11.21.14: SP 500 Weekly Earnings Update: Q3 ’14 Earnings Were Strong; Q4 ’14 Will Also Be Very Healthy (Despite Energy)

November 22, 2014 at 3:13 am | Posted in BAC, Basic Materials, Earnings, Earnings estimate revisions, Energy sector, Fwd 4-qtr growth rate (SP 500), S&P 500, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuters, the “forward 4-quarter” estimate this week fell slightly to $126.48 from last week’s $126.64.

The metrics as of 11/21/14’s close:

SP 500: 2,063.50

P.E ratio: 16.3(x)

PEG ratio: 2.15(x)

SP 500 Earnings Yield: 6.13% down from last week’s 6.21%, thanks to 1.16% rally in the SP 500 this week.

Forward 4-qtr growth rate: the y/y change in the forward 4-qtr growth rate ticked up this past week to 7.58% from last week’s 7.54%.

Analysis / commentary: Thomson is now putting the SP 500’s q3 ’14 earnings growth rate at +11.2% (486 of SP 500 have reported q3 ’14) if the Bank of America charge is excluded. JP Morgan’s year-over-year easier compare is in q3 ’14 so the +11% isn’t a pure number, but that is still one of the better quarters of operating earnings growth for the benchmark in some time. (I’ll try and get an adjusted operating number for q3 ’14 this week.)

As was noted last week, current q4 ’14 SP 500 earnings growth expectations is expecting 7% growth as of 11/21/14, which given the drop in Energy and Basic Materials, is still a very strong quarter expected for q4 ’14, and we still have another 6 weeks of likely downward revisions ahead of us. My guess is – by early January ’15 – the y/y growth estimate for q4 ’14 will be around 5% – 5.5%, and then we’ll see the upward revisions after q4 ’14 earnings start getting reported around January 10, ’14.

 Full-year 2014 SP 500 Earnings Growth Still Looking Pretty Strong:

With basically all of the SP 500 having reported q3 ’14 earnings, here is the change in full-year 2014 expected earnings growth by sector since July 1 ’14 (ranked highest to lowest):

Health Care: +16%, +11.9%; ( no surprise here)

Telecom: +15.3%, +15.9%

Technology: +10.9%, +10.4% (Apple’s calendar q3 ’14 was strong – really helped tech.)

Industrials: +10%, +8.8%

Utilities: +8.1%, +7.0%

SP 500: +8.1%, +9%

Basic Mat: +7.2%, +8.6%

Cons Disc: +5.9%, +8.6%

Financials: +4.2%, +6.6% (So may charges, hard to get a feel for operating earnings)

Energy: +4.2%, +9.4%

Cons Spls: +4.1%, +5.9%

One of the reasons I go through this exercise of analyzing the sectors from different timeframes is to simply see what jumps out; despite the drop in crude oil prices, Energy is still not the sector with the slowest expected earnings growth for full year 2014. That title is held by Consumer Staples. I would not have expected that.

Since July 1 ’14, Health Care, Technology, Industrials, and Utilities have seen upward revisions to full-year 2014 expected earnings growth.

There look to be some sector positives for 2015 as well, which we will be out with early next week.

Thanks for reading,

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

11.20.14: Bond Market Update: Municipals outperformed Corporates Handily in 2014

November 20, 2014 at 9:52 pm | Posted in Asset allocation, Bond Funds, Bond Market Liquidity, Bond Market(s), MUB, Municipal Bond market, Municipal High Yield, Uncategorized | Leave a comment

We’ve had a tougher year in our balanced and fixed income accounts, mainly because like the 99% of the other money managers in the universe of money management, we thought interest rates would rise again this year, (sentiment should have been a huge tell at this time last year) and they didn’t.

Given the 30 – 35 year lows in interest rates, we’ve maintained a position in the TBF, or the unlevered Treasury short position.

However, the one thing we’ve done right this year, even in tax-deferred accounts like IRA’s and such, is that we’ve maintained a nice weighting in municipal bonds, whether through two closed-end funds we like to use ( Nuveen’s NUV, and Blackrock’s MEN), but also through a position in John Miller of Nuveen’s High Yield Muni Fund, as well as the HYD or the Barclay’s Market Vector High Yield Muni ETF.

We’ve been out of taxable high yield for some time, although we’ve traded the HYG for short periods.

My own opinion is that the bond markets this year have been far harder to navigate than the stock markets.

Here is a quick rundown of performance of some of the various fixed income markets:

The first column is year-to-date (YTD) return, and the 2nd column is 1-year return:

HYG:+2.83%, +3.86% (iShares taxable high yield ETF)

HYD: +13.74%, +12.66% (Barclay’s High Yield Muni ETF)

AGG:+5.04%, +4.61% (Barclay’s Aggregate, the bond market equivalent of SP 500)

MUB: +8%, +7.47% (iShares National Muni Bond ETF)

Here are how some of our individual muni vehicles did:

NUV: +9.42%, +11.2%

MEN: +15.78%, +19.70%

HYMB: +15.71%, +14.36% (Nuveen SPRD High Yield Muni Bond ETF, as proxy for John Miller’s Nuveen High Yield Muni open-end fund)

There is a lot of sectors we haven’t covered like TIPS, and Mortgages (MBS) and Preferred Stock (PFD), but checking some Bespoke data from their Wednesday night Fixed Income Weekly, TIPS and MBS are up 4% – 5% YTD.

The big disappointment for 2014 is probably taxable high yield, and a lot of that is probably Energy-related given Energy’s weight in the high yield benchmarks.

My own rationale for the muni outperformance is that 2013’s Taper announcement coincided with the Detroit bankruptcy in August – September of ’13, and the market just got hammered. While Puerto Rico is still an issue and will be in 2015, there has been time to clean out that paper. Plus state finances have improved, as have municipalities ability to refi existing debt. The Puerto Rice Electric Power’s (PREPA’s ?) seem to be on a lot of radars, as they first to default, possibly as early as Spring ’15.

We wrote about the muni closed-end fund discounts way back here, before anyone was noticing. (Actually, after re-reading the piece from August ’13, it looks like there was some press on the closed-end fund discounts.)

2015 could be a different story.

No question, Energy’s woes and general liquidity issues hampered the taxable fixed income market in 2014.

We even bought John Miller’s Nuveen High Yield Muni Fund for IRA’s and pension accounts, given at one point during the summer, the fund’s current yield was higher than the HYG current yield.

We have no early thoughts on 2015 in terms of bond sectors or asset class positioning. The current yields on NUV of 4.60% for investment grade muni’s and MEN’s 6.7% (with leverage) still look ok to me.  We’d be a quick seller of MEN should the short-end of the Treasury market start to turn.

Be forewarned: the big issue with municipal high yield is the very long duration of this market. A lot of this is 30-year paper or longer, and highly illiquid. Some of it will be called, or refi’ed for sure, but the duration is a lot higher than taxable-equivalent funds.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

11.18.14: REIT’s Will Be 11th Sector of the SP 500

November 18, 2014 at 6:53 pm | Posted in Financial sector, REIT's | Leave a comment

Standard & Poor’s made a big announcement in the last few weeks: REIT’s will be broken out as a separate asset class beginning in September, 2015 and will constitute the 11th sector of the SP 500.

If you follow our regular weekly earnings work on this blog, you know the other 10 sectors by now.

Greg Harrison of Thomson Reuters provided me with the following spreadsheet this morning on the new sector and I was somewhat surprised at its small size. FC – REIT sector

The market cap will be less than 3% of the SP 500, which means that the REIT’s listed will be smaller than the Telco, Utilities, and Basic Materials sectors of the SP 500.

The REIT sector will be roughly 2.3% of the SP 500 when it is spun out, and is currently contained in the Financial sector of the SP 500.

Although  I haven’t owned it in a while for clients, given the popularity of the rental market in terms of multi-family housing, Equity Residential, which is a Sam Zell REIT, is our favorite. EQR’s CEO is a guy by the name of David Neithercut, who was EQR’s CFO in the early 1990’s, when a lot of the REIT’s had just come public, and I was looking at REIT’s from the debt or credit side of the capital markets.

Sam Zell timed the market perfectly in late 2006, when he sold Equity Office to Blackstone, so Boston Properties (BXP) looks like it will be the only commercial real estate or office property REIT in the index.

I got to know some of the retail REIT’s like Kilmco and others as well in the early 1990’s, although you would think mall properties are another sector being punished or pressured by Amazon. (Long AMZN).

Kimco (KIM) is (or was back then) considered to be a very good operator.

To my knowledge, there isn’t a lot of information being disseminated on the new sector, so Fundamentalis readers have gotten an early look.

Hope this helps.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

11.15.14: SP 500 Weekly Earnings Update: q4 ’14 SP 500 Expected Earnings Growth Starts to Stabilize

November 15, 2014 at 7:59 pm | Posted in Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuters’ “This Week in Earnings” the forward 4-quarter earnings estimate for the SP 500 fell this week to $126.64 from last week’s $126.77.

P.e ratio: 16(x)

PEG ratio: 2.14(x)

Earnings yield: 6.21%

Year-over-year (y/y) growth rate of the forward estimate: +7.54%, versus last week’s +7.63% or a 9 basis point drop.

Analysis / commentary: the one metric at caught my eye this morning as I read through the weekend earnings research at Saturday breakfast, is that the expected earnings growth for q4 ’14 for the SP 500 as a whole was 7.3% as of Friday’s “This Week in Earnings” report, versus 7.6% last week, which tells me that the Energy and Basic Materials negative earnings revisions could be coming to an end, at least for now.

With 450 of the SP 500 having reported q3 ’14 earnings, the results have actually been pretty positive: actual earnings growth for q3 ’14 per Thomson Reuters is +9.8%, but that includes what is widely-regarded as the last good quarters of Energy and Basic Material’s earnings growth, which was +10.4% for Energy, and +20.7% for Basic Materials (compared to the -7.9% and -0.3% for q4 ’14, respectively.)

Here is how the 10 sectors of the SP 500 expected q4 ’14 earnings growth have changed in the last week:

Consumer Disc: +8.8%, +9.6% (80 basis point decline)

Consumer Spls: +0.9%, +1.4% ( 50 basis point decline)

Energy: -7.9%, -6.9% (100 basis point decline)

Financl’s: +8.6%, +8.6% (no change, and somewhat puzzling given the charges that are circulating regarding the forex scandal);

Hlth Care: +18.1%, +17.9% ( another weekly increase)

Industrials: +11.2%, +11.2% (no change, should be beneficiary of falling crude prices)

Basic Materials: -0.3%, +0.1% (pretty dramatic change from q3 ’14’s +20% growth)

Technology: +8.5%, +8.6%

Telco: +19.6, +19.9%

Utilities: +9.8%, +9.3% (another increase)

SP 500: +7.3%, +7.6% (30 basis point decline)

My own opinion is that we are starting to see estimates stabilize for q4 ’14 after the Energy and Basic Materials shock.

2015’s expected SP 500 earnings growth fell from +10.3 to +10.2% in the last week, not really worth mentioning, but we keep track of the changes in expected earnings growth across multiple timeframes.

It is just my opinion, but SP 500 earnings continue to be a bright spot: despite ugly revisions for Energy and Basic Mat for the 4th quarter, consensus estimates are still looking for +7.3% growth in q4 ’14. That will surely come down before q4 ’14 earnings start to get reported in January, ’15, but we should end up with a +5% growth rate just as earnings start. That is a plus, particularly with the pressure on the Energy sector.

We saw a lot of high profile commentators go negative on q3 ’14 earnings starting early, September ’14 and we didn’t as you can see here.

SP 500 earnings growth is still very much a positive aspect to this market. Don’t bail because of earnings.

 

 

 

11.8.14: SP 500 Revenue Growth, 3rd and 4th Quarters

November 8, 2014 at 10:45 pm | Posted in S&P 500, SP 500 Revenue Growth | Leave a comment

We occasionally post an update to SP 500 revenue growth, which we are doing tonight again here (FCSP500revgro(qtrly)).

As you can see SP 500 revenue growth for q3 ’14 is coming in slightly better for the 3rd quarter with almost 80% of the SP 500 having reported their 3rd quarter, 2014 results.

The two sectors with upside in terms of revenue growth are Healthcare (no surprise, a lot of which is biotech), and Technology.

In terms of the 4th quarter expectations, Thomson Reuters doesn’t give any look forward for revenues as they do with earnings, but Factset does, so here is what Factset is showing for the changes in q4 ’14 revenue expectations, from Sept 30th to Friday, November 7th (first column of data), as ranked from highest to lowest expected revenue growth:

Health Care: +9.2%, vs the +8.8% expected of 9/30/14

Technology: +6%, vs +7.2%

Telecom: +4%, vs +4.2%

Consumer Disc: +3.5%, vs +4.7%

Consumer Spls: +3.2%, vs +3.8%

Industrials: +2.8%, +3.3%

Ute’s: +2.5%, vs +0.8%

Fincl’s: +2.3%, +2.9%

SP 500: +2.2%, vs +3.8%

Basic Materials: -0.6%, vs +1.9%

Energy: -9%, vs. -1.7%

Only Healthcare has seen upward revisions to revenue estimates for q4 ’14. What a shocker that Basic Materials and Energy are at the bottom of the list. Every sector besides Healthcare has seen revenue growth estimates decline for q4 ’14.

My guess is, as was the case with yesterday’s Weekly Earnings Update, (see November 7th post), is that Energy is having a significant drag on q4 ’14 SP 500 revenue estimates as well, not just SP 500 earnings estimates.

The expected revenue decline of 9% within the Energy sector for q4 ’14 as of this weekend, is 400% greater than the expected revenue decline as of September 30th’s expected -1.7% and it could still get worse.

 

11.7.14: SP 500 Weekly Earnings Update: Energy and Basic Material Downward Revisions Exerting Pressure on Forward Estimates

November 8, 2014 at 1:06 am | Posted in BAC, Basic Materials, Earnings, Earnings estimate revisions, Energy sector, Fwd 4-qtr growth rate (SP 500), Weekend Link Fest | Leave a comment

Per Thomson Reuters, This Week in Earnings, the forward 4-quarter estimate for the SP 500 closed this week at $126.77, versus last week’s $127.04.

After the 70 bp increase in the SP 500 this week, the p.e ratio using the forward estimate is 16(x), slightly higher than the 5 and 10-year average p.e on the SP 500, per Factset.

PEG ratio: 2.10(x), a sharp jump from the 1.6(x) – 1.7(x) range we saw over the summer and for most of 2014, and you’ll see why in a minute.

Earnings yield: 6.24%

The year-over-year change in the forward growth rate fell to 7.63% this week, from last week’s 7.87%.

Analysis / commentary: Energy is 12% of the SP 500 by market cap weight, while Basic Materials is 3%, thus if you take the two sectors together, 15% of the SP 500 is seeing heavy downward revisions of forward earnings estimates.

Energy: the 5-week change in earnings growth for the Energy sector for just q4 ’14 is a whopping 1,350 basis points negative, from an expected +6.6% on October 1, to -6.9% as of November 7th;

Energy: for full-year 2015, the Energy sector’s expected earnings growth has declined a negative 870 basis points, from +6.9% as of October 1 to -1.8% as of November 7th;

Basic Materials: the 5-week change in earnings growth for the Basic Materials sector for just q4 ’14 is a negative 990 basis points, from +10% as of October 1, to +0.1% as of November 7th;

Basic Materials: for full-year 2015, the Basic Mat’s expected earnings growth has declined from +19.1% as of October 1 to +16% as of November 7th;

For just the 4th quarter alone, Energy – according to my math – is having a 160 bp drag on the SP 500 as a whole. Thus the current 7.6% expected growth rate for q4 ’14 as of November 7th, should be closer to 9.2%.

With Basic Materials 990 basis point drag for q4 ’14, with just a 3% market cap weight, the drag for just the Basic Mat sector looks to be pretty miniscule at les than 1/2 of 1%, but add the two sector together and you get almost a 200 bp or 2% drag on the SP 500 for q4 ’14.

Thus, 53% of the drop in the q4 ’14 expected growth rate, for the SP 500 can be explained by the 190 basis point drag of Energy and Basic Materials.

Mathematically:

  • q4 ’14 expected earnings growth for SP 500 as of October 1: +11.2%
  • q4 ’14 expected earnings growth for SP 500 as of Nov 7, ’14: +7.6%
  • Total Difference since October 1 ’14: 360 basis point decline
  • Energy and Basic Mat revisions: estimated 190 basis decline
  • Remaining 8 sectors of SP 500: 170 basis point decline

The additional announcements this week on Bank of America, and the continued onslaught of charges and special charges at the big banks, complicates the earnings picture even more. (Long BAC)

 2015 expected SP 500 earnings growth: Usually at this time of the 4th quarter, I start looking for sectors that are remaining stable in the face of the typical downward revisions. Usually, 2015 SP 500 earnings growth isn’t given full freight, until q4 ’14 earnings are released and management’s give their best 2015 guidance on the January and February conference calls.

I went back and looked at 2014’s expected earnings growth for the SP 500 at this time last year: Between October 1 ’13 and January 31 ’14, the expected 2014 earnings growth for the SP 500 declined just 160 basis points in 3 months. Already, since October 1, 2014, the expected 2015 earnings growth for the SP 500 has declined 210 basis points. Energy’s expected decline for full-year ’15 (see above) is 870 bp’s alone.

What worries me is that despite Energy’s pressure for 2015, not all of the decline can be explained by Energy.

Now that Energy’s revisions are baked into the forward estimates, I would like to see that “forward 4-quarter earnings growth” rate for the SP 500 start to increase again.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

11.5.14: How Big of an Impact is Energy Having on 4th quarter SP 500 Earnings Growth ?

November 5, 2014 at 1:50 pm | Posted in Energy sector, S&P 500, Sector Earnings Growth Estimates | Leave a comment

Per Greg Harrison of Thomson Reuters, as of 11/4/14, the SP 500’s q4 ’14 year-over-year earnings growth for the key benchmark was projected to be 7.8%.

If the Energy sector was just flat for q4 ’14, (i.e. no growth), the growth rate for the SP 500 would be +8.6%, so Energy, assuming no growth, is a drag of 80 basis points currently.

Now, the energy sector isn’t expected to be flat, but is currently expected to see y/y earnings decline of -6.8%.

The point is – as you can imagine – is that Energy is a significant drag on the SP 500 earnings as a whole.

As we noted in the Weekly Earnings Update, the “forward 4-quarter” growth rate of the SP 500 is starting to come down, not insignificantly.

Healthcare, Industrials, Financials and Technology are the sectors to play in lieu of Energy.

Our own forecast given the numbers, is that Energy estimates will likely bottom in q4 ’14, from our October 25th blog. Modeling out the numbers got us to that conclusion. Once we move trough the 2nd half of 2015, compares get easier.

Boone Pickens noted the he thought Energy would bottom in q1 ’15, in a CNBC interview yesterday, albeit he likely arrived at the conclusion in a different manner.

Give the Energy sector time. Values will present themselves.

The estimates and numbers change every day. We’ll have more on the changes in estimates this weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

11.3.14: Change in q4 ’14 Expected Earnings Growth since October 1

November 4, 2014 at 1:31 am | Posted in Sector Earnings Growth Estimates | Leave a comment

Here is the change in q4 ’14’s expected earnings growth by sector since October 1 ’14. Most of this was on the spreadsheet from this weekend, but not all.

(First column is expected growth as of 10/31, 2nd column is expected growth as of 10/1)

Cons Disc: +10.1%, +13.9%

Cons Spls: +2.1%, +4.5%

Energy: -5.9%, +6.6% (whopping change of 1,259 bp drop)

Fincl’s: +8.7%, +10.4%

Hlth Care: +17.8%, +19.4%

Industrials: +11.3%, +12.4%

Basic Mat: +2.1%, +10% (In q3’14, Basic Mat will be +20%, so we are seeing a big drop in q4. The commodity pain continues)

Technology: +9.2%, +10.5%

Telco: +18.4%, +23.8%

Utilities: +8.1., +7.7%

SP 500: +8%, +11.2%

Only Utilities has seen an increase in expected growth for q4 ’14 since October 1. Two weeks ago we wrote that Technology was showing an improvement but that has evaporated. With the criminal probe at JP Morgan, announced tonight, Financials might get whacked again. Ex Energy, the 4th quarter would be looking pretty solid. A 1,250 basis point drop in a sector that is 12% of the SP 500’s market cap implies a 1.5% reduction in the SP 500, which means that the SP 500 expected growth would be closer to 9.5% versus today’s 8%.

Data Source: Thomson Reuters

11.2.14: Factset on 4th quarter, 2014, SP 500 Earnings Estimates

November 2, 2014 at 3:58 pm | Posted in Apple (AAPL), Basic Materials, ECA, IBM, TBF - inverse Treasury | Leave a comment

In yesterday’s SP 500 Weekly Earnings Update, I tried to lay out the case for Technology and Industrial’s overweights, while quantifying the drag that the Energy sector was having on SP 500 forward earnings estimates.

The question on just how much of a drag the Energy sector was having on q4 ’14 and forward SP 500 earnings estimates wasn’t answered directly, but I hope to have that for you this week.

John Butters writes the weekly earnings commentary for Factset, and prior to do doing this for Factset, John was grand poohbah at Thomson Reuters, writing the “This Week in Earnings” weekly missive, which Greg Harrison now quite ably handles for T/R. I read both every week, but our model is based on the hard data provided by Thomson, so we’ve stuck with Thomson Reuters as our (my) primary earnings data provider.

In the Factset commentary this week, John Butters notes that:

1.) “The q4 ’14 bottoms-up estimate (which is an aggregation for all the companies in the index) dropped by 2.7% this month”;

2.) Without quoting verbatim, but using the Facset stats, the “average decline” during the first month of a quarter historically has been:

  • 1.3% – 4 quarter average
  • 0.6% – 20 quarter average
  • 1.8% – 40 quarter or 10-year average

Although John didn’t exactly quantify the earnings drag, he did go on to note that “most of the reductions in earnings estimates have occurred in the commodity-based sectors”.

Per the Factset data, the Energy sector has recorded the largest decline of all 10 sectors in terms of bottoms-up EPS estimates at -10.8%, followed by Basic Mat at -7.5%.

Per John Butters commentary, “no other sector has recorded a decrease in bottoms-up EPS of greater than 3.3% through the first month of the quarter”.

Factset had some other interesting tidbits as well, but we’ll save those for the trading week. Here is the link to John Butters and Factset’s earnings commentary: www.factset.com/earningsinsight. What Thomson Reuters and Factset provide is powerful info for the medium-to-long-term investor.

Stay with and overweight the non-commodity sectors of the SP 500, at least through the end of the year.

Do your homework, and track the data, or continue to read this blog where we try and do that for you, in a meaningful way.

Thanks for reading and stopping by. We’ll be out with more what we hope is useful and interesting data during the week.

The conclusion you should take from yesterday’s and today’s post(s) on SP 500 earnings is that, while there is pressure on the SP 500’s forward estimates, and on q4 ’14 earnings, it is overwhelmingly coming from Energy and certain commodities. That should leave the reader plenty of room to pick your sector and sub-sector and individual names into year-end 2014.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

11.1.14: SP 500 Earnings Update: Technology and Industrial Sectors Looking Better, Avoid Energy

November 1, 2014 at 7:05 pm | Posted in Energy sector, Industrials, Sector Earnings Growth Estimates, Technology, Weekly Earnings Update | Leave a comment

 

Per Thomson Reuter’s This Week in Earnings, the forward 4-quarter estimate fell this past week to $127.04 from last week’s $127.54.

All metrics as of 10/31/14:

SP 500 close: 2,018.05

P.E ratio: 15.9(x)

PEG ratio: 2.02(x), the PEG’s highest level since the week ended April 18, ’14, when the PEG was 2.25(x);

SP 500 Earnings Yield: 6.30%

Growth rate of forward estimate: 7.87% down from last week’s 9.11%.

Analysis / commentary: The decline in the “forward 4-quarter growth rate above to 7.87% from last week’s 9.11%, is an important story, but the $64,000 question remains, “How much of the decline in the forward growth rate, is Energy-sector related ?”

Here (FCearningsRTofCHANGE) is a spreadsheet we started working on this summer, which measures the “rate of change” of the growth rates of the SP 500 sector estimates as published by Thomson Reuters. The point of this is to try and isolate sectors and changes in the growth rates both to identify opportunities and risks. A couple of items that are of interest to us:

1.) 4th quarter, 2014 Energy sector earnings estimates (q4 ’14 by sector is line 1 – 20 on the spreadsheet) have declined dramatically – 1,250 basis points – in just the last 30 days from an expected +6.6% growth rate as of October 1, to an expected decline in sector earnings growth of -5.9%;

2.) Interesting that q3 ’14 data, with about 2/3rd’s of the SP 500 having reported, shows an improvement in Energy sector earnings growth. Enjoy it now, it will get worse from here;

3.) Here is the change in Energy sector estimates by quarter, from October 1 to October 31, 2014:

q3 ’14 change: +250 bp improvement (actual results, better-than-expected)

q4 ’14 change: -1,250 bp decline

q1 ’15 change: -1,120 bp decline

q2 ’15: -1,030 bp decline

q3 ’15: -1,290 bp decline

Those are sharp declines in percentage growth rates for the Energy sector, and they represent a significant drag on the SP 500 overall earnings growth.

The two sectors that continue to look good in terms of full-year 2014 earnings growth are Technology, Industrials, and Utilities:

Technology: +10.7% as of 10/31, +10.4% as of October 1;

Industrials: +10% as of 10/31, +9.5% as of October 1;

Utilities: +8% as of 10/31, +7.5% as of October 1;

Note on the spreadsheet for q4 ’14 how the “rate of change” for Industrials and Technology is slowing. That is a good sign. Typically during the calendar quarter, estimates get revised lower in the final 3 months, until we start getting those earnings reports. The fact that the downward revisions are slowing down for these two sectors is a positive sign (at east for right now).

Health Care has been flat in terms of full-year 2014 expected earnings growth, 15.2% today vs 15.2% as of October 1.

This is a lot of number-crunching and navel-gazing. Bottom line is avoid Energy (for now) and focus on Technology and Industrial sectors for opportunity.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

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