7.13.13 SP 500 Earnings Update: Watching for an SP 500 Breakout, to Confirm Record SP 500 Forward Earnings EstimateJuly 14, 2013 at 1:24 am | Posted in AA, CAT, CNBC, DE, Earnings, Financials, GE, GOOG, HYG, IBM, INTC, JNK, JPM, TBF - inverse Treasury | Leave a comment
A quick thanks to CNBC-Asia, Elly Whitaker, and Joanne Wong, for the interview on CNBC-Asia Monday night. We talked Alcoa (AA) earnings and SP 500 expected earnings for Q2 ’13. Hopefully the CNBC anchors, Oriel Morrison and Adam Bakhtiar found the discussion worthwhile and insightful.
Again, thank you CNBC for the invite…
We were fortunate enough to do a Big Data Download segment a few months ago with Courtney Regan and Aaron Task, too.
It is always a compliment when someone in the media asks for your opinion. It is a bigger compliment when they keep asking…
Per ThomReuter’s This Week in Earnings, the “forward 4-quarter” earnings estimate for the SP 500 rose a smidge this week to $116.81, from last week’s $116.67, and a continued record high for the SP 500 forward earnings estimate.
The p.e ratio on the forward estimate as of Friday’s close was 14.4(x).
The “earnings yield” on the forward estimate has slipped back under 7% to 6.95%.
The year-over-year growth of the forward estimate also slipped for the 2nd consecutive week to 4.22% from last week’s 4.91%.
I would like to see that forward estimate start to increase again on a year-over-year (y/y) percentage basis, and move past the March 1 high of 6.10%. (This is the key metric to watch.)
By the end of next week, about 100 SP 500 companies will have reported Q2 ’13 earnings. Current expectations are for +2.4% earnings growth (y/y) and +1.4% revenue growth.
Q2 ’13 Earnings growth by Sector: ranked Highest to Lowest:
Cons Disc: +6.0%
Cons Spls: +2.8%
SP 500: +2.4%
Hlth Care: -0.2%
Basic Mat: -7.7%
The Telecom earnings growth data needs to be verified at ThomsonReuters since the year-over-year earnings growth of the Telecom Sector fell from 18.7% to 5.3% just since July 1. Full-year ’13 data was revised lower as well. (Let me check that and get back to readers this week. ) Telecom is just 3% of the SP 500 by market cap. Relative to the index, it is a small piece of the pie.
Financial sector earnings growth is the clear winner for Q2 ’13, and for 2013 as a whole.
In Q4 ’13, the Financial sector is expected to generate 25% y/y earnings growth – that is pretty good growth when 2013 is only looking for 7% for the full year for the SP 500 in its entirety.
The flip side to this is virtually every guru and CNBC / Bloomberg guest is now bulling Financials.
It is a statement heard often through the years, particularly the 1990’s, but a stock market led by Financials, is not a bad market, in fact it is the sign of a healthy stock market.
Two things we look for as our holdings report earnings each quarter:
1.) How do leadership stocks respond to good news ?
2.) Will there be some catalyst for our laggards or value holdings to start to close what we perceive is the valuation gap between market price and intrinsic value ?
Wells Fargo (WFC) and JP Morgan (JPM) responded ok to what were pretty decent, albeit probably already-discounted earnings reports. Both stocks are at or near all-time highs. JPM traded above its May 2007 of $53 in May ’13, and WFC is still about $1.50 – $2 short of its 2007 high. Both these stocks are in an economy and capital market environment that is a tail-wind now, versus a head-wind in 2010, 2011, and 2012.
Alcoa (AA) is trading a little better, but there was nothing about it’s earnings report that looked like the world has changed. There is still pressure on alumina pricing and FORWARD revenue and EPS estimates were revised downward. However, AA finished up 3.71% for the week, a good sign given the earnings report. Remember, the stock will always move before you see a change in fundamentals.
We think AA is worth at least $15 per share, while Morningstar has a $19 fair value on the stock. Alcoa earned close to $3 in 2007 – it may only print $0.50 per share in 2013, if that.
Other laggards we are watching are Caterpillar (CAT), John Deere (DE), General Electric (GE), and the Basic Materials stocks like Freeport (FCX) and US Steel (X).
If you like to play the long-shot at the track, Basic Materials is your sector: On October 1, 2012, the expectation for Basic Mat was that q2 ’13 sector earnings growth would be +23.8%. Today that same number is -7.7%. That is a whopping 3,000 basis point negative revision in just 9 months.
But here is the catch: full-year 2013 Basic Mat sector earnings growth is still looking for +5.7%. Q3 ’13 expectations are for 14% currently (expect that number to come down), which we won’t start hearing about until October 10th or so.
The sentiment and the numbers are lining up so that the sector could bottom this summer. Look at the action in gold. This was the best week for the GLD since 2011 per a headline on Marketwatch.
At just 3% of the SP 500, Basic Mat isn’t like Financials (17% of SP 500 by market cap) or Technology (18% of SP 500 by market cap). However, you can get a lot of outperformance if you overweight at the right time.
Conclusion: the next iteration in terms of earnings is the “return to global growth theme”, which should break SP 500 earnings and revenues out of this 5% and 1% growth range these two metrics have been locked into for some time. Basic Materials could benefit, as will Industrials and Technology. 100% Domestic companies have outperperformed Internationals for some time. More on this below, but I suspect this dynamic will change will change over the next few years. Watch and see if the SP 500 trades again to an all-time high. Earnings should follow… We expect Q2 ’13 earnings growth to wind up between +5% to +7%.
- Ryan Detrick, a fellow Xavier alum and simply one of the best market prognosticators in the media (which includes frequent CNBC and Bloomberg interviews) out with the Schaeffer’s Investment Research weekly missive this weekend. Like Josh Brown, Ryan is now a “must-read” every day on Twitter (@RyanDetrick). Josh is found at @ReformedBroker. The negative sentiment bias is (I think) a huge plus for this market. Ryan alerted me to the consolidation and eventual breakout the last few months in the Russell 2000 too. Amazon (AMZN) and Google (GOOG) had good week’s too in terms of price action. The SP 500 now needs to close above the May 22nd, 2013, 1687.18, all-time high print to confirm the RUT and other break-outs;
- Ryan Detrick talks the potential for the SP 500 to trade to 2,000 from a July 11th post;
- From Norm Conley (@JAG_Norm) Twitter feed, the hedge-fund article by BusinessWeek. My own opinion is that hedge funds did work well from March, 2000 through March ’09, since a hedge-fund is an absolute-return vehicle. They couldn’t get much attention in the late 1990’s generating 5% – 6% steady returns, when the SP 500 had 5 years in a row with annual returns of 20% per year. The cycle has now returned to long-only guys, and more importantly, instruments like Inverse ETF’s allow small advisors like me to short sectors and short entire asset classes (like Treasuries) with great ease, and be “hedge-fund like” for small Schwab accounts that historicallly don’t interest anybody but small advisors. Personally, and this is just my opinion, but the inverse ETF’s and knowing how to use them has made me far more effective as an advisor. Our largest position as of June 30th, was the TBF (unlevered Inverse Treasury ETF) which we had unfortunately been long (and wrong) for too long, but allowed me to hedge client’s intermediate bond risk and duration risk and get client’s absolute return in their bond accounts in May and June of this year;
- Another good Tweet from Norm Conley on tech’s relative outperformance. Financials and Technology are our two largest sector overweights. We split our technology weightings between value Technology like Intel, and IBM, and then growth Technology like Amazon and Google. (Long all 4 stocks.);
- Corporate high yield or the junk-bond market had a good week this week, with the HYG and the JNK up 3% respectively. The TLT is now resting against it’s 200-week moving average, and is the most oversold as it was in early, 2010. Ultimately, my own opinion is that the 10-year Treasury puts in an intermediate peak near 3.90% – 4% this year;
- Jon Najarian talks gold miners with the Street’s Joe Deaux. Jon made a nice call on gold, and we are watching the Basic Materials earnings for some clue of a bottowing. Certainly sentiment and technical action are starting to line-up. We aren’t long any gold yet, but will be interested in Freeport (FCX) and US Steel (X) in terms of earnings. Gold seems to have its own particular fascination and weird, cult, following. The constant cacophony in terms of the infomercials, and the advertising around the precious metal is more noise than substance. US Steel earned $18 per share in 2008, and traded as high as $196 in June ’08, before falling to $21 in November, 2008. We went long some X near $17 and change this spring. The chart is very interesting for X – will be out with a post on it this week. People said tech stocks in the 1990’s were volatile – wait till you see the chart of US Steel. (Long AA, X, FCX)
- In Barron’s this weekend, Kopin Tan’s Streetwise column talks about Financial stocks being 50% below their 2007 peak, without once mentioning shareholder DILUTION. I will never buy Citigroup (C) or AIG ever again, simply because the dilution and then the reverse stock split was pathetic. Citi has 4(x) as many fully-diluted shares outstanding today as in 2007, so that means operating income or pre-tax, pre-provision operating profit must be at least 4(x)’s higher to get the same EPS than in 2007, and it could be worse. Actually looking at ThomsonReuter’s Datastream, to which we subscribe, here is the fully-diluted shares outstanding for Citigroup starting with 2008:
2012: 3.015 billion (fully diluted shares outstanding)
2011: 2.999 billion
2010: 2.968 billion
2009: 1.157 billion
2008: 526 million
Yes, I was wrong, it is actually 6(x) more shares outstanding than 2008. Both Citi and AIG have completely crapped on the shareholder. Some of it government-forced, most self-inflicted.
- TheStreet doing their homework on Apple. Still long some, but it is getting interesting. Not buying more yet;
- Here is Jeff Miller’s latest at A Dash of Insight. Always insightful – Jeff is a great blogger, and (i hope) a friend;
- Bob Lang of www.explosiveoptions.net and a former fellow Street poster has a new article up on Twitter this weekend: Summer Rally or Summer Meltdown ? Let the SP 500 answer that for you.
- Intel reports Wednesday night after the close. Morningstar has a new article out on Intel’s mobile processor – looks like Morningstar is bullish, but yet their intrinsic value on INTC is just $26 per share;
- Bespoke tracks an interesting stat: as of the end of April, ’13, the Domestic’s within the Sp 500 (company’s with 100% of revenues from US, like retail), had outperformed International’s (more than 50% of revenues from non-US countries), by a whopping 600 basis points. As of the end of June, the outperformance differential was 310 bp’s. My own opinion is that this differential will continue to narrow as international economies recover. Industrials, Technology, maybe even Basic Materials will perform better;
- On the Alcoa conference call, the comments were that the European auto business is still quite bad. That obviously could impact Ford (F). The $2 billion European loss that Ford guided to this year is $0.50 per share. Can’t believe they would guide to a bigger loss, but there may not be the “positive body language” some were expecting on the 2nd quarter call. F’s valuation is getting elevated given historical valuations and p.e ratio’s, but Ford’s US pre-tax auto margin has never been higher either. (Long AA, F)
Thanks for reading this far, and putting up with my weekend ramblings. In effect, Fundamentalis becomes my own form of research. The discipline of writing this blog forces me to stay abreast of Twitter, good research, tracking earnings, making value judgments for client portfolios, who is saying what, the various good chartists, etc. etc.
We are positioning portfolios for global growth, versus US domestic growth in the next 18 months. Japan and economic news out of Europe will be key. Dont care much about the Emerging Markets, thinking more of major developed economies like the US, China, Japan and Europe, first.
How the Financial sector reacts to Q2 ’13 earnings results is key. However the plan (as of today) is to remain overweight the group for 2013 given how the sector earnings estimates have tracked for the last 9 months, and given the stability of the q4 ’13 Financial estimates.
We remain overweight equities in the majority of client accounts, versus the standard 60% / 40% asset allocation portfolio.
We remain overweight credit risk and high yield, as well as the Inverse Treasury in the fixed-income portion of client accounts, although the 10-year Treasury has reached price support at its 200-week moving average. Our thought is the 10-year Treasury yield gets to 3.90% – 4% by year-end.
Be careful out there…
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA