Pfizer reported earnings last week that beat analyst estimates, and was shortly followed by a successful IPO of the animal-health unit Zoetis (ZTS), but as the above chart indicates we sold about 40% or our poistion Monday, February 4th.
Pfizer was a great performer for accounts last year. We started buying in December, 2011, and held all year, and had a very nice gain on the stock.
Here is the valuation issue: at $27 – $28 per share, PFE is getting fully valued and with a lot of Zoetis news already baked in (the proceeds are being used to repo shares), we need to start seeing something from the pipeline. Forward revenue estimates for the next three years for PFE are calling for -2% revenue growth on 4% earnings per share growth through 2015.
Yes, expectations are modest, but until we see some pipeline successes, I think a lot of the fundamental news, like the healthy 3.5% dividend and the share repo plan, is already in the stock.
We still have 50% – 60% of our original position in PFE, but given how JNJ and PG have performed, we want to use part of the proceeds elsewhere. We like MRK too but I want to watch it to make sure it holds $40 per share.
Pfizer could correct a substantial amount and remain technically in good shape.
(Long PFE, MRK, JNJ, PG)
Earnings update: January 27, 2013: Earnings Continue to Impress (except Apple) – stay with FinancialsJanuary 27, 2013 at 6:01 pm | Posted in BA, Earnings, F, PFE, S&P 500, SPY, Uncategorized | Leave a comment
According to ThomsonReuters, the “foward 4-quarter” earnings this week stayed relatively stable at $113.16, versus $113.29 from last week, for year-over-year (y/y) growth of 6.24%.
The p.e ratio on this week’s earnings is 13.1(x).
By the end of this coming week, 2/3rd’s of the SP 500 will have reported Q4 ’12 financial results, with y/y growth in earnings so far coming in at 2.8%, and revenue growth coming in at 2.3%.
While these numbers don’t seem impressive, they are better than q3 ’12′s results, and at least according to our data, earnings growth will likely improve as we move through 2013.
Last week, we wrote briefly about the revenue growth the financial sector is seeing. I wanted to follow up with our “stat of the week” and show how financial sector revenues and earnings have progressed the last two years.
Stat of the Week
The first column is the y/y revenue growth for the financial sector, with the 2nd column y/y earnings growth. We used ThomsonReuters data as of the last week of each quarter to insure that all financials had reported their numbers. The exception is the 4th quarter of 2012, which we are in the process of hearing about currently. 4th quarter, ’12 financial results arent thought be materially concluded until mid-February ’13.
q4 ’12: +7%, +12.5%
q3 ’12: +0.5%, +7.4%
q2 ’12: +2%, +63% (influenced by BAC mortgage settlement lawsuit)
q1 ’12: +1%, +16.1% (again, BAC litltigation settlemet greatly boosted sector earnings growth)
q4 ’11: -4%, +4.9%
q3 ’11: +2%, +12.7%
q2 ’11: -1%, -28.7%
q1 ’11: +6%, +16%
q4 ’10: +4%, +100% (materially distorted SP 500 earnings growth for q4 ’10. Ex financials, SP 500 +11% for q4 ’10)
So what does this prove ? Q4 ’12 is showing the best revenue growth for financials since q1 ’11, and in my opinion is probably better quality growth and more “even” growth than we’ve seen since the March ’09 lows.
The other thing this proves is that Bank of America has a huge impact on the sector.
Here is how full-year 2013 earnings growth estimates have tracked for the financial sector over the last 4 months:
Jan 25 ’12: +16.6%
Jan 1 ’12: +16.2%
Oct 1’12: +12.6%
Financials could have a very good year in 2013, which likely means that the stock market is in for a decent year. The other aspect to this is that in my opinion, banks are a good proxy for the housing recovery: as housing improves, banks are a tangential way to play that improvement, at a lower p.e than homebuilders.
Our Apple and Intel calls weren’t very good in terms of q4 ’12 earnings. We remain long both. Amazon, Ford, Pfizer and Boeing report this week, and we remain long all 4 names in various weightings.
Here is where I think “intrinsic value” resides for the following names in our portfolios, based on a combination of our internal model, and Wall Street calculus:
* Ford (F) – low $20′s
* Amazon (AMZN) – $330 (wouldn’t touch the stock until $225) http://seekingalpha.com/article/1135631-amazon-earnings-preview-revenue-momentum-continues-capex-growth-slowing?v=1359306227&source=tracking_notify. Here is our earnings preview. Like Herb Greenberg of CNBC used to say, the “hostile-o-meter” is running full tilt on AMZN.
* Apple (AAPL) – internal model values AAPL at $535. $425 is that huge bullish gap from Jan ’12.
* Intel (INTC) – think the stock trades to at least $27 as PC sales improve through 2013.
* Pfizer (PFE) – Zoetis IPO this week. Dr. Mark Schoenebaum of ISI says Merck has animal health unit too. Well-received Zoetis IPO could see MRK get a bid;
* Boeing (BA) – our sleeper stock of the week. Headline risk hasn’t really dented stock at all. Good sign…
* Sandisk (SNDK) – our best call last week. Stock getting fully valued. Think it is worth $50 conservatively.
* Another article on how overvalued high-yield is getting. Amazing the level of bears in credit and interest rates. Has not worked for 10 years. Still, we are always nervous about credit. (Overweight high yield.)
* 10-year Treasury ended week at 1.947%. The Spring ’12 high was a 2.4% yield on the 10-year. Over 2% and we could re-test that high tick of 2.40%.
To conclude, we expect SP 500 earnings to continue to improve as we move through the year. Financials finally seeing what we hope is sustainable revenue growth is a key positive.
Thanks for reading and stopping by. Want to keep it brief this week.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Alcoa (AA) and Wells Fargo kick off the 4th quarter, 2012 earnings season this week. The key aspect to 4th quarter earnings is that typically company managements give the Street their first intelligent assessment of what the coming 12 months might look like in terms of earnings and revenue growth. From this info, analysts start to modify and fine tune their individual company models for the next 12 months.
While company managements typically issue guidance every quarter, it is the 4th quarter that is unusual in the sense that during the calendar year guidance is typically limited to the coming 3 months, but with the 4th quarter, managements at least make an attempt to give a 12-month view.
Here is one key aspect to this year’s guidance: given the two horrific bear markets of the last 13 years, and the subdued equity returns since the late 1990′s, managements have gradually taken in their “irrational exuberance” (to steal a quote from Alan Greenspan) to what can only described as somber and conservative guidance. In fact corporate managements have no reason to be aggressive in their forecasts, since equity market valuations can’t reward an aggressive estimate anyway. (Apple might be the perfect example – if a company with an expected 70% revenue growth rate can trade 7(x) earnings ex-cash, why should any other corporate CEO stick their neck out on an optimistic earnings or revenue estimate ?)
Besides corporate CEO’s not being aggressive, analysts craft their own models which have been consistently conservative as well. The guidance environment is the complete opposite of the late 1990′s. We still haven’t mentioned the quality of earnings relative to the 1990′s, which in my opinion are much higher today than just 12 years ago. There is far less dilution in the technology sector.
As of Friday, Jan 4th, 2013, and per ThomsonReuters, the “forward 4-quarter” earnings estimate for the S&P 500 is $113.88, a new all-time high forecast for the key benchmark, surpassing early October’s $112.26 estimate from the week of October 5th,, that was gradually taken lower as we moved through calendar q4 ’12.
As of Friday’s close, and with last week’s 4% rally on the S&P 500, the p.e ratio on the S&P 500 is 13(x) that forward estimate, with 10% earnings growth expected for 2013.
We’ve studied the S&P 500 earnings data closely for many years (starting back in 2000) and it is easy to get lost in the data. You have to be careful (as we weren’t) in 2007 – 2008, and not focus exclusively on the data, but listen to message of the markets as well.
4th quarter, 2012, earnings are expected to grow 2.8%, down from 9.9% expected on October 1, 2012. Here is the change in expected Q4 ’12 year-over-year earnings growth by sector for the S&P 500 as of Jan 4, 2013, (first column) from October 1, 2012 (2nd column):
Consumer Discretionary: +11.1%, +16.8%
Consumer staples: +5%, +7.4%
Energy: -1.8%, -1.3%
Financials: +14.5%, +28.9%
Healthcare: -0.4%, +2.6%
Industrials: -5.6%, +3.4%
Materials: +0.7%, +21.9%
Technology: -1.0%, +9.4%
Telecom: +5.1%, +4.1%
Utilities: +0.7%, -4.4%
S&P 500: +2.8%, +9.9%
Only Telecom and Utilities saw estimates revised higher through the calendar 4th quarter, 2012. Energy estimates remained relatively stable. Financials, Industrials, Technology, and Materials saw sharp downward revisions. As the reader can quickly see there continues to be downward pressure on earnings estimates, but I suspect the absolute numbers have bottomed with the 3rd quarter.
So, what is the point ? My educated guess is that both 4th quarter, 2012 and full-year 2012 earnings growth will come in close to +5% (we’ll know more by late January, mid February, 2013, since by that time, the majority of the 4th quarter earnings reports will be over) and the 3rd quarter, 2012, will be the bottom for S&P 500 earnings growth, coming off the 2008 Great Recession.
Here is the recent quarterly S&P 500 earnings history (both actual and estimates) :
q4 ’13 +17% (est)
q3 ’13 + +10.8% (est)
q2 ’13 +7.8% (est)
q1 ’13 + 3.8% (est)
q4 ’12 +2.8% (est – actual results start this coming week – expect +5% by the end of earnings)
q3 ’12 +0.1% (actual)
q2 ’12 +8.4% (actual)
q1 ’12 +8.1% (actual)
q4 ’11 +9.2% (actual)
q3 ’11 +18% (actual)
q2 ’11 +12% (actual)
q1 ’11 +18.9% (actual)
q4 ’10 +37% (actual)
q3 ’10 +31% (actual)
q2 ’10 +38.8% (actual)
Anyone detect a pattern here ? It looks like we saw a huge “productivity-driven” earnings boom off the March ’09 market lows, that has gradually lost steam as US economy has remained below its long-run potential growth rate. Still, I do believe that q3 ’12′s earnings nadir of flat earnings growth on flat to +1% revenue growth was the bottom for the key benchmark.
2013 by sector
Here is the current S&P 500 earnings growth projections for 2013 (ranked by expected growth, by sector as of Jan 4, 2013):
Basic Materials +21.3% (flat since Oct 1 ’12 – China related ? From “Worst to First” in ’13 )
Telecom +21.1% (down slightly from Oct 1, still a strong ’13 is expected. Handset sales ?)
Financials +16.4% (interesting that for q4 ’12, financials earnings growth cut in half, but ’13 taken higher from +12.6% as of 10/1)
Consumer discretionary +15.2% (another good year expected)
Technology +12.7% ( Tech will be up 4% – 5% for 2012, when all done)
S&P 500 +10.4% (same growth rate for 2013, as we started 2012 with – more of the same ?)
Consumer staples +9.8% (will finish 2012 near 4% – 5%)
Industrials +9% (sleeper sector for ’13 given China, Japan and Western Europe recovery. +6% in 2012)
Energy +3.9% (has seen sharp downward revisions since Oct 1 for 2013 – not a good thing – from +7.8% as of Oct 1)
Healthcare +1.4% (also seeing sharp downward revisions already for 2013 – from +8.1% as of October 1)
Utilities +0.9% ( from -6.6% in 2012 to just barely positive. Never owned ute’s.)
The downward pressure on 2013 estimates already for Energy and Healthcare is interesting. Energy I expected, Healthcare is a bit of a surprise. Didn’t expect that, which is why I do this exercise every week. We’ve been lifting our healthcare weighting this year, particularly Johnson & Johnson (JNJ) given its pharma, medical device and consumer brands. More to come below.
That is it for our “data” aspect of the weekly blog. Here is our color commentary on the market(s):
Asset Class/Sector/Individual stocks updates:
* S&P 500 short-term overbought: Bespoke noted on Friday, that 88% of the S&P 500 is trading above its 50-day moving average, the highest such percentage since October, 2011. With q4 earnings starting this week, we bought some SH (SP 500 inverse ETF) on Friday to cover our downside a little bit. A lot of stocks are walking into earnings season “overbought” but that doesn’t mean they cant go further to the upside on fundamental news. We’re playing “reversion to the mean”.
The old saw or maxim in investing is that “fundamentals follow technicals”. However a change in fundamentals isn’t always preceded by a technical change.
Bottom-line, I think q4 ’12 earnings will be better-than-expected, but with 88% of the average overbought, I dont think they can be that good.
* The 10-year Treasury yield rose 20 basis points last week, from 1.71% on Friday, 12 /28, to 1.91% as of Jan 4th. Wow, that is quite a pop. Might there be a sea change occurring in the bond market ? Dick Hoey, a respected market-watcher called an end to the 30-year Treasury bull market this week on CNBC. We havent made a new low in the 10-year Treasury yield since late July (see our blog post of a few weeks ago noting this). Norm Conley had a good tweet on this topic this week:http://twileshare.com/abyd. Norm shows the upper-band of the 10-year Treasury could still rise quite a bit and not be “broken” so to speak.
Bottom-line, I think we could see higher rates in 2013, but we’d have to move a long way (according to Norm’s chart) to do permanent technical damage. Bearishness is still the prevailing sentiment in the bond market, and has been that way since 2003. JP Morgan puts out an institutional bond fund sentiment survey (or at least they did) and CONSISTENTLY bond fund managers were short their duration benchmarks off the March, 2003 (!) stock market bottom, and remained that way.
No question the risk-reward remains poor in fixed income. The Street is stretching for yield.
* As a sector, Financials still look good given earnings growth estimates. Per our opening remarks, 2013′s estimates still portend favorably for the sector. Here is another graph from Norm Conley of JA Glynn on financial http://twileshare.com/abyy outperformance. We remain overweight the financial sector which is roughly 15% of the SP 500 by market cap. (Long JPM, GS, WFC, CME, SCHW, V). We could probably use a regional bank in client portfolios.
* Basic materials, 3% of the S&P 500 by market cap, is expected to show the best growth in 2013 as estimates stand currently. Alcoa reports Tuesday night, Jan 8th after the bell. Here is our earnings preview found on www.seekingalpha.com:http://seekingalpha.com/article/1093321-alcoa-earnings-preview-trading-at-a-discount-to-tangible-book-for-a-reason?v=1357309641&source=tracking_notify. AA trades at a discount to tangible book, and pressure still remains on forward estimates. (long AA). Commentary around China and inventory will be noteworthy.
* A number of our portfolio laggards in 2012, really caught fire late in 2012, including Ford (F), Alcoa (AA), and Schwab (SCHW). All three stocks really had good weeks in the first week of the year too. (Still long all 3 mentioned).
* Here is a tweet from Ryan Detrick, a technician we follow that has produced some good work. http://stocktwits.com/message/11298380. The smart money doesn’t seem so smart here – there were a lot of hedge funds that opened up after 2000, but 2008 took the wind out of those sails. It is tough to do this for a living with any vehicle, i.e. hedge fund separate account, mutual fund, etc. We use separate accounts for clients, and tax-advantage the taxable money. We had an ok year in 2012. It could always be better.
* Another interesting tweet from Ryan Detrick http://stocktwits.com/message/11298287. The market is near term overbought but this graph shows how out-of-favor equities are as an asset class.
* Combine this tweet http://stocktwits.com/message/11292818, with the Bespoke data showing 88% of stocks above their 50 day m/a, and we have the ingredients for a decent pullback.
* One last tweet from Eric Platt http://twitpic.com/bsfhdx. Remember “Services” is 80% of the US GDP.
* Finally, we will keep an eye on our large-cap pharma and heathcare exposure given the trend in estimates. Our two biggest longs are Merck (MRK) and Pfizer (PFE). Dr. Mark Schoenebaum at ISI does the best work. We are also long Amgen and buying more JNJ. Not sure where the earnings pressure is coming from in the healthcare sector. Could be non-pharma related. The valuations on pharma are attractive, with stocks selling at 11(x) earnings, expecting better pipeline news, and with the ability to cut costs. Eli Lilly (LLY) guided higher on Friday, Jan 4. (No positions in LLY.)
To conclude, expect a correction within the S&P 500 here shortly, but expect Q4 ’12 earnings to come in better-than-expected, given subdued expectations. The key to individual stock trading around earnings will be the 2013 guidance. My own guess is that 2013 will be “conservatively decent”, with room for upside.
We remain overweight Financials, Industrials, and Technology in clients accounts, with a longer-term overweight in stocks vs fixed-income. These weightings have been fairly constant themes in our weekly reviews.
Thanks for reading, and for stopping by the site.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Earnings / Market Update: December 29 – 30, 2012: S&P 500 grew earnings 4% – 5% in ’12, started year at +10%December 29, 2012 at 10:44 pm | Posted in AA, BBY, F, Fiscal Cliff, GOOG, MRK, PFE, Uncategorized | Leave a comment
2012 will likely go into the history books as a pretty good year, with the S&P 500 up roughly 12% year-to-date, although that could change dramatically with Monday, December 31′s trading action, given the events in Washington. (As this is being written on Saturday / Sunday morning, S&P 500 futures are down 26 to 1,384 and the Dow futures are down 226, to 12,770 thanks to the lack of anything resembling an agreement coming from Washington after Friday’s market close. After-hours futures prices can be pushed around pretty easily given the lack of liquidity, so the action that will really count will be Monday morning’s futures as we near the opening bell on 12/31.)
Per ThomsonReuters, the “forward 4-quarter” earnings estimate as of Friday, December 28, was $108.83, down from last weeks $108.91, and at the lower end of the three-month range between $107.89 and $112 from early October.
Thus, the S&P 500 is trading at a little under 13(x) forward estimates, for a projected 10.8% S&P 500 earnings growth rate in 2013.
2012 was better than a lot of folks thought, given the volatility in 2011. Here is an analysis by S&P 500 sector on the earnings growth expectations for 2012 as of Jan 1 (first column), and then the actual earnings growth rate for each sector as of 12/28/12 (second column). Finally the 3rd column is the year-to-date performance of the SPDR ETF (as of Friday, 12/28, and per Briefing.com), which tracks that particular S&P 500 sector:
Consumer discretionary: +13%, +10.2%, XLY returned 20% YTD
Consumer Staples: +8.9%, +3.1%, XLP returned 7% YTD
Energy: +2.3%, -8.8%, XLE +1% YTD
Financials: +23%, +20.2%, XLF returned +25% YTD
Health Care: +4.5%, +2.2%, XLV, +14% YTD
Industrials: +13.3%, +6.2%, XLI, +11% YTD
Basic Materials: +9.6%, -12.7%, XLB, +10% YTD
Technology: +8.9%, +3.1%, XLK +12% YTD
Telecom: +7.7%, +1%, IYZ +14%
Utilities: -2%, -6.6%, XLU -4%;
S&P 500: +10%, +3.7%, SPY +12% to 13% (when incorporating dividend)
A couple of observations on the above data:
* Every sector saw earnings growth expectations get revised lower as we progressed through 2012, as 2012′s y/y earnings growth for the S&P 500 was the lowest since 2008;
* The correlation between the SPRD ETF’s and the S&P 500 earnings growth rates, can be distorted by market cap, e.g. the XLF is all of the mega-cap banks. The SPDR ETF’s annual returns do not correlate or match precisly the actual returns by sector for the S&P 500, given the stock selection and the weightings for the SPDR ETF’s;
* Basic Material’s earnings got whacked pretty hard in 2012, but surprisingly the XLB ETF was up 10% on the year thanks to Monsanto, (MON), the XLB’s largest single stock at 10% of the ETF. MON looks to be up about 32% year-to-date, not bad for a sector where earnings growth has been revised considerably lower – down 22% – in the last 12 months.
* Healthcare did well, thanks in part to the resurgence of large-cap pharmaceuticals stocks. JNJ, PFE and MRK are 32% of the XLV and the top three holdings in the ETF; (Long JNJ, MRK, PFE)
So what are the current S&P 500 consensus earnings estimates by sector for 2013 ?
Consumer discretionary: +14%
Consumer staples: +9.8%
Health Care: +6.8%
Basic Materials: +21.8%
S&P 500 +10.8%
* Based on current estimates and expectations, the S&P 500 is expected to generate 10.8% earnings growth in 2013, same as 2012 started out. 2012′s earnings growth will likely end up near +4% – 5%.
* Basic materials is expected to generate the highest earnings growth by sector in 2013, which would be a complete reversal of 2012′s drop. Consumer discretionary, financials, tech and telecom, are all sectors expected to grow earnings faster than the S&P 500 in 2013.Telecom is expected to show the 2nd fastest rate of growth in 2013, +21.1% as estimates stand currently.
* Energy has seen the sharpest decline in the past 3 months in terms of expectations for 2013, from 7.8% as of October 1, to 3.9% as of Friday. Financials is the only sector to be revised higher for 2013, from +12.6% on October 1 to +16% as of Friday, 12/28. (Energy might continue to struggle in terms of earnings growth in 2013, if the US continues to find more supply. )
Our three largest sector overweights in clients accounts remain the same: Technology, Financials and Industrials. We managed to avoid utilities this year, (thankfully) although the no-weight and underweight hurt us last year.
Financials were the pleasant surprise in 2012, and I would speculate Industrials could be the pleasant surprise in 2013, given the recent resurgence in China, Japan and Europe.
Try and ignore Washington: there will be some kind of a deal, and I suspect tax reform will occur gradually over 2013. We still think S&P 500 earnings bottomed with q3 ’12′s +0.1% year-over-year growth rate, and that year-over-year growth will gradually get stonger as 2013 unfolds.
* One of our best sales this year was Best Buy (BBY) in June, at better than $20 per share. We managed to eke out a gain in client accounts on BBY, and yet, given their cash-flow I never thought the stock would sink this low. We recently bought some Dell (DELL) and Hewlett-Packard (HPQ) for a longer-term patient account. Both DELL and HPQ are about as cheap (actually cheaper) on a cash-flow basis as BBY was, when we bought it. We have tight stops on both stocks. The recent low of $8.69 on DELL where it traded in mid-November is one such stop. $11.35 is the other stop for HPQ. The PC sector is being left for dead, and maybe that is the right place for it, but the headlines are now overwhelmingly negative for the sector, and I just dont think the PC is going away immediately.
The valuations on DELL and HOQ are almost Armegeddon-like:
DELL is trading at 0.30(x) 4-quarter trailing sales (i.e. price to sales), 1(x) cash-flow (excluding the balance sheet cash), about 1.5(x) free-cash-flow (again when excluding balance sheet cash from market cap), 0.20(x) entrerprise value (EV) to sales, and 3(x) enterprise value to cash-flow. DELL has an 18% free-cash-flow yield.
HPQ is trading at 0.22(x) 4-quarter trailing sales, 3(x) cash-flow and 4(x) free-cash-flow and HPQ sports a 26% free-cash-flow yield.
Interesting that even with the Goldman Sachs upgrade of Dell, it is HPQ that showed margin improvement in the 3rd quarter, even though DELL’s margin continued to slide. (Long GS, DELL, HPQ).
Limit your risk with these stocks, but the valuations are too cheap in my opinion. We had to buy some recently.
* We added to Coca-Cola (KO) and Merck (MRK) just after the holiday: a great technician we follow, Gary Morrow, tweeted a chart on KO this week http://twileshare.com/aber, that was too compelling to ignore. KO is the classic defensive stock, and in this market, defense wins championships.
* Ford Motor(F): what a run this stock has had. $13 is a key technical level, a price level in the first quarter, where it was rejected numerous times. In Jan ’12, Feb ’12 and then March ’12, Ford hit and was rejected at the $13.04, $13 and $13.05 levels before getting crushed through the summer. One of our “dirt cheap, value stocks” in 2012, we remain long F. The cash-flow valuation of 5(x) automotive cash-flow is too cheap to ignore, as the balance sheet will continue to improve, and the company saw a record automotive pre-tax operating margin in q3 ’12.
* Ford’s (F) stock lagged most of the year, but as of Friday’s close, and excluding the dividend, the stock is up 20% in 2012, all of that return coming in the last 45 days of the year. Could it be a play on the European recovery ? Absolutely, but we own because F is selling better quality cars, that Americans want to own, while the foreign OEM’s run into problems (i.e. Toyota). Success brings its own set of problems.
* Alcoa was another of our dirt-cheap value stocks coming into 2012: for the year, excluding the dividend, AA is flat on the year, closing at $8.65 on 12/30/11 and ending at $8.50 on 12/28/12. Monday will be key as to whether AA can close in the green this year. No question it will underperform the S&P 500. Trading at 75% of tangible book value, AA is a deep value play. The problem is margins for the alumina smelter: every quarter since June ’11, AA has beaten revenue estimates by 3% – 4%. The problem is the company can’t generate earnings from the better-than-expected revenues. Aluminum inventory is an issue too – thought to be about 3(x) current demand, versus copper inventory which is much more in balance and prone to an inventory deficit, thus AA is (0r was) being neglectted for FCX. A resurgent Chinese economy could help the price of aluminum. Still long and still wrong on AA.
* Our equity portfolios are probably 70% value stocks and 30% growth stocks, within the overall 60% / 40% – 70% / 30% asset allocation mix. Our growth names include Visa (V), Starbucks (SBUX), Amazon (AMZN), and Google (GOOG). (Long all mentioned)
* To conclude the weekly missive, http://twileshare.com/abjz. Norm Conley with a tweet on income tax receipts. Because of the ideological and political rift that has split the country in half, our conservative clients seem to get angry when i say that despite Washington, there seems to be an underlying strength to the economy. As a young analyst in 1992, after Bill Clinton was elected promising wealth re-distribution, socialized healthcare and higher taxes, I was amazed the market continued to trade higher in 2003. I remember thinking at that time, “Let the market tell you where it wants to go” – a maxim I forgot in 2007 and 2008 as earnings estimates were climbing.
It has been almost 13 years since the S&P 500 has made a material new high, despite the outbreak of capitalism around the globe. Eventually Europe will right itself. Forward earnings estimates today, are just a touch higher than where they were in July 2008, $108 versus $102 - $103. Something will break us out of this long, flat trading range, although I cant say we wont drop 10% before that happens.
Wall Street predictions are notoriously bad, and no one person, firm, style, strategy, or fund is consistently right about the future, unless you are Bernie Madoff.
Final point: the 10-year Treasury hasn’t made a new low in yield since late July, ’12. Interesting that with the late week Cliff worries, we still didn’t see a huge Treasury rally. The MUB is still weak and below its 200-day moving average. Something happening in muni land for sure.
Thanks for stopping by, and thanks for reading.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Corporate earnings update – October 28th, 2012: Finally, a Market Correction, but Earnings aren’t the IssueOctober 28, 2012 at 4:58 pm | Posted in Earnings, GOOG, PFE, S&P 500, thestreet.com, Uncategorized, WMT | Leave a comment
The S&P 500 has corrected 4.5% since the key benchmark ticked 1,474 in mid-September, with most of the cacophony from the mainstream media revolving around a poor 3rd quarter and 2012 earnings reports. The problem is, it has been expected for almost the last three months that 3rd quarter S&P 500 earnings would see slightly negative in terms of year-over-over earnings growth, and even flat to slightly negative revenue growth.
As of Friday, October 26th, the “forward 4-quarter” estimate for the S&P 500 was $111.14, down from last week’s $111.83, but still near the record high forward estimate recorded on October 5th, 2012 of $112.06. Year-over-year revenue growth for the 3rd quarter, 2012 S&P 500 aggregate revenues is -0.6%, versus the October 5th estimate of -0.1%.
More importantly, the year-over-year growth number for forward earnings that we cited two weeks ago, was 5.54%, down slightly from last week’s y/y growth of 5.72%.
Unfortunately, S&P 500 earnings data (courtesy of ThomsonReuters) is like Presidential polls or statistics in general: you can interpret or “spin” the numbers anyway you want, and make them fit your version of reality, versus simply letting the numbers tell the story.
(One shortcoming in the ThomsonReuters data that we see, is that while the data shows forward 4 quarters earnings growth by sector, ThomsonReuters does not do the same with forward revenue estimates. The only revenue number we get by sector for the S&P 500 is the current quarter.)
Here is the ThomsonReuters earnings forecast for the S&P 500 for the from q4 ’12 through q3 ’13, and then full year 2013, both as of Friday, October 26th, and as of October 1st, 2012. What we are trying to show is – since q3 ’12 earnings season has started – how have analysts changed their forward estimate expectations – given the current environment:
q3 ’12: -1.2% vs -2.1%
q4 ’12: +8.2% vs. 9.9%
q1 ’13: +6.1% vs +7.1%
q2 ’13: +9.8% vs +10.4%
q3 ’13: +13.8% vs 15.9%
2013: +11.3 vs +11.6%
While consensus analyst expectations have trimmed forward quarters slightly, it is our own opinion (and we are out here alone on this one), that the S&P 500 year-over-year earnings growth will reach its nadir in q3 ’12, and then slowly accelerate into q4 ’12 and beyond, which is what the earnings forecasts tell us currently.
Part of our belief in q3 ’12 being the bottom is that we have the Presidential election in 9 days, and the looming uncertainty over what the fiscal cliff means for spending and personal and corporate tax rates. There continues to be a tremendous amount of uncertainty over what the future will look like both from a political and economic perspective (and these are often one in the same), thus no one wants to be aggressive and / or bullish about expected stock prices, which in my opinion has created an unusual amount of pessimism around earnings and economic activity.
One final stat for readers: here are the year-over-year S&P 500 earnings and revenue growth by SECTOR for the S&P 500 for q3 ’12:
Cons discr: +8% and +3.4%
Cons stpls: +1.6% and +1.7%
Energy: -16 and -17.7%
Fincls: +6.3% and -0.1%
Hlth Care: +0.3% and +5.8%
Indus: +5.4% and +1.5%
Basic Mat: -26.4% and -4.9%
Tech: +1.3% and +3.5%
Telco: -2.7% and +2.7%
Utility:-8.9% and +8.0%
The only sector that has consistently shown upward revisions to sector earnings estimates since July 1 is Financials, not just for the 3rd quarter, but the 4th quarter, 2012 estimates as well. The financial sector continues to reflect tepid revenue growth of flat to +1% (which has been the case since the March ’09 market low) even though Financial sector earnings estimates continue to be revised higher. Financials are doing more with less.
Trading / market update: The S&P 500 is finally getting to an oversold level for the first time since late May, early June, 2012. Per Bespoke, of the 10 S&P 500 sectors, technology is the most oversold of all the sectors currently. Consumer staples is next.
* Our sector overweights continue to be Technology/ Financial Services / Industrials, which has hurt our performance this year. Our performance relative to the S&P 500 has improved throughout 2012, as we have lifted our large-cap pharma exposure, but we haven’t embraced the telco and utility (part of the so-called dividend trade) sectors as we should, and as others have suggested simply because I dont feel there is the value in these sectors that I see in our top 3 sectors.
* We have had very good relative performance in our straight bond/fixed-income accounts, given our credit overweight, and our over-weighting of high yield, but I have cautioned clients that proposed tax changes around the fiscal cliff could be more disruptive than what most clients think. We have a heightened awareness around corporate high yield as an asset class, given that it is being viewed as almost a safe-haven trade today (somewhat pradoxically) as investors reach for yield. No question we are nervous about the amount of money the asset class has attracted (and attention), not to mention favorable commentary high-yield has gotten in the financial media.
* We do all of our earnings previews over on www.seekingalpha.com. Tonight or early tomorrow (i.e. Monday) morning, we’ll have our Ford earnings preview, as well as Pfizer’s earnings preview, both of which are scheduled to hit the tape on Tuesday, October 30th.
* As we tweeted about this week (@trinityassetman), even though we have seen a 4.5% correction in the S&P 500 since mid-September, Treasuries haven’t rallied much despite the weak stock market. This is another indication that the “character” of the market is changing. In 2010 and 2011, we saw a quite a bit of volatility, and numerous “1% days”, but in 2012, particularly this rally since early June, July, the market has been relatively constrained and quiet, as it has slowly crept higher. Even though the S&P 5oo is off 4.5% from its high, the month-to-date return on the Treasury ETF’s are all negative (using Bespoke return data).
* Technology earnings reports have been ugly: IBM, our largest tech position outdside of Apple, is down 10% since reporting, but even Sandisk (SNDK), which beat on both eps and revenues, and guided higher, is down 5% since it reported. Technology will soon get to a point where sentiment and fundamentals lead to a bounce. Look at the weekly chart of Intel (below) – the stock held and bounced off its 200-week moving average, and ended Friday close to its weekly high, despite ongoing issues with the S&P 500. Since ’04, it has paid to but INTC in the low $20′s and sell into the high $20′s. Intel is now heavily oversold on both the daily and weekly charts.
* To his credit, Vitaliy Katsenelson, the author of a couple of pretty good investment books, and a friend / colleague from our www.thestreet.com days, warned me that Windows 8 would not be what people thought, and the reviews have been decidedly mixed to negative. The “tile” or touch GUI, seems vastly different than the old ‘Icon and mouse” function, and although Windows 8 lets a user revert back to the traditional GUI format, the fact is – from an adoption standpoint – this new touch screen will require a longer learning curve, and take more getting used to than the previois Windows operating systems upgrades. This will slow the adoption on Windows 8, which is slow already given the increasing acceptance of tablets, and the declining relevance of the PC. Still, we listened to Rick Sherlund, the famed software analyst that was formerly with Goldman Sachs during PC and tech halcyon days of the late 1990′s and he gives Windows 8 a “thumbs up” review, although he suspects it will take some getting used to on the part of consumers and the enterprise.
* Given the above, the PC sector is experiencing a “nuclear winter” in our opinion. We like Intel here under $22, and MSFT even more at $26. Haven’t bought Dell or Hewlett yet, as we want both to base more. We think the next PC upgrade cycle could be as much about job growth as technology. The PC will not be relegated to the graveyard completely. (Long INTC and MSFT – may add more this week, depending on the action).
* Google (GOOG) is a maddening stock, as Barron’s noted and we completely agree. The way it trades seems to be completely detached from any economic reality. We maintain a small position in the stock within client accounts, but it is – without a doubt – the most puzzling trading action we’ve ever seen. GOOG traded from $570 to $770 between 2nd and 3rd quarter, 2012 earnings, on very little substance. After this most recent earnings fiasco, the stock will now likely chop around from the low $600′s to the $700′s aimlessly.
* Amazon in the best secular growth story in retail, but seems ridiculously overvalued on any meaningful valuation metric. That being said, AMZN with $63 billion in expected annual revenues in 2012, represents just 1% of total global retail sales. Amazon’s annual rev’s are just 10% – 12% of WalMart still, to give the reader some perspective on Amazon’s growth potential. (long AMZN and WMT. ) We still love WMT even though it is still consolidating its breakout over the all-time high of $70.25. (long AMZN, WMT and would look to add to both on weakness.)
* Housing data continues to improve, but homebuilder stocks have stalled, which we like to see. It was October, 2011 when the homebuilders really started to move higher and names like TOL and LEN have doubled in the last year. We prefer Home Depot at this point, if you have to buy something housing related, but even then, I think WalMart is partially a housing-related stock. The homebuilders will start to lap higher results when we enter into 2013, and the market might be starting to reflect that. Masco reports this week. It is my own opinion, but the homebuilder’s earnings seems to be inflated thanks to lower-than-usual effective tax rates even though these quarterly reports are strong. I can’t find any good 3rd party research on what “normalized earnings” should be for the homebuilders, or if this is even the right way to look at the sector. (Long HD, TOL, LEN, WMT)
* Jeff Miller, over at a Dash of Insight, hasn’t posted his weekly update to his blog, but check out last week’s (http://oldprof.typepad.com/) post here. It is always worth a read.
* Another friend, Norm Conley of JA GLynn, in St. Louis, manages over $1 bl, and now tweets regularly @Jag_Norm. This week, Norm’s most interesting tweet (in our opinion) was http://twileshare.com/xeq, this one on the relationship between the 10-year Treasury and BBB-credit spreads.
To conclude our ramblings for the week, we have seen our first decent market correction, now 6 weeks longs, since early June, (which lasted about 8 weeks), with technology as oversold as I have seen it since late 2011. Corporate earnings estimates, either current or forward, havent changed that much, so take the financial media cacophony with a grain of salt. I do think the Presidential election and the uncertainty over 2013 tax rates and spending, has created an unusual amount of angst on the part of bothe the longer-term investor and the corporate manager, all of which will seem clearer when we wake up on Wednesday, November 7th.
Thanks for stopping by:
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
First, we never managed to get to our sector revenue analysis this week, and for that we apologize. With all the earnings coming out, we have our hands full until mid-August, when we will be able to write some more reflective and analytical pieces.
For now though, per ThomsonReuters, the “forward 4-quarter” estimate for the S&P 500 fell this week to $108.23, still above the end of June’s $107.25, but down from last week’s $109.01. The S&P 500 is still trading at 12.5(x) these forward earnings estimates and close to the record print of $111 per share.
For the 2nd quarter, year-over-year S&P 500 earnings growth per ThomsonReuters is 7.2%, but after excluding Bank of America (very good compare vs q2 ’11), actual growth is closer to 1%. Overall revenue growth for the S&P 500 remains at 1%, about where the estimates were several weeks ago.
For the 3rd quarter, 2012, expected year-over-year earnings growth has fallen to -1.7%, where we expect S&P 500 earnings to bottom for this cycle. That is our educated guess, given the weak compares from 2011 around the Japan earthquake and tsunami, and the debt downgrade and European issues we saw in August – September, 2011.
That brings up a good topic: if you look at a chart from the S&P 500, we have followed an almost identical pattern in 2012, as we did in 2011, except that late last week and this week, the market action has begun to de-couple – in a positive way – from the previous pattern. This week the S&P 500 rose about 5 points, while last year, for the same week ended August 5th, the S&P 500 fell 90 points. (Thanks to ISI Research for tipping us off to this fact, but ISI referenced just Friday’s action and instead we chose to look at the entire week’s change versus last year. Still the credit goes to ISI for bringing this to our attention.)
Last year at this time, we were in the throes of the brutal European and Congressional deadlock correction, even though earnings were still growing year-over-year by 17%. This year the stock market has started to decouple from the pattern, but year-over-year growth has slowed to 1%.
Our largest sector overweights remain technology, industrials and financials. Per ThomsonReuters, Industrials have had the highest beat rate of any sector with 83% of those industrials which have reported earnings, beating estimates. Since July 1, year-over-year earnings growth for the industrial sector has risen from 10% to 15%, the best bump of any of the 10 sectors of the S&P 500, and the highest year-over-year growth of any sector but financials. We remain long Boeing (BA), United Technologies (UTX), MMM, GE, Fed-Ex (FDX) and a few others in client accounts. ThomsonReuters made the point that the Industrials were not seeing the same revenue beat rate as earnings, but I attribute a lot of that to currency. Most companies with any kind of international exposure, are seeing negative currency impact on revenues in q2 ’12. The fact that the industrials can make that up with expense savings or share repo’s shows financial flexibility and doesn’t detract from the quality of earnings in our opinion.
Healthcare has been a pleasant surprise: on July 1, year-over-year growth for q2 ’12 was expected at just 0.1%, today that is +4.8%, thanks in part to large-cap pharmaceuticals. In addition an investor gets 3.5% – 4% dividend yields with large-cap pharma. Intuitive Surgical still worries me a little. We have a small long in the stock in one long-term account and with this recent correction, ISRG is still trading below it early June low of $498. Wait for a close above $498 before buying, but know that this is a high p/e growth stock with a lot of risk.
The two sectors where we have little to no exposure are telecom and utilities. I think Verizon (VZ) and AT&T (T) are WAY stretched technically, and way overbought. We’ve never been big utility investors so but I can’t help but think a lot of what is driving these stocks is:
a.) a big push into the dividend trade;
b.) Very low interest rates, which makes the dividend yields look attractive;
c.) The consistency and stability of the earnings growth (certainly not a bad thing);
We looked at our AT&T and Verizon spreadsheets this weekend, both telco’s have a dividend payout-ratio of 60% or more, a statistic which should tell you light years what management’s think about the growth prospects of the business. Earnings retention for future growth is just 35% – 40% for both T and VZ. For most of Industrial America, the dividend payout ratio is closer to 30% and the earnings retention ratio is 70%, for reinvestment back in the business, or just the opposite of the two major telecoms.
One of the few utility stocks we follow technically – Southern Company (SO) – has been overbought on the weekly chart since late 2011.
If interest rates should ever rise suddenly, it will be interesting to see how telco and utilities react to the higher rates.
Everything seems to be on hold until the Presidential election and the key issues around the fiscal cliff are resolved. For that reason, I think S&P 500 earnings bottom in the 3rd quarter of 2011.
We are going to leave readers with a brief analysis of the S&P 500 by sector. The first column (in parentheses) is the sector weight, while the 2nd and 3rd columns are the expected full-year 2012 sector earnings growth rates both as of Friday, August 3rd, and on July 1:
Cons discr (11%) 11.8% and 11.6%
Cons stapl (11%) 4.4% and 6.4%
Energy (11%) -9.9% and -5.7%
Financials (14%) 19.3% and 24%
Hlthcare (12%) 2.2% and 2.2%
Industr (11%) 10.3% and 9.9%
Technology (20%) 10.4% and 7.1%
Basic Materials (3%) -6.9% and -0.7%
Telco (3%) -1.6% and 0.9%
Utilities (4%) -7.3% and -7.8%
A lot of retail earnings get reported over the next few weeks. We’ll be out with a preview of CVS’s earnings report on www.seekingalpha.com, which is due out Tuesday morning. We’ll also hear from Department Store retailers like Macy’s, (M) on Wednesday , and Nordstrom (JWN) and Kohl’s (KSS), on Thursday. Home Depot (HD), Lowe’s and I suspect Walmart (WMT) is due out the week after this one. (Long WMT and HD, small position in CVS.)
Thanks for dropping by.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Corporate earnings update – S&P 500 earnings growth has slowed to zero – is q3 ’12 the bottom for earnings ?July 29, 2012 at 11:44 pm | Posted in BA, Earnings, FDX, Fiscal Cliff, GE, MRK, PFE, S&P 500, thestreet.com, Uncategorized, UTX, WMT | Leave a comment
The forward 4-quarter estimate for the S&P 500 slipped to $109.01 this week, (per ThomsonReuters), but remains above the final estimate for June of $107.25, and continues to be close to the all-time high of $111.88 set the week of July 13th, 2012 despite the headwinds of Europe, and an uncertain business climate here in the US.
In q1 ’12, most of the commentary around the 1st quarter’s 8% year-over-year earnings growth for the S&P 500 was that Apple was such a big part of the q1 ’12 increase, but we heard very little this week about the Apple miss and the fact that q2 ’12 earnings are now expected to grow 6.2% year-over-year, versus 6% on July 1. (Excluding Bank of America and the financial sector entirely, S&P 500 earnings are expected to grow -0.4% in q2 ’12.)
The point being that – even with the Apple miss – q2 ’12 earnings are coming in better-than-expected as we thought they might over the last few weeks.
Here is how q2 ’12 growth estimates by sector have changed, from July 27th and then back to July 1 (the start of the quarter):
Financials +58.1% from 55%
Industrials +15% from 10.2%
Technology +7.9% from 7.8% (despite the big miss by Apple, growth is still higher)
S&P 500 +6.2% from 6%
Telecom +6% from +0.9%
Cons disc +3.8% from 3.5%
Cons staples +2.1% from +1.5%
Hlthcare +2% from +0.1%
Utilities -14.2% from -17%
Materials -15.9% from -11.8%
Energy -20.7% from -14.7%
The sectors that – coming into the quarter – were projected to have positive y/y earnings growth, have seen growth estimates taken higher, while the sector with negative expected growth have gotten worse (i.e. the China trade which is Energy, and Materials.)
Utilities i’m still very puzzled by, in terms of the sector action relative to earnings growth.
Telecom was a positive surprise for the quarter. I think AT&T’s and VZ’s earnings were well received by the Street.
What does the 3rd quarter hold for S&P 500 growth estimates ? Current projections for the S&P 500 are that y/y growth will slow to -0.4%, exactly where q2 is now ex financials, and why we think q3 ’12 could be the bottom for earnings.
With the 2nd and 3rd quarters of 2012, S&P 500 earnings growth will be barely positive, and i believe will represent the trough in earnings from the post 2008 recession boom. Financials will return to a more normalized 5% y/y growth rate, in q3 ’12 since there wont be the one-time issues from 2011, but more importantly, financials are still expected to grow faster than the S&P 500 as a whole.
Given the level of pessimism we saw coming into earnings season, expecting a bounce wasn’t that hard of a call. Historically in election years, per Bespoke, the market continues to rally right into year-end, but the fiscal cliff complicates the issue this year.
Revenue growth for q2 ’12 is still +1%, about where it has been the last few weeks.
So why has the stock market held up so well the last few weeks ? Check our trading update which follows.
Next week, we’ll chart the pattern of S&P 500 earnings off the March ’09 market bottom, and dig into the revenue numbers for some clarity.
Trading update - people forget that the S&P 500 is a “market-cap” weighted index, and one of the reasons that the market remains strong, despite the plethora of issues we hear about daily, is the resurgence, in large-cap and mega-cap stocks. We touched on this last week, but the topic was covered more thoroughly in the Sunday New York Times by Paul Lim, in his “Fundamentally” column. Per Paul, since the start of the year the Russell Top 50 stocks are up 14%, versus the S&P 500′s roughly 8% – 9% return.
Look no further than Walmart, the $252 bl market cap retail giant - we blogged about it months ago and gave readers a chart. The breakout was the trade over $70.25. The stock is currently badly extended technically, and has been rising on light volume, but check our earlier blog posts on what could be driving WMT’s resurgence. WMT reports mid-August - I just wish the stock would corrrect and re-test that January 20th, 2000 $70.25 high. (That would be a safe, low-risk entry to get long more WMT.) (We are long WMT, and want to get longer.)
GE got some nice play this week, after reporting earnings, on Friday, July 20. The $221 bl market cap industrial and financial conglomerate is STILL trading at just 1/3rd of its mid-September 2000 peak of $60.75, and is still trading below the price where Warren Buffett made his preferred stock investment ($22 i believe). (Long GE)
Large-cap pharma: Pfizer reports Tuesday morning, July 31 and sports a $178 bl market cap, while Merck reported last week, rose nicely after earnings and sports a $137 bl market cap. (Check our earnings preview for Pfizer, over on Seeking Alpha (www.seekingalpha.com). It was just published on Sunday, July 29th. (Long PFE and MRK.)
Finally, how about IBM and Coca-Cola, a $223 bl market cap technology company and a $180 bl consumer staple, both of which are near an all-time high. IBM is closer to its all-time high, but Coca-Cola, topped out in August, 1998, just prior to the LongTerm Capital debacle, at $88 per share, and looks to be ready to make a run at that price level. KO will split their stock 2-for-1 on August 10th – my guess is that KO makes an all-time high before calendar year-end 2012. (Long IBM and KO.)
If you are feeling nostalgic about this market, it is that the sector leaders of the 1980′s and 1990′s are starting to show some signs of life, after being left for dead for years, and i’m really talking large-cap healthcare like Pfizer, Merck, and Johnson & Johnson. (Long MRK, PFE and JNJ.)
Our three largest sector overweights remain technology, financials and industrials. We are boosting healthcare’s weighting too. Industrials in my opinion offer great value, names like Boeing, United Technologies, and FedEx, even GE. (Long BA, UTX, FDX, GE)
Our worst decision the last 18 months was having very little in utilities, and telecom, two very strong sectors for a while now. (Long small amount of T.)
We could have had a key “outside reversal” day in the IEF on Friday, the 7 – 10 Treasury ETF. The 10-year Treasury yield backed up suddenly in the back half of last week after hitiing an all-time low yield during the week. That would be very good news. (If you arent reading Gary Morrow, the superb technician over at www.thestreet.com in the RealMoneyPro section, and a long-time friend you should be.) (Long (TBF, TBT)
Also, high yield corporate bonds continue to remain well bid. Neither the HYG or JNK has hit an all-time high but on days when the S&P 500 is down ugly, I always look at the high yield ETF’s first and they show very little concern. Remember, credit is your early warning indicator. (overweight high yield in client accounts.)
There are more positives to this market than you think. No one out there is wildly bullish ( a good contrarian indicator), even though according to Bespoke, economic data this week was positive: of the 14 indicators released this week, nine came in stronger-than-expected, while four were weaker and one was inline. Per Bespoke in their weekend review, “we dont remember any week in the last few months where the pace of economic beats was this strong”.
The July payroll report is Friday morning, August 3rd and consensus is around 100,000 jobs created, versus the 80,000 from June. The central banks meet this week including the Fed and the ECB. Check Jeff Miller’s “A Dash of Insight” as of Friday for insightful commentary on media punditry around the Fed. Most of it is bad.
Thanks for reading. Check back during the week as we develop more topics.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
According to ThomsonReuters, the forward 4-quarter earnings estimate fell this week to $109.55, down from last week’s $111.88 and down from early July’s $110.94, even though the S&P 500 rose this week by 0.43%. The S&P 500 is now trading at 12.5(x) forward earnings with expected 5% earnings growth for 2012.
Here is the progression for full-year 2012 consensus earnings estimate for the S&P 500 in terms of expected year-over-year growth:
July 20 +5.4%
July 1 +6.3%
Apr 1 + 8.5%
Jan 1 +10%
From the data, it looks like analysts are expecting S&P 500 earnings to trough in q3 ’12, with q3 ’12 earnings currently expected to growth just 1.3% versus q2 ’12 current expectation of 5.7%. The 4th quarter of 2012 is expected to show the strongest year-over-year earnings growth for 2012, currently projected at +12.1%, although all quarterly growth estimates are seeing downward revisions.
By quarter, here is how the S&P 500 earnings are expected to track through the year (y/y growth):
q1 ’12 +8.1% (actual)
q2 ’12 +5.7% (estimated as of July 20, and assume 5% for simplicity)
q3 ’12 +1.4% (estimated as of July 20)
q4 ’12 +12.1 (estimated as of July 20)
What retail investors sometimes forget is that the stock market is a discounting mechanism, and looks forward 9 – 12 months, much like the forward earnings estimate. From this, we can infer that the market is trying to glean what 2013 is going to look like, but i think the Presidential election and the binary political climate (either far left or far right) has left the market and investors in an unusual state of ambiguity and uncertainty. All this has resulted in what seems to be a modest valuation for the S&P 500, which is trading below historical norms on any number of measures, including the long term p/e, dividend yield, earnings yield, etc. etc.
Having modeled this ThomsonReuters data for some time, the last few week’s forward estimate has been more volatile than historical patterns suggest, and I dont know why this is the case. Perhaps just analyst (bottom-up estimates) and strategist (top-down annual estimates) uncertainty rules the day, and the prospects for a more opaque-than-usual future given the Fiscal Cliff, the tight Presidential race, the uncertainty of QE3, the barrage of negative headlines and constant cacophony about Europe, have the bottoms-up and top-down analysts pulling in their horns, all of which should make for conservative estimates.
In fact we saw that combination with tech stocks this week: Intel rose 1.07% on the week, IBM rose 3.46%, Google rose 5.95% and Sandisk (one of our 2nd quarter underperformers) rose 15.08% this past week, and the one commonality for all these stocks was that expectations were quite low coming into their respective earnings reports, while the fundamentals for all were very reasonable. (Long IBM, Google, SNDK and Intel)
The familiar refrain continues i.e. “horrible macro, but decent micro.” (Horrid headlines but passable and even decent company earnings results when companies do report earnings).
To conclude, here is how 2012 is expected to unfold by sector earnings growth:
Cons discr +11.3%
Cons stples +6.2%
S&P 500 +5.4%
Our three largest sector overweights within client accounts are technology, industrials and financials. In what might come as a surprise to some, technology is back to a 20% weighting within the S&P 500 (thanks in large part to Apple). Remember, tech peaked at 33% of the S&P 500 in March of 2000, but with the sector having a much much higher valuation. Financials peaked at 30% of the S&P 500 in q3, 2007. (Long AAPL)
Looking at the above sector earnings growth data, two sectors jump out and those are financials and healthcare. We still like financials with JP Morgan and Goldman Sachs below tangible book value (Goldman is trading at a 27% discount to tangible book value (TBV) at $95 per share) although the stocks are universally disliked. Judging from the headlines and stock action, you wouldn’t guess that financials are expected to have the best growth of any sector in the S&P 500 by a factor of 2(x) this year. Visa is a growing position in client accounts. Technically you think of it is a financial, but it could also be classified as a tech stock or a consumer discretionary stock. (Long JPM, GS, V, SCH, and CME)
Healthcare has been a strong performer this year, and well under the radar. Large-cap pharmaceutical is seeing its best relative performance in years. I remember when large-cap pharma started to break down in early 1999, and the first thought was “what the bleep is happening ?” given Viagra was a Pfizer mainstay and since the prospects for an aging America and more demand for healthcare, made the sector a no-brainer. The sector went through a 13 year bear market that looks to be on the verge of becoming a bull market, per John Mendelson, ISI Group’s crack technician. John has been pounding the table on the large-cap pharma group since last fall, and thinks the sector is poised for a major breakout. ISI’s fundamental pharma analyst is Dr. Mark Schoenebaum, and he does a fantastic job on the group. Mark thinks MRK’s intrinsic value is in the high $40′s and PFE’s intrinsic value is in the high $20′s. There are other names that Mark likes but our two largest l/c pharma holdings for clients are Merck and Pfizer. We are building a position in Amgen too.
Pfizer broke above its April, 2012 high of $23.30 on decent volume this week and is trading at a multi-year high. We wont add more until we see PFE’s q2 ’12 earnings.
The key attributes around large-cap pharma are similar to the S&P 500 in general: investor expectations are low, technicals are improving, and valuations are very attractive. Hard to beat that combo. (Long PFE, MRK and AMGN).
We wouldnt touch telco and utilities here, given their overbought nature, and since i believe they have attracted a lot of money for their defensive characteristics. Note also where telco and utilities rank in terms of 2012 expected earnings growth. I think the “dividend trade” is also getting overdone, especially with the fiscal cliff and higher tax rates looming in 2013. However almost every day on CNBC i hear someone saying invest in the dividend stocks. I cant honestly say they are wrong, but i wonder if that action is a function of low Treasury rates too. The “dividend trade” seems to be a crowded trade. When looking at dividend stocks, make sure there is some earnings growth or some future catalyst around it too.
Materials and energy are a function of China and BRIC growth. The jump in crude oil prices since late June has really caught us off guard. We are underweight energy now, focusing on natural gas and the undervalued oil services group.
Valuation matters – some higher p/e stocks got slammed this week, like Chipotle, (CMG) down 21% on Friday, Intuitive Surgical (ISRG), down 8% Friday and for the week, and Whole Foods (WFM), down 11% for the week. Whole Foods was the only drop not earnings related. In the “it is better to be born lucky than smart” category, we sold half of our Whole Foods on Thursday at $90.50. We’ll ride the remainder out, since i do believe WFM will continue to gain share against the rest of the grocery segment. Whole Foods and Starbuck’s report this week. We are long both – both could have issues given their lofty valuations, but both are long-term holdings (for now anyway). WFM should have long-term support at the 2007 high of $78. (Long WFM, SBUX and a small position in ISRG).
Finally, i think industrials are setting up positively this week, like technology did last week – low expectations and attractive valuations. A number of our industrial holdings report this week. We write our earnings previews over on www.seekingalpha.com. Last week we looked at IBM, Sandisk and JNJ. We had all three pretty well pegged, prior to earnings. This week look for us to preview Texas Instruments (TXN), for Monday night, Ford (F), Boeing (BA) and Whole Foods for Wednesday (WFM), CME (CME), United Technologies (UTX) and Amgen (AMGN) for Thursday and Merck (MRK) for Friday. (Long a lot of the names just mentioned, but not all.)
Apple reports Tuesday night after the bell. It will be the most watched earnings report this week, and so much will be written about it, we wont say much here other than expectations are low, given the expected lull before Iphone 5 is released this fall. The iPad will likely be key to the quarter. The secular growth of the iPad is formidable, with 30% growth per year expected for a while, with Apple expected to maintain a 50% market share. (Long AAPL)
The large-cap and mega cap names are showing signs of life, which have a big influence on the indices. The headlines could stay bad, but the market will advance if the mega-caps and the larger-caps get a bid.
By the end of next week, the majority of the S&P 500 will have reported. It is bad out there from a sentiment perspective, but companies are adapting, and many are delivering good results.
Thanks for reading,
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Corporate earnings / trading update – Week of July 16th – Record S&P 500 earnings – record low sentimentJuly 15, 2012 at 12:26 am | Posted in AA, Earnings, Fiscal Cliff, MRK, PFE, S&P 500, WMT | Leave a comment
You would think with the way that CNBC handled the earnings releases this week (starting with Alcoa) and then the earnings pre-announcements from Cummins (CMI) and such mid-week, and with Bespoke as well as S&P Capital IQ hammering on the “dour and poor guidance”, that we should be digging bomb shelters and storing canned goods, but you can imagine my surprise on Friday afternoon, upon reading the latest weekly earnings update from ThomsonReuters, that the “forward 4-quarter” earnings estimate for the S&P 500 rose to $111.88, from last week’s $110.94, despite Alcoa’s earnings release, despite Cummins (CMI) warning, and despite Applied Materials (AMAT) and a host of others, issuing weak or poor guidance.
For someone who thought the q2 ’12 earnings season would be ok, given the dour sentiment, it was still quite a surprise to see the $111.88 number from ThomsonReuters. The total “forward estimate” increase for the S&P 500 as we have rolled into July is $4.63, or roughly a 4% increase from the $107 estimate at the end of June.
Prepared for something far worse, particularly since individual company negative revisions continue to outnumber positive, I still think q2 ’12 earnings will not only be ok, but will demonstrate that the bearish sentiment is out-of-whack with bottoms-up company fundamentals, within the S&P 500.
What’s more, reading our weekly review from Bespoke, most “market/investor sentiment” gauges are at or close to multi-year lows, including the “strategist recommended equity allocation” which is sitting on its 5-year low. In other words, Wall Street Strategists have the lowest percentage weighting to equities currently, as measured over the last 5 years. Conversely, we remain overweight equities in client balanced accounts and tilted more aggressively to US equities given the valuation and risk / reward.
At $111.88, the S&P 500 is now trading at 11.5(x) forward earnings estimates, about 30% below the 15-year average p/e for the S&P 500 of 16(x) – 17(x).
Revenue growth for q2 ’12 was revised from 2% last week to flat or 0% this week, pretty much all of that on the energy sector being revised lower.
We were fortunate enough to get invited to JP Morgan’s Investment Forum in Chicago this week, where Dr. David Kelly, JP Morgan’s Chief Economist spoke. We could only hang around for his presentation, but here are some of David’s nuggets of wisdom left with the audience:
1.) The US will likely not fall back into a recession in 2012. US GDP growth has averaged 2.4% off the March ’09 bottom, while private sector growth has averaged 3.3%, so the reader can quickly see the drag the public sector is having on the economy, but we still wont see a recession. (Remember, a recession is defined as two consecutive quarters of negative GDP growth, so we could still see one quarter of negative growth and not see a recession. But with the housing recovery I doubt we’ll even see one quarter of negative growth.)
2.) Housing starts are still less than half of the 30-year average of 1,400. The housing recovery is just getting started;
3.) The US budget deficit is actually shrinking (in other words progress is being made despite the slow-growth economy), but the expected CBO Baseline projection of -3.8% (deficit as a percentage of GDP) given the “fiscal cliff” is too much too quickly, from the current -7.8% percentage. David thinks that President Obama (if re-elected) will temper the austere measures of the pending fiscal cliff;
4.) The capital gains and ordinary income tax rates will rise in 2013 for investment-related gains and income (per David) probably to 20% for capital gains, and dividend income. Most pundits I’ve heard are expecting at least 20% next year, which is affecting our trading this year for client accounts (more discussion on this topic below under the “trading update”);
5.) Europe is “priced for ugly” but the euro will stay together. David thought that EFSF would fix Ireland and Spain first ( I didnt understand some of the mechanics of the discussion here) and essentially back the bank debt and then the sovereign debt, but it will be a bumpy ride over several years. The two choices Europe faces (per David) are 1.) Unite the fiscal policies, or 2.) Split up and dissolve the euro. He thinks the euro stays together.
6.) Don’t trust the Chinese GDP numbers;
7.) The Treasury market with negative yields on the 10-year and 15-year TIPS is the most distorted, twisted market David has seen since the Nasdaq in March, 2000;
8.) High yield bonds still look relatively attractive (we agree and have been overweight credit for a while);
9.) And last, but surely not least, my favorite stat of the week, David Kelly noted that the “earnings yield” on the S&P 500 on July 6th of 8.20% “was higher than 99% of days since 1962″. It is even higher this week, from 8.19% on July 6th to 8.25% as of July 13th (and that includes Friday’s rally). Jeff Miller of “A Dash of Insight”, Doug Kass and I have written about the earnings yield of the S&P 500 on more than one occasion. (See our May 20th blog post and the comparison of 1999′s 3.5% earnings yield with the 6.5% Treasury yield on the 10-year back then, to today’s earnings yield and 10-year Treasury.) The Fed model worked back then, can it do so now ?
To repeat: Record high “forward 4-quarter” earnings estimate for the S&P 500 at $111.88, combined with close to or record low investor sentiment.
How are you invested ?
Trading update: We added to JP Morgan on Friday after their earnings release but are still working through the numbers. What caused us to add to our position was when Briefing.com reported that Jamie Dimon said on Friday’s conference call that 2012 would see “record earnings for JP Morgan”. Since 2011′s actual earnings were $4.48, even if just assume JPM does $4.50 this year, you could nominally make the case for 10(x) p/e on $4.50 earnings or a $45 fair value price. My own calculation was that – assuming some volatility and uncertainty around earnings – JPM is worth at least the low $40′s or a 20% increase from Friday’s close not including the dividend. (Long JPM and WFC)
Morningstar’s fair value on JPM is $51 per share.
Healthcare continues to power ahead. Merck (MRK) and Pfizer (PFE) are our two biggest holdings, but we also have a little bit of AMGN. Merck rose 8.72% in the 2nd quarter, (excluding the dividend) while Pfizer rose 1.55% (also excluding the dividend). Merck seems too overdone and stretched technically here, so we added to Pfizer on Friday. Both MRK and PFE sport 3.9% dividend yields. Our favorite pharma and biotech analyst, Mark Schoenebaum of ISI, thinks that very little value is being given to either drug pipeline at MRK or PFE. Mark thinks PFE worth $27 – $28 and MRK is worth $47. (Long MRK, PFE, AMGN, and adding to PFE of late)
Alcoa – we took the loss on our Alcoa in brokerage accounts, but kept the position in IRA’s and other tax deferred accounts. The stock was down heavy on Tuesday - over 4% on heavier volume – following its Monday night earnings release, and is testing its multi-year low near $8.21. It doesn’t look good, probably due more to China being wobbly. If the Shanghai market breaks support here, i would think Alcoa will get dragged down with it. This value play is turning into a value trap. AA is cheap on a lot of metrics, but the 2012 consensus eps estimate has been cut to $0.37 per share. Wow – can it get any worse ? Morningstar has an intrinsic value on AA of $19 per share so the stock is selling at 44% of one firms fair value. (Still long AA, just a smaller position. )
Walmart still looks good – stock is still above its 12-year breakout of $70.25. Still extended technically. We wouldnt add to it here. Target doing well too. Return to the discount mass merchants ? Sure seems like it with Costco near $95. Wouldnt buy any of these stocks until they correct. (Long WMT and small position in COST – waiting for a pullback.).
The 10-year Treasury nearing it’s early June low of 1.44% yield. Hit that same level in 1944 (not a typo) I think. Note the 1.44% yield in June 2012, coincided with the S&P 500 touching 1,260 in early June, and NOT on the weak economic data.
We are still overweight high yield in client accounts. We like the 6% – 7% yield, and with all the corporate cash and the central bank liquidity, credit is an easy decision here. Plus high yield gives us some duration (interest-rate sensitivity) cushion in the event of sharply higher rates.
Because most expect higher investment taxes in 2013, we are taking a combination of more losses and more gains in taxable accounts in 2012. I wonder if – with the higher expected cap gains rate – if a tax-loss carryforward in 2013 will be worth more to a client given the higher cap gains rate ? I would assume so.
I am out on a limb here but i think we are in the top of the first inning of a 9-inning ballgame regarding the electric car. A huge game changer for crude oil and gasoline (energy), the auto industry and the electric utility business. The www.thestreet.com had a good article this week on the number of electric cars sold (Jim Cramer referenced the article in one of his tweets), and market share currently is roughly 1/2 of 1%. I think the electric or plug-in is like the PC in 1980 – it is just a matter of time. Cost needs to come down and mass production needs to improve, which are not mutually exclusive events. Better battery function particularly for cold weather climates is critical too, and progress is reportedly being made in that area. Gasoline will come back to $1 a gallon. Energy, auto’s and electric utility’s are what percent of GDP do you think ?
We are overweight US equitities in balanced accounts 65% – 70%, and remain overweight credit in the fixed-income portion of client accounts. We’d be wildly bullish if we knew what the outcome was of the US Presidential election and if Europe could just stabilize. I think if we could get away from this anti-business, anti-wealth, anti-financial rhetoric and free-up the US economy, i think we could see a series of years for the S&P 500 reminiscent of the early 1980′s.
However, Ive been called an idiot before (early and often too).
Corporate earnings are sending a good signal, as is investor sentiment.
Be sure and check www.seekingalpha.com for our earnings preview on various companies. Last week we previewed Alcoa, JP Morgan and Wells Fargo. This week we will preview a handful of others as well.
Thanks for reading.
Trinity Asset Management, Inc by:
Brian Gilmartin, CFA