Earnings update: March 16th, 2013: Best Quarterly Revenue Growth for SP 500 since – well – a long timeMarch 17, 2013 at 2:53 pm | Posted in Bond Funds, DVN, Earnings, Eurozone Crisis, IBM, JNK, NKE, S&P 500, SNDK, Uncategorized | Leave a comment
The “forward 4-quarter” estimate for the SP 500 as of Friday, March 15th, 2013 was $111.96, down a whopping $0.06 on the week, and down $1.92 since we rolled into the first quarter, 2013.
The p.e ratio on the forward estimate is 14(x).
The earnings yield is 7.17%.
490 of the 500 SP 500 companies have reported q4 ’12, with year-over-year earnings growth +6.1% and revenue growth of +3.6%, both much better-than-expected, pre- January 10th.
We think Q1 ’13′s earnings and revenues, which officially start April 9th or 10th, should be similar to Q4 ’12, i.e. low expectations, surpassed with better-than-expected actual results. We might not hit those same percentage gains, but I expect q1 ’13 to be better than the current +1.5% for earnings growth.
This coming week, we start to hear what are 1st quarter, 2013 numbers for a number of companies, with quarter’s ending February, ’13:
Monday: Micron Tech (MU) – DRAM company which one hedge fund manager described in the late 1990′s as “an airline with a fab attached”. All that means is that MU’s capex is often greater than the profits it generates over longer periods of time, meaning that as a company MU destroys capital. However, if you can get the cycle right, as in 1990 to 2000, you can make a boatload of money on the stock. DRAM prices are expected to be firm in 2013, and are thought to be up for the first quarter of 2013 already. MU could be interesting this year. Just know what you own.
Wednesday: We hear from Lennar (LEN) which is a homebuilder, Fedex Corp (FDX), the freight company and Transport component, both before the opening bell, and Oracle (ORCL) after the closing bell Wednesday. That is a good cross section of the economy, with growing bullishness around housing and homebuilding, FDX up almost 20% year-to-date, and Oracle giving a good look into “enterprise” technology.
Thursday: Nike (NKE), a consumer staple reports after the bell, with China and margins the key focus.
Friday: Luxury retailer Tiffany (TIF) reports pre-open.
Think about that: we get a look at a national homebuilder, a global transportation company with tentacles in every aspect of international business, an enterprise technology company with perspective into corporate tech spending, and a mid and high end retail perspective. All of the companies have a January or February quarter end too. I think TIF might have a January 31 quarter end, but the rest give us a pretty good look through the end of February, and the conference calls will likely include March commentary in terms of the business update. (Long LEN, FDX, ORCL, NKE)
Although every sector of the SP 500 remains overbought, the benchmark keeps chugging ahead.
Stat of the week:
Although I could have gotten the same info from going back through the pile of ThomsonReuters, “This Week in Earnings” reports, that is about three feet high and sits next to my desk, JP Morgan’s Market Insights Market Bulletin, which came out late Friday, March 15th has some info we have been thinking about for a while.
What has been the quarterly revenue growth rates for the SP 500 off the March ’09 low ? (The following is courtesy of Joe Tanious, CFA of JP Morgan via Sharika Cabrera, our JP Morgan coverage):
q4 ’12: +3.2%
q3 ’12: – 1.1%
q2 ’12: 0%
q1 ’12: +1.5%
q4 ’11: 0.4%
q3 ’11: +1.8%
q2 ’11: +2.6%
q1 ’11: +1%
q4 ’10: +1.4%
q3 ’10: +0.4%
q2 ’10: -0.1%
q1 ’10: +0.5%
q4 ’09: +2.3%
Commentary: Q4 ’12′s revenue growth run rate has been one of the strongest off the ’09 lows. Not included in the JPM report is that Financial sector revenue is +20% in q4 ’12. Although I havent confirmed that by going back through all the TWIE reports since March ’09, that without a doubt has to be the best y/y growth rate for the Financial sector in 4 – 5 years, possibly as back as far as 2006.
There is some other great data in the JP Morgan report I will get into during the week. (It is St. Patty’s Day and I’m late for a party, and remarkably lazy as well.) Great report, by Tanious. If you can get it, take a minute to read thoroughly.
Joe’s conclusions are a little different than ours: he thinks that any further market appreciation will essentially be from p.e expension on the SP 500. Joe doesn’t put much faith in SP 500 earnings growth growing much faster than mid-single-digits. I have a little more confidence in the US recovery, despite the job-killing and redistribution-of-wealth policies emanating from Washington. I still think we get close to 10% or even hit 10% y/y earnings growth for the SP 500 by q4, 2013.
The SP 500 faces very easy earnings “comp’s” in the back half of 2013.
Is Cyprus a big deal and is the Eurozone Crisis awakening again ? The region needs some economic growth. We’ll find out Sunday night at 8 pm central, when futures and the Nikkei opens for trade.
New position this week in Devon Energy (DVN). We have been looking for oversold names. Good summary of the stock by Colin Temple, a Twitter bud. Here is his blog review of DVN http://www.dydd.org/?p=3648, at www.DYDD.org. (Long DVN)
We are still long an inverse SP 500 position, SH. Painful. If the pattern holds, the correction will come early April, with q1 ’13 earnings. However this q1 rally is much different than 2010, 2011 or 2012. (Long SH)
Sandisk and IBM, both good breakouts this week. SNDK took out the October, 2011, high of $52 and change, while IBM took out the October, 2012, high of $211 and change. Still like ‘em both. (Long SNDK and IBM).
Remember, “retail is detail”. I think the stocks and sector is looking quite gamey. However betting against retail at any time unless you have individual short positions has been folly. With companies not reporting monthly comp’s, analysts dont have the monthly crack habit of data to feed the models. (Long a bunch of retail names);
Cristina Padgett of Moody’s (MCO) published the Moody’s High Yield Research on the covenant quality of high yield bonds this week, and the index continues to flash yellow. We have upgraded our high yield funds to PIMCO’s higher-quality, high yield (i.e. the New Normal and all that) and have the JNK for a trade here. The problem with the Moody’s credit research as good as it is, is that the index is just a year or two old, and yelling the “sky is falling” is a good way to attract attention to your work. I’m not saying Moody’s is doing that, but yelling “Fire” can get folks attention. As long as economic growth doesn’t turn down suddenly, I think the mid to higher-end of the high yield bond market is probably ok. Given recent economic data, I would fully expect Q1 ’13 GDP growth to come in better-than-expected when reported in late April. I think a number of economists are already lifting Q1 ’13 GDP estimates, based on housing, and some other data.
Lots of housing data this week: Lennar (LEN) reports Wednesday morning. Here is our preview from www.seekingalpha.com:http://seekingalpha.com/article/1275911-lennar-earnings-preview-valuation-is-full-but-cycle-still-early
Interesting article from Standard & Poors on the rapidly improving credit improvement being discounted in homebuilder bonds: http://ow.ly/d/17vb. Very few credits in the homebuilder sector are investment grade rated. Toll Brothers (TOL) was long thought to have the best balance sheet in the sector, but I notice SP only has them rated BB+.
Jeff Miller’s, A Dash of Insight blog:http://oldprof.typepad.com/a_dash_of_insight/2013/03/weighing-the-week-ahead-more-opinions-less-data.html. Always one of the best reads of the week.
Quote of the week (my own, I hope): “You can lose your money in the stock market, a lot faster than you can make it elsewhere”. Evaluate risk as well as reward throughout your entire investment process.
Thank you for reading, if only one person looks at www.fundamentalis.com, then it is worth the effort.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
As the 4th quarter, 2012 winds down and with all eyes focused on Washington, it has been a better year for stock and bond returns than many expected. The S&P 500 is up roughly 15% – 16% year-to-date, and the Lehman Aggregate will end the year with an increase of 4% – 5% (approximately).
In terms of S&P 500 (and per ThomsonReuters), the “forward 4-quarter” estimate for S&P 500 earnings is now $108.91, down slightly from last week’s $109.09, and towards the lower end of the 3-month range of $107.89 from Sept 28th, and $112 from October 5th. This pattern is typical of how earnings estimates “evolve” during a quarter. The forward estimate tends to get revised downward through the quarter, and then we will see a nice “pop” in that forward estimate as we roll into the first week of January, as the old quarter rolls off and we add the next forward quarter to the estimate.
With 3rd quarter, 2012 financial results all but reported (497 of 500 companies have reported their 3rd quarter, 2012 results already), the calendar 2012 earnings estimate for the S&P 500 is $101.38 as reported by ThomsonReuters (7 estimates), and I would expect that to drift a little higher as the 3rd quarter results are finalized, and the 4th quarter starts getting reported in early January.
Thus, the S&P 500 is trading at 13(x) those forward earnings expectations.
Last week, Jeff Miller, the erudite blogger that authors “A Dash of Insight” every week (http://oldprof.typepad.com/a_dash_of_insight/) called me out on my comment that I thought the S&P 500 was “fairly valued”.
When I look at S&P 500 earnings growth expectations for this year and 2013, year-over-year growth for S&P 500 earnings is expected at 4% in 2012, and 10% in 2013, and if you average the two you arrive at 7%. A 13(x) multiple on the S&P 500 currently is roughly 2(x) the average growth rate of the two years, so on a P.E-to-growth basis, the S&P 500 is thought by some to be “fairly valued”.
As a smart lawyer once said, “I can argue it either way”, but like a lot of folks in this business, I tend to think the risk / reward in terms of asset allocation is more favorable to stocks (more reward) than bonds (more risk).
This article from Brian Wesbury, First Trust’s excellent resident economist from November 5th, 2012 (http://www.ftportfolios.com/Commentary/EconomicResearch/2012/11/5/election-matters,-but-stocks-are-cheap) makes a compelling case for the US stock market.
While the Washington discussions have thrown a temporary wrench into market forecasts and have have resulted in economic predictions ranging from Armegeddon to cautious optimism. I hear a lot of recession talk about 2013 that guys like Jeff Miller and Doug Short have shot considerable holes in the last 12 months, starting with the August, 2011 market selling. Even though I don’t personally agree with the tenor of the discussions coming out of Washington regarding higher taxes, I just dont think 2013 will be that bad, unless the President really loses all perspective about America and Americans, and their willingness and ability to want to get out of bed each day and control their own destiny economically.
Ultimately, I think there will be a reasonable compromise from Washington and the taxation issue, and Americans will get about “the business of business” in 2013.
Each week, in this opening section, we like to leave readers with a “stat (or stats) of the week” and this week we look at equity market returns across the various market cap ranges and investment styles. What struck me is that this has been a fairly unform year for most equity investors, even as money continues to flow out of actively managed equity funds: (Source: JP Morgan’s Weekly Market Recap as of 12/17/12)
Large-cap Value +16.2%
Large-cap Blend +14.9%
Large-Cap Growth + 14.1%
Mid-Cap Value +16.5%
Mid-Cap Blend +15.3%
Mid-Cap Growth +13.9%
Small-Cap Value +14.2%
Small-Cap Blend +12.7%
Small-Cap Growth +11.2%
From the data, I would attribute a slight edge to larger-cap and a slight edge to “value” over “growth”. The biggest return disparity is between small-cap growth and large-cap value, which is a 5% difference. (I wonder how much of that disparity is Apple (AAPL) ? (long AAPL).
Sector / Security / Market comments:
* Muni’s had a tough week – the MUB ETF looks to be in the early stages of a breakdown (see attached chart). Note the “double-top” in the attached chart from February and then late November. We have sold all of our muni exposure and have left the proceeds in a municipal money market waiting to see what happens. It could be interest-rate related, but I suspect that the tax-exemption that favors municipal bonds might be on the table in 2013 as Washington looks for additional revenue. Here is our blog update from November 17th that details our early comment on muni’s:http://fundamentalis.com/?p=780
* How bad was Citi’s downgrade of AAPL Monday morning, only to see the stock finish higher on the day? Analysts are pulling in AAPL’s 2013 and 2014 earnings estimates as they did in last year’s December quarter, only to get caught with AAPL’s outstanding earnings report in Jan, 2012. Is past prologue ? Hard to say, but it sure looks like AAPL is basing here. It has absorbed a lot of selling and negative commentary and NOT broken that November ’12 low near $500. The stock remains cheap at 7(x) 4-quarter trailing cash-flow (ex-cash). In last year’s December quarter, AAPL grew revenues 73% year-over-year, after growing just 39% in the September quarter of 2011. Not one of our world-class brands i.e. Coca-Cola (KO), Nike (NKE), Procter & Gamble (PG), Johnson & Johnson (JNJ) trades as cheaply as AAPL, right here and now, even though AAPL has substantially higher revenue and earnings growth. (Long all those stocks just mentioned.) There is still that “gap” on AAPL near $425, from the January earnings report that worries me – those technical gaps tend to get filled.
* Ford (F) finished strong on Friday, December 21, and closed right at its high of the day on 2(x) average volume. Some of our value stocks are getting a push late in the 2012. One of our worst sales this year was Applied Materials (AMAT), a value stock, at $10.15, now trading over 10% higher. AMAT also closed Friday on good volume. (Long F).
* Our PC sector call in early October (October 4 to be exact, and here is the link http://fundamentalis.com/?p=508) was too early (and wrong), but we took our first positions in Dell (DELL) and Hewlett-Packard (HPQ) this week, in a long-term, patient account. These are small positions to start, and we’ll buy more Dell at $9.80 – $9.85, and and more HPQ after we see the stocks base. I think the PC sector is more about job growth than tablets. While tablets will see cause some market share erosion, as will the Cloud, there is too big of an installed base of PC’s to say that the Windows – Intel platform is completely dead. We havent owned Hewlett (HPQ) since the late 1990′s, 2000. I like Meg Whitman, but she has been buffeted and rocked by one problem after another. Even “stability” would help Meg and HPQ today. Also, I think the Windows 8 re-design to touch from the mouse and GUI will simply take time for corporations to adapt to, and get comfortable with in terms of training their employees. The Windows 8 “touch” couldn’t have come at a worse time for the sector, but that is opportunity for those that are patient.
* Financials: Meredith Whitney finally came around to our conclusion here (http://fundamentalis.com/?p=678 ) that financials are a good bet, even in 2013. We’ve been blogging that – given the 2013 estimates for the financial sector, the stocks look like they have more upside than downside. However, Elizabeth Warren was put on the Senate Banking Committee, and she is no friend of the banks. Some think they will be (essentially) regulated utilities, for years to come. I’m not that negative though. Essentially the banks are a tangential play on the housing recovery and a lending recovery, while the proprietary trading revenue is gone from the income statement. (Not sure how much of the big bank’s earnings prop trading represented.) If nothing else, with the death of prop trading, the financial sector estimates become more stable, and stable might be “better” in 2013. (Long JPM, WFC and GS.)
* Good week for Goldman Sachs (GS) – rallied again and is testing that March ’12 high of $128.72.
* Gary Morrow, a hedge fund manager in San Luis Obsipo, California tweeted http://twileshare.com/aaun, this chart of Wal-Mart (WMT) this week. We like the stock down to $65. Had a monster run in 2012, but has given a lot back since mid-October. Talk about an earnings juggernaut in terms of consistency. One of the best (and most mis-understood) businesses in America today. The story is those US “comps”and the Cliff complicates that story, although the President seems to want to protect Wal-Mart’s typical demographic. (Long WMT – want to buy more.)
* High yield (i.e. junk bond) spreads are still tightening as are low investment-grade bond spreads. Here is a tweet (http://twileshare.com/aabo) from Norm Conley of JA Glynn out of St. Louis on historical levels of Baa yields. If there is a recession in the offing, my guess is that we will see it earliest in credit spreads.
* BBBY was our best call this past week. Here was our earnings preview http://seekingalpha.com/article/1065581-why-we-worry-about-bed-bath-beyond-heading-into-earnings. The stock was down 4% on the week. Nike (NIKE) was our worst call this week and shows how hard it is to gauge world-class brands. The valuation is extreme, but the company continues to execute. Here was our earnings preview http://seekingalpha.com/article/1073161-nike-earnings-preview-waiting-on-the-iconic-brand-to-sink-into-valuation, and we couldnt have been more wrong. Nike up sharply on Friday in a tough tape.
Thanks for stopping by and thanks for reading. Have a wonderful holiday and New Year.
We will be posting during the holiday weeks on topics of interest.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
There are a number of important earnings reports due out this week, including Oracle (ORCL), the enterprise software giant on Tuesday night; Fed-Ex, (FDX) the transport giant due out Wednesday morning; Bed, Bath & Beyond (BBBY) due out Wednesday night; Nike, (NKE) the athletic footwear giant due out Thursday night; and then Walgreens (WAG), the retail drugstore chain, is scheduled to release fiscal 1st quarter, 2013, earnings on Friday morning, December 21 before the open. (Disclosure: long ORCL, FDX, NKE).
We will get a reading on a wide swath of the US economy this week from these earnings reports, from FDX’s look across the globe from a basic industrial perspective, to Oracle’s read into enterprise tech and the cloud, and WAG, NKE and BBBY’s look into retail and the consumer.
There is little new to add to S&P 500 earnings: the forward 4-quarter estimate is now $109.09 as of Friday, December 14th (and per ThomsonReuters), 4.85% higher than the same estimate one year ago.
I feel like we are beating a dead horse here, but we continue to think that q3 ’12′s earnings for the key benchmark will be the nadir in terms of year-over-year growth and that q4 ’12 and forward quarters will show better growth than q3 ’12′s +0.1%.
The financial press continues to beat on the fact that 4th quarter, 2012 earnings are “only” expected to grow 4% year-over-year, downwardly revised from the 10% expected from q4 ’12 as of early October, but that is better than q3 ’12′s +0.1%, and the fact is forward quarters (as least in terms of how current estimates look) will continue to be better than the end of 2012.
The two big events of the last two months, the Presidential elections and the Fiscal Cliff (getting to hate that term) seems to have had an interesting effect on Corporate and Consumer America: the Cliff and the almost-certain higher cap gains taxes in 2013 has seemed to spur a rush of private client transactions and business on real estate and some business transactions to lock in the lower cap gains tax rate in 2012, while the pending Cliff has seemed to slow some aspects of Corporate America as enterprises and such seem to be on hold waiting for what tax reform might look like. (An old collegiate friend is a tax attorney in Cleveland with his own practice that revolves around manufacturing, and he is booked solid through q1 ’13 as a number of his clients are selling businesses now to lock in long-term gains. Heard something similar from another friend in Southern Wisconsin, around longer-term real-estate holdings.) Unfortunately that is very anecdotal, but it seems to be a growing theme.
It is currently a very strange macro environment, with very mixed data points on the economy.
The one aspect that doesn’t seem well understood in Washington is that tax reform changes consumer and investor behavior (without a doubt).
This coming week, we get more housing data (starts and permits and existing home sales) as well as the final look at 3rd quarter, GDP. This coming Thursday’s Jobless claims release will no doubt get a lot of scrutiny. Last Thursday’s Jobless Claims release portends bullishly for the December employment report due out early in January, from what we’ve read.
When Forward Estimates Aren’t Predictive: we’ve spent a lot of time educating readers on the importance of understanding forward earnings estimates and what that information tells us, but the fact is that sometimes – with the 2008 Great Decession (sic) as a prime example – forward earnings estimates can be flat out wrong.
We stayed bullish throughout 2008 because that ”S&P 500 forward earnings estimate” was consistently rising up until early July, 2008, when it peaked at $104.07 on July 4th, 2008. (We’ve tracked this data weekly since 2000.) Even by late August, early September, 2008, that forward estimate had only been revised lower to roughly $100 per share, so the forward estimate didn’t capture the mortgage and liquidity crisis of 2008 until it was happening, and by then it was too late. We were in the teeth of a horrific market correction by September 15th, 2008, and the Lehman collapse.
The point is that forward earnings estimates may not be a great predictor of the “exogenous shock” and I’m not sure that the Lehman collapse and the mortgage crisis qualifies as “exogenous”, but the point is that in late 2008 the forward earnings estimates followed the crisis rather than helped predict the crisis.
And that brings us to a tangential and related topic this week: the nature of our recessions and business cycles has changed. When I studied finance and economics in the 1980′s and 1990′s (BSBA, MBA, CFA, etc.) the nature of the business cycle was cyclical, (and still is), with a foundation around manufacturing. Since the tech bubble burst and then housing popped (after a 60 year bull market in housing), much of the “traditional” economy such as manufacturing, actually continued to expand thanks to China and Europe (until the last two years anyway). The point being that I think 2000 and 2008 were the first “services” recessions we ever experienced, (and that is simply an educated guess and I could be wrong on that.) Services are now 80% of GDP, and have been since the mid 1980′s. The post WW II US economy was primarily manufacturing and agrarian based, which then transitioned in the 1960′s and 1970′s into a services based economy. The point is that the nature of our business cycle has changed in demonstrably the last 12 years, and continues to evolve as trading partners such as China and Europe suffer through their own issues.
Each recession and crisis is somewhat different than the last as the US economy continually evolves and changes its shape and structure.
To conclude, after the last 12 years and the two horrific bear markets we have experienced, the quality of today’s earnings and estimates are probably more “predictive” than historical earnings estimates, but the important element to remember is that we cant rely on any metric solely, and at the exclusion of others. The Cliff could present an issue with forward estimates if we have broad and far-reaching changes to our tax system. As of yet, in terms of revisions for 2013, that doesn’t seem to be in the cards.
- The 10-year Treasury has not made a new low in yield in almost 6 months or late July, 2012 when it touched 1.38%. Hard to say if a long top is forming in the Treasury complex. Ray Dalio, the famed hedge-fund manager and founder of Bridgewater & Associates, was interviewed this past week and said that the decline in bonds will be “the” trade (i.e. being short bonds) of the next century or something to that effect. The unusual element about Ray making such a statement is that he really isn’t prone to hyperbole. Ray thinks Treasuries start to rise in yield in late 2013. We remain long the TBF and will be long the TBT at some point. You can be patient with the TBF (unlevered or 1:1 inverse Treasury ETF) and you can time your Treasury short with the TBT (levered or 2:1 inverse Treasury ETF). (We use both but are only long the TBF currently.)
- It seems very strange to hear those “guru’s” and prognosticators be bearish Treasuries and interest rates (e.g. implying higher interest rates down the road) and then be bearish equity markets, like the US equity market or the S&P 500. Inflation would be beneficial to corporate earnings. It looks like the S&P 500 will finish 2012 with a 4% – 5% year-over-year growth rate for earnings, versus a – what – 1.5% core inflation rate (if that). The point being that “real” or inflation adjusted earnings continue to be positive. After 10 – 12 years of disinflation or deflation, a little faster rate of inflation might be welcome by the Fed. Certainly I think that a little inflation would be beneficial to corporate earnings.
- Day after day we continue to hear about recession worries in early 2013, mostly Cliff-related. The big surprise could be unexpected economic strength once Washington comes to some agreement and now that the Presidential election is behind us. Without a doubt, it seems there is a lot of short-side money riding on a recession in 2013, but the unexpected and lower-probability occurrence for 2013 would be economic acceleration. (The contrarian in us tells us that the “recessionista’s” can not all be right, and hopefully Washington is not that stupid).
- Natural gas – there is a US manufacturing “renaissance” occurring in the US after two decades of losing jobs to China and Latin America, and ISI Group thinks it is due to lower natural gas prices and the US finding cheaper sources of energy by drilling domestically than by importing. The equilibrium price for natural gas is thought to be between $5 – $6 per MCF. While natural gas looks substantially undervalued at its current price, they keep finding more of it too. We are long only Encana (ECA) and are underweight Energy as a sector. We’ve never been very good energy traders as it was – still, I think the growing numbers of hybrid’s and eventually electric cars impacts gasoline prices and gas prices (supply and demand) are a huge determinant of crude oil prices. The price of electric cars seems to be the prime deterrent to widespread consumer acceptance at this point, but in effect the auto OEM’s are cannibalizing their own product lines. Eventually I expect prices to decline over time and for electric cars to gain greater acceptance. (I don’t qualify as an expert on this topic by any means, but electric cars and hybrids remind of PC’s in 1979 – 1980, i.e. consumers have a growing awareness of the technology, but pricing is still prohibitive, and it is still viewed as cutting edge rather than mainstream technology.)
- Gold and silver – neither has an “intrinsic value” so it is impossible to tell whether the metals are cheap or not. We are long just a smidge of gold and no silver. After a 12 – 13 year bull market in both, there are far more gold and silver bulls in the market, which is what you’d expect. My own opinion is that the “long gold and short dollar” dollar trade of the last 10 – 12 years is nearing an end. Both have run their course. That doesn’t mean gold is a short or the dollar is a long trade, but that it will be more difficult to make money on that traditional theme. Goldman Sachs made a call the past few weeks saying the gold bull market has ended. (long a very small position on GLD in a few client accounts, and long GS).
- Tom Lee of JP Morgan Asset Management was out this week saying “Basic Materials” will be the best performing sector of 2013. The forward earnings estimates for the sector for 2013 have been flashing positive signs, as we wrote about a few weeks ago. Currently Basic Mat – which is 3% of the S&P 500 by market cap - is expected to have the highest level of earnings growth in 2013, at +22.2% up from 19% as of July 1. (Tom is looking at the same data we do.) Telecom is the 2nd highest sector at 20.8%, up from 17.5% as of July 1. The one quirk to these sectors is that – in total – basic materials and telco – are just 5% of the market cap of the S&P 500, or relatively tiny sectors. Technology is the largest sector at 20% of the key benchmark. If you are looking at Basic Materials, that would be Freeport (FCX), Alcoa (AA) and the steel stocks for starters. (Long Alcoa, sold in taxable accounts for the tax loss, kept in tax-deferred accounts.)
- There will be a plethora of 2013 predictions about 2013 in the next few weeks, with very few firms telling you how their predictions panned out for 2012. Those whose forecasts and predictions were right for 2012 will crow about it loudly. One thing most individual investors do not consider is that no one person, or one firm, or one style or investing methodoology or economic or forecasting model is ever (and I mean, ever) CONSISTENTLY right about predicting the economy or the stock / bond markets. One lesson I’ve also learned in fact, is that the “righter” you are, the more wrong you will likely be, since success in the money management business often attracts assets, and the more successful you become with a particular strategy, the less likely you are to want to deviate from that strategy even though that is often the prudent course of action. This is a topic for a longer article, but as an advisor to individual wealthy investors, we try to stay flexible and think as much about risk as we do about return. With the 20 year bull market in the late 1990′s we didn’t do that, and like a lot of other shops, we should have. Don’t forget to sell on occasion, and don’t ignore valuation.
- Resurgent Chinese economy – the FXI (the China 25 Index ETF) had a big day Thursday as the Shanghai Composite rose 4%, its best day since 2009. We have played China through the FXI in the past. Haven’t owned that ETF in a long time.
- The US market was outperforming most non US markets until the last month. I think some of that is AAPL’s decline, which is still a big part of the S&P 500 index. European markets are now up more than the S&P 500 for 2012 year-to-date.
- Facebook (FB) was one of our better calls this year. We bought most of it under $20.
- Finally our corporate “high-yield” overweight in balanced or bond accounts remains, although Moody’s raised another red flag about the covenants starting to erode on new issues. This is what happens when you get a strong demand for a “yield”. You want to focus on corporate high yield when it is a buyer rather than a seller’s market, and today is an issuer’s market. Could be an early warning sign for the fixed-income market, but we remain overweight. About a month ago we sold one high yield fund and put the proceeds into the “Unconstrained” asset class which gives managers flexibility to move between and amongst asset classes, so we while we reduced our high yield overweight slightly, the proceeds are still predominantly in corporate bonds.
- Municipal bonds – The MUB (National muni bond ETF) had a tough week and is sitting at key support. Could municipal bonds tax-exempt income be under the gun in Washington ? Be careful of your muni portfolios. Individual bonds would be safer on a risk/reward basis than either mutual funds or ETF’s if muni’s tax exemption gets thrown under the bus. We sold all of our muni’s in late November when we worried about this happening. We are still not “right” yet, but why take the chance, and we lock in capital gains at the 15% rate. This doesn’t smell good…
- Wal-Mart at $65 – $66 is a screaming buy. Buy it all the way down. One of the best -run and under-loved companies in America. (long WMT, want to get longer.)
- This week we posted an article on three large-cap stocks poised for all-time highs. Here is the article:http://seekingalpha.com/article/1054421-3-brand-giants-poised-for-all-time-highs-are-there-fundamental-catalysts-for-a-breakout. JNJ got a positive mention in Barron’s this weekend. PG may take a little longer. (Long JNJ, PG, HD).
- Finally this is expiration week and the S&P 500 is sitting right between overbought and oversold. There isn’t a clear sentiment trade one way or the other. Here is our preview http://seekingalpha.com/article/1065581-why-we-worry-about-bed-bath-beyond-heading-into-earnings of Bed, Bath & Beyond (BBBY) earnings report due out this Wednesday night, as well as FedEx’s earnings preview http://seekingalpha.com/article/1060631-fedex-earnings-preview-express-restructured-but-issues-linger-in-slow-growth-economy due Thursday morning as found on www.seekingalpha.com. We have a much bigger position in FDX than in BBBY. FDX is trading at 5(x) enterprise-value to cash-flow. We have no position in Bed, Bath because we are hoping to buy it between $45 – $50. We’ll be out with previews on Nike and Wagreen’s early this week.
Thanks for stopping by, and as always, thanks for reading. We’ll be out during the Christmas break with some topical articles during the week. Questions, comments and criticism’s always welcome.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Given that the last day of June fell over the weekend, we won’t get the July “forward 4-quarter” estimate for the S&P 500 until next Friday, July 6th. However, if the pattern remains similar to previous quarterly increases, we would expect the forward 4-quarter estimate to increase to$110 per share (or better) when we see the detail next Friday.
As of June 29th, the forward 4-quarter estimate for the S&P 500 was $107.25, resulting in the S&P 500 trading at 12(x) earnings as of Friday’s close.
Many are now worried about guidance and preannouncements for the 2nd quarter when q2 ’12 earnings start with Alcoa’s release on July 9th.
Here is how q1 ’12 eps growth by sector fell out for the S&P 500 (data from ThomsonReuters):
Consumer Discr +10.1%
Consumer Staples +5.1%
HealthCare + 3.8%
S&P 500 +8.1%
What is ironic is that telecom and utilities were the two best performing sectors in the S&P 500 in q2 ’12, while financials and technology were the two worst. (Note the earnings growth relative to q2 ’12 sector performance. )
While Bespoke now has q2 ’12 earnings growth as decidedly negative, our ThomsonReuters data indicates that q2 ’12 earnings growth is still expected at +5.8% however Bank of America is thought to be disproportionally contributing to q2 ’12, so ex Bank of America and ex Financials, q2 ’12 earnings growth is expected at 0.06% and -0.7% respectively or flat on year-over-year. Once earnings start getting released, there tends to be a minor positive bias to estimates.
Preannouncements by Ford and Nike last week didnt help. The negative-to-positive preannouncement ratio is decidedly negative. (We’ll be out with a comment on Ford later this week.)
To conclude pessimism is rampant (I heard from a CNBC anchor this afternoon, that “at best, the S&P 500 will be breakeven in the 2nd half of year”), and no one likes the market. Year-over-year earnings growth is expecetd to be subdued for q2 and q3 ’12, and expectations for earnings are very low.
Long FDX, F and NKE (smaller position)
For the remainder of the quarter, things will be likely quiet in terms of corporate earnings. Fed-Ex and Walgreen’s reported this morning, with FDX reversing higher on the day, and Walgreen’s down hard on heavy volume on what looks to be a puzzling acquisition of the UK’s Alliance Boots. (As a trade update, we took a 4% – 7% gain in Best Buy today (see earlier blog posts), and are now entirely out of the position.) We are still long WalMart.
As of last Friday, June 15th, the “forward 4-quarter” earnings estimate for the S&P 500 was $107.86, down $0.28 from the previous week (and leaving the S&P 500 trading at 12(x) earnings as of Monday’s open), and down about $1.11 for the past 4 weeks, all of which is pretty normal erosion as we approach the end of the quarter. Year over year growth has slowed to about 4% – 5%, consistent with the quarterly estimates at ThomsonReuters.
Corporate earnings are still at a record high, for the S&P 500, something not often mentioned in the financial press.
We hear from a homebuilder and Nike next week, both of which will give us a good look into their respective sectors.
In terms of revenue growth for the S&P 500, q1 ’12 growth is coming in around 5%, down from its peak of 7% – 8% in early ’11. Revenue growth doesn’t get near the press that S&P 500 earnings growth does, for obvious reasons, but it is still important.
The sectors with the best revenue growth for q1 ’12 have been technology (+9%), Industrials (+7%) and Consumer Staples (+7%). q1 ’12 earnings growth for the same sectors have been 15%, 18% and 5% respectively. The disconnect between revenue and earnings growth is still in financials: The Financial sector earnings growth is still expected to grow 25% for 2012, while revenue growth for the sector in q1 ’12 was just 1%.
The sectors with the best expected earnings growth for all of 2012: Financials (+25%), Consumer Discretionary (+11.9%), Industrials (+10%) and Techology (+7.4%).
As of last Friday, the S&P 500 as a whole is expecetd to grow earnings for calendar 2012 at 6.9%, which hasn’t changed much this past quarter, down from 8.5% on April 1.
Since Jan 1, and per ThomsonReuters, the sharpest downward revisions in earnings in terms of sectors have been in Utilities and Energy. Utilities continue to be a puzzle – we wouldnt own them here for clients given their overbought status on the charts, and the sector has had negative earnings for two years now, but the “ute’s” have been a sector and market leader the last two years.
To conclude, when July 1 rolls around, we would expect the “forward 4-quarter estimate” for the S&P 500 earnings to pop back near $110 per share, a new record. My friend Jeff Miller at “A Dash of Insight” is worried about earnings pre-announcements, but i dont think we will see them to any great degree. Managements have had absolutely no incentive to get aggressive on guidance off the ’08 – ’09 recession lows, and what’s more, have plenty of cash to repurchase stock, which may or may not be in current estimates anyway. (Some analysts include the repurchase plan in forward estimates and some don’t.) Also i do think the quality of corporate earnings is quite high, especially relative to the late 1990′s.
As a final point on earnings pre-announcements, given the mid single digit growth in q1, q2 and q3, expectations for earnings have been pulled way back. Earnings preannouncements if negative, are never a good thing but valuations are so temperate today, there isnt the downside risk like we saw in the 1990′s.
Here is how 2012 looks in terms of y/y expected earnings growth per ThomsonReuters:
q1 ’12 – +8.1% (closer to 5% if Apple is excluded)
q2 ’12 – +6.5% (down from 9% on April 1 but i think when mid August rolls around, q2 will wind up closer to 9%)
q3 ’12 – +3.7% (down from 5.3% as of April 1)
q4 ’12 – +14.5% (down from 16% on April 1 – bodes well for the typical q4 rally that we have seen the last 3 years)
We’ll update corporate earnings again after the July quarter starts and we get the new estimates to review.
Something occurred to me as this was being written: if we exclude Apple (AAPL) and financials for 2012 estimates, we are probably flat to little growth for the rest of the S&P 500. q1 ’12 eps growth for the S&P 500 was 8.1%, ex Apple was 5.7%.
Long NKE, (small long-term position), TOL and LEN, FDX