digit, possibly 10% growth rate on an operating basis, and be a positive catalyst for the stock market.

Q4 ’14 expected earnings growth for the SP 500 is 10% as of Friday, 10/17. There is always downward pressure on the current quarter’s estimate, but this week will give us a better feel for non-Energy sector guidance.

Thanks for reading and stopping by. We’ll be out with more articles tonight or tomorrow.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




10.16.14: Energy Sector: A Look Ahead Before Weekend Revisions

October 16, 2014 at 11:13 pm | Posted in Energy sector | Leave a comment

Well, the thesis that we started the week with, i.e. that some of the large-cap Financial’s earnings reports for q3 ’14 would help stabilize the market, wasn’t such a great prognostication.

We’ve been underweight the Energy for several years, which helped our outperformance in 2013 (the Energy sector underperformed the 32% return of the SP 500 in calendar 2013) and it REALLY helped our numbers in q3 ’14. We are preparing performance reports for clients for the 3rd quarter presently, and the numbers look good. (We waffled on Energy during the 2nd quarter, 2014 here, but we never wound up adding any positions, outside of being long HAL, which we sold at $69 – $70.)

That being said, with Baker Hughes (BHI) reporting this morning and Schlumberger (SLB) reporting after the bell tonight, I wanted to show readers how the sector has performed in terms of earnings growth historically, and how the forward estimates look prospectively.

The international, integrated’s like Exxon and Chevron typically report near month end. By Monday morning, October 20th, the big three oil service companies of BHI, SLB and HAL will have reported.

As of last Friday, October 10th, the full-year 2014 expected earnings growth for the energy sector was +6.8%, down from 7.3% as of October 1, despite the drop in crude oil in the 3rd quarter.

For 2015, the full-year 2015 expected earnings growth for the Energy sector was +5.9%, vs 6.9% as of October 1, so it looks like analysts had pulled in their sails / numbers a little for 2015 already.

Here is the detail by quarter: (first column is as of October 10, 2nd column is the earnings growth estimate as of October 1)

Forward estimates:

q3 ’15: +12%, +12.7%

q2 ’15: +1.8%, +2.9%

q1 ’15: +1.3%, +2.3%

q4 ’14: +4.6%, +6.6%

q3 ’14: +5.3%, +6%

Actual Historical:

q2 ’14: +17%

q1 ’14: -0.1%

q4 ’13: -8.8%

q3 ’13: -7.5%

q2 ’13: -.85%

q1 ’13: 0.5%

q4 ’12: +6.4%

q3 ’12: -16.4%

q2 ’12: -18.1%

Our bearish take on Energy has been based more on perceived ultimately, slowing demand thanks to the growth in electric cars and hybrid vehicles, than growing supply. The point is, it truly is better to be born lucky than smart.

Either way, we’ll take it.

What is puzzling is that if you look at the years of negative earnings and revenue growth, the Energy sector didn’t perform that badly.

Maybe the incredible carnage we’re seeing in the energy sector today is prelude to a material slashing of numbers. According to one source, Schlumberger, the large-cap oil service company, lifted their 5-year capex program in June ’14, just as crude oil was peaking. The oil service companies all reported strong q2 ’14 earnings.

One thing we will focus on is the degree of revisions to the Energy sector estimates as we move through October and early November ’14.

Stay tuned: we will update the Energy estimates at the end of the month.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


10.13.14: SP 500 Weekly Earnings Update: Financials Should Help Market This Week

October 13, 2014 at 6:59 pm | Posted in AA, BAC, Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), GE, Weekend Link Fest | Leave a comment

We are late reporting the latest our SP 500 earnings update since I spent 2 days last week (Friday and Saturday) fishing one of a handful of lakes where “they” expect the next world record musky to be caught. Unfortunately, I didn’t catch it, and had to settle for 2 days in the Great Cold North (two hours north of Duluth, in the wonderful state of Minnesota), and two days of driving from there and back to Chicago, enjoying some of the most beautiful fall scenery on God’s Green Earth.

Oh well, back to reality.

Per Thomson Reuters, the “forward 4-quarter” estimate remained steady this past week, at $103.02, exactly the same as last week’s forward 4-quarter estimate.

The p.e ratio on the forward estimate after last week’s market drubbing is 14.6(x), while the PEG ratio fell back to 1.57(x) and you’ll see why in a minute.

The earnings yield on the SP 500 rose to 6.82%, its highest print since the August 1, 6.60% (and the date of the recent low for the SP 500 at 1,904).

More importantly, the year-over-year growth rate on the forward estimate jumped back to 9.32% its highest print since mid-August, 2014 and a very good sign for q3 ’14 earnings.

Analysis / commentary: Alcoa (AA) had strong earnings last week, and more importantly strong upward revisions to forward EPS and revenue estimates. With JP Morgan (JPM), Bank of America (BAC)  set to kick off the big banks on Tuesday morning, followed by Wells Fargo (WFC), and then Citigroup (C) this week, and also the investment banks Morgan Stanley (MS) and Goldman Sachs (GS), by Friday morning we will have a very good look at the good chunk of the large-cap Financial sector, and expect decent, but not “lights-out” results from the sector. (Long all of the above except C, MS, and GS.) Technically an Industrial stock, GE reports on Friday, October 17th, 2014, but it is still very much a Financial, with GE Capital labeled a SIFI, so don’t kid yourself, Financial sector conditions still impact GE’s financial results.

Here is why I think Financials are a low-risk, low-reward sector:

  • With the advent of Dodd-Frank and the rabid regulators, I don’t think the banks want to report strong results and instead want to fly under the radar and produce stable, low-volatility, results to avoid attracting attention;
  • The big banks are shedding the higher risk businesses like the trading desks and scaling down the capital allocated to these businesses;
  • Goldman and Morgan are PROBABLY still doing proprietary trading but not bragging about it, for the same reasons as above;
  • The banks and major Financials, those labeled SIFI’s or Strategically Important Financial Institutions, have to really watch their P’s and Q’s. They have been neutered to a large degree and the shareholders wont likely see the EPS and revenue “upside surprises” that were important in the late 1990’s and mid 2000’s;
  • I do think the major Financials have become as much “cost reduction” or cost containment stories to help leverage EPS growth; If the big banks do manage to generate more than mid-single-digit revenue growth going forward, I would be surprised;
  • Both Goldman and Morgan Stanley have committed themselves whole heartedly to the asset management business which means more stable revenues, fees and less risky volatility;   While the mid-term elections and a pro-business Senate might help to some degree, I don’t think we’ll ever return to the late 1990’s type financial environment, where the numerous regulators were completely vacuous, there was a “home-on-every-balance sheet” mentality, and the repeal of Graham-Leach-Bliley (GLB) was a disaster, all of which led to the 2008 Financial Crisis, which should have never happened.
  • Unfortunately, the only entity left standing is the regulators;
  • Basically the big banks and Financial’s are required to hold more capital, take less risk, which results in lower ROE’s, and have to ask the Fed and regulators for permission to pay dividends and make share repurchases. That is like asking your Mom or Dad for more allowance.

We are overweight Financial stocks in client accounts, but not by much. Financials comprise about 16% of the SP 500 by market cap. Our favorite Financial remains Charles Schwab, which we think is a huge beneficiary of “asset aggregation” and has a huge start on GS and MS, and does no trading with its balance sheet.

It is truly hard to say if easier regulatory standards makes for a safer Financial system. I still think the near-apocalyptic events that unfolded in late 2008, were a confluence of many events, not the least of which was a 60 – 70 year bull market in housing ending, Alan Greenspan said it best in the mid 1990’s in one of his many Humphrey-Hawkins testimonies when he said that “you can’t have a banking system where profits accrue to private shareholders, but losses are absorbed by the public domain (i.e. read taxpayer).

One of the reasons that the US economic growth slope or glide path off the 2009 low has been so tepid is partly due to the constraints on the Financial System, in my opinion. Some is demographics for sure, but the eternal question remains how do you allow what is a homogenous industry to foster growth and not be tempted to run the US economy into the ground ? We are still looking for a healthy earnings season for q3 ’14. Financials should show good numbers, too, but expect high single digit EPS and mid single digit revenue growth in the New, Post-2008 World we remain.

Financials might not be huge outperformers, but after the post-2008, regulatory world, I don’t think there is much risk to their results either. Credit is stable, revenues are stable, the risky businesses are being repelled and the dividends are decent.

Trinity Asset Management, Inc. by:

Brian Gilmartin,

CFA Portfolio manager

10.8.14: Final Look at Q3 ’14 Earnings. Financial Sector Adjustments on Operating Basis

October 8, 2014 at 5:06 pm | Posted in AA, BAC, Earnings, Earnings estimate revisions, Financial sector, JPM, S&P 500, Sector Earnings Growth Estimates | Leave a comment

By the time most readers might get to reading this, the Fed’s September meeting minutes will be released (due in 75 minutes) and Alcoa will have released its q3 ’14 financial results, due after the bell tonight.

The market sentiment seems to think that q3 ’14 will be quite bad thanks to the US dollar and a weak European economy.

Industrial numbers have been taken down probably thanks as much to Europe as currency. However the Thomson Reuters data has shown little overall change in the expected q3 ’14 Industrial sector growth since Jan 1 ’14. At that time Industrial’s were expected to grow +9.2% and as of Friday, 10/3, that expected growth was +8.3%, i.e. not even a full 100 bp’s reduction. Revenue growth has been firm as well. That being said, let’s see what the Industrial numbers look like.

Financials: here is where the story gets interesting: Greg Harrison of Thomson Reuters noted this past weekend that if we mutually exclude, JP Morgan’s q3 ’13 charge and Bank of America’s expected q3 ’14 charge individually, we get different growth rates for the Financial’s and the SP 500. My question to Greg was, “what if exclude both charges and look at just the operating earnings for JPM’s q3 ’13 and BAC’s q3 ’14, where does that leave the numbers for the Financial sector as a whole and how does that change the SP 500’s expected q3 ’14 earnings growth rate ?”

The answer is that if look at operating numbers for Financials (excluding both JPM and BAC’s charges), the sector is expected to grow 4.5% for q3 ’14 and the SP 500 is expected to grow +5.3%. (Long JPM and BAC)

Further complicating q3 ’14 estimates (per Factset) Consumer Discretionary is being impacted by the Pulte EPS compare ($0.36 this quarter vs the $5.42 in last year’s same quarter) so if the Pulte compare was excluded, Consumer Discretionary’s year-over-year earnings growth would be +1.9%.

Typically when the quarter starts getting reported and analysts see results, numbers get lifted. My experience over the last two years is that the average quarterly increase in the earnings growth number from the start of the reporting period to the end, is usually 3% or more.

While Alcoa will set the tone in 3 hours, I still think q3 ’14 SP 500 earnings growth will come in at a pretty healthy rate, at least 8% – maybe as high as 10%.

Nothing has changed that much in the last 3 months, of a material nature.

Thanks for reading. Given consensus EPS and revenue estimates, we expect a good quarter from Alcoa (AA) tonight.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



10.6.14: Expected q3 ’14 SP 500 Revenue Growth by Sector

October 6, 2014 at 3:30 pm | Posted in Consumer Discretionary, Consumer Staples, Industrials, SP 500 Revenue Growth | Leave a comment


Here is the latest expected revenue growth rates by sector for the SP 500 for q3 ’14.

A couple of items caught my eye:

  • Consumer Discretionary, which is retail, auto’s, housing, is returning to a mid-single digit quarterly revenue growth rate;
  • Consumer Staples, which should be heavily influenced by the US dollar volatility, given the low to mid single digit secular growth rates and the degree to which the Staples revenues are non-US, actually has seen revenue growth accelerate for the 4th consecutive quarter, despite significant dollar strength in q3 ’14;
  • Industrials: one notable CNBC commentator did comment that Industrial numbers were being cut a few times in the last few weeks, but Industrial revenue growth is expected to report its strongest revenue growth as a sector, in q3 ’14, since we’ve been tracking the data from q4 ’12.  Not sure how much of the Industrial sector is GE, which should really be split between Industrial’s and Financials. (Truthfully, if GE would follow Hewlett-Packard’s (HPQ) model and split the company in two, you would think GE would unlock a lot of Industrial/Energy value. Long GE and HPQ.)

Brian Langenburg, lead analyst at Langenburg & Company, and a former Industrial analyst, does also note that estimates are being cut in the Industrial sector.   Revenue growth doesn’t look too bad despite the strong dollar and global worries. (Tried to attach Langenburg & Company’s report released at this am, but couldn’t get it attached.)

The conclusion is that Industrial revenue estimates have been relatively stable, while the Industrial’s earnings (EPS) estimates have seen some pressure.

No question the dollar is going to be an issue this quarter: whether it has been fully discounted and the results come in better-than-expected, or the dollar strength’s impact has been under-estimated, and guidance for q4 ’14 is reduced further, remains to be seen.

My own opinion is that, after January 1, 2000 noting that domestic US growth was slowing, more US companies moved their manufacturing and cost-of-goods-sold abroad, and aligned their revenue generation with their expense structures (the natural currency hedge) than the last period we saw prolonged dollar strength, which was the late 1990’s.

Thus a prolonged period of dollar strength, could be less onerous than in previous decades, given the shift in US manufacturing and services into other geographies.

This is all navel gazing right now. We’ll know more in the next few weeks.

We’ll update the actual revenue growth spreadsheet at the end of October ’14.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

10.5.14: More on SP 500 Earnings and a Look at Revenue Estimates by Sector

October 5, 2014 at 9:00 pm | Posted in Biotech, Financial sector, Financials, Gilead, MSFT, S&P 500, SP 500 Revenue Growth | Leave a comment

Our primary source of earnings data is Thomson Reuters, both the weekly “This Week in Earnings” and the intermittent emails, as well as Factset’s “Earnings Insight”. “This Week in Earnings” is typically published by Thomson Reuters after the market closes on Friday afternoon each week, while Factset’s “Earnings Insight” is published typically before the market closes each Friday.

The great thing about these publications is that both are free to readers.

A third and developing source of earnings data is Bespoke, which does require a subscription. From looking at Bespoke’s data, it looks as if they are reading the weekly Factset report, since Factset typically (at least in my experience of comparing the two) has lower growth rates when looking at SP 500 and sector earnings growth rates, and slightly different dollar estimates.

Many on Wall Street make fun of CNBC and the mainstream financial media, and I do think the mainstream media is as vacuous an enterprise as there is, but I also think there is always an endeavor to “get it right” even in a 30-second or 1-minute sound bite.

For analyzing macro and micro earnings data, a discerning investor needs to consider:

1.) Are the macro estimates top-down or bottom-up ? (Bottom-up estimates for the SP 500 are usually higher, but the top-down is what is typically reported.)

2.) Are the estimates GAAP or non-GAAP (i.e. operating) ? (My impression is Thomson uses “operating” or whatever the analyst’s use which is typically operating, while Factset uses reported since Factset estimates typically come in lower than T/R.)

3.) For company-specific estimates, how many analysts have submitted an EPS or revenue estimate ? ( I typically don’t like to use a company EPS or revenue estimate until 5 – 7 analysts have modeled the company.)

4.) For company or sector growth rates are the revisions upward or downward and to what degree, and how do the sector revisions fit with the direction of the overall SP 500 growth rate ? (Starting in late q3 ’12 and early q4 ’12, even though EPS estimates were falling overall for the SP 500 for expected 2013 EPS growth, Financial sectors estimates were stable to higher. It isn’t just absolute revisions that matter, but severity and stability.)

5.) Although much is often heard about SP 500 earnings, what about revenue trends by sector ?

These issues are never vetted by the financial media anchors, and instead, a complex and opaque topic is often left to quick sound bites that fit the market view of those being interviewed.

Here is our latest update on q2 ’14 revenues by sector using Thomson Reuters data. The spreadsheet is my own.


Note the change in revenue growth by sector from q1 ’14 to q2 ’14. Did weather in q1 ’14 make that much of a difference ?

Also note that q2 ’14 revenues didn’t change much within the quarter, as SP 500 companies reported results. (Readers will see a q3 ’14 SP 500 expected revenue growth estimate on Monday, 10/6/14.)

It isn’t surprising that biotech is doing so well. Gilead is smoking, and biotech, mainly Gilead is driving a lot of Healthcare revenue growth. (Not long any biotech.)


Finally, Thomson Reuters notes the impact the Financial sector charges by Bank of America in q3 ’14 and JP Morgan’s easy compare from q3 ’13 are having on both the Financial sector and the SP 500 in general. If Bank of America’s expected q3 ’14 charge is eliminated and and the old estimate of $0.32 is used, expected SP 500 earnings growth for Financials would be +20% and the SP 500 expected growth rate for q3 ’14 would be +8.1%. However if JP Morgan’s charge from q3 ’14 is reinstated to an operating basis, then y/y growth for Financials falls to -2.9% and the SP 500 expected growth falls to +4.1%. (Long BAC and JPM.)

My point is if both JP Morgan and BAC 2008-mortgage related charges are excluded and the Financial sector is looked at on an “operating EPS basis” then I think the SP 500 starts the quarter at closer to a 6% expected y/y earnings grow rate, which is typically revised upward as analysts start to get results.

Factset notes that the q3 ’14 “bottom-up” SP 500 EPS estimated growth rate dropped 4.2% from July 1 to September 30th, more than the 4-quarter average of 3.2%.

Thomson Reuters notes that with the closing of the Nokia acquisition, Microsoft’s q3 ’14 (fiscal q1 ’15) estimate fell from $0.64 to $0.49 per share. Without the MSFT drop, Tech is expected to show a +9.9% q3 ’14 earnings growth rate. (Long MSFT)

The point being that discussing earnings can be a complex topic.

I like to look at SP 500 earnings estimates over a quarter, and note the changes amongst and between the sectors, and then look at the full year expected earnings growth and see if those estimates are being revised as well.

I particularly like to look at the change in the expected growth in the SP 500 earnings as a whole, and then compare the sector changes, to get a feel for relative strength and weakness.

My impression is that over the last few years (since 2011), while there has been short-term volatility, the longer-term growth has been steadily inching higher from mid to high-single-digits.

More to come early this week, before the earnings season kicks off for good.

Thanks for reading. Hope this sheds some light on an involved subject.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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