We saw the first full week of q1 ’14 SP 500 earnings this past week, with the SP 500 “forward 4-quarter” estimate falling to $122.86, versus last week’s $123.04.
With the SP 500’s 1.7% gain this past week, the p.e ratio on the forward estimate rose to 15(x). The PEG ratio jumped to 2.25(x).
The “earnings yield” on the SP 500 is now 6.359%, still very elevated relative to the 10-year Treasury yield at 2.72%. For those Fed model followers, stocks remain pretty attractive in terms of relative value to the bond market.
The y/y growth rate of the forward estimate rose to 6.75%, versus last week’s 6.86% and still shy of the 8% range we saw at the end of 2013.
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We are fortunate enough to be part of Adviser group that holds a bi-weekly teleconference call usually on Thursday afternoons. Jeff Miller, the “A Dash of Insight” blogger and founder and lead investor at NewArc Investments participates, as does Rob Martorana, the former editor of RealMoney at TheStreet.com, and now lead investor at RightBlend Investing, as well as a host of other investing talent.
The point is, on the bi-weekly call yesterday, the energy sector came up in terms of its seemingly attractive relative value. The sector performed well last week, too, with the XLE up 4.61% in the last five trading days as of Thursday’s close.
We are under-weight energy at present, and have been the last 2 years, (far more by luck than brains), but that might change. Here is a history (and outlook) of Energy sector’s revenue and earnings growth the last two years:
q4 ’14: +9.1% (est)
q3 ’14: +13% (est)
q2 ’14: +12.4% (est)
q1 ’14: -7.5%, -0.1% rev gro (est, with earnings reports starting this week)
q4 ’13: -8.8%, +1.5% rev gro
q3 ’13: -7.5%, -5.1% rev gro
q2 ’13: -8.5%, -14.9% rev gro
q1 ’13: +0.5%, -10.8% rev gro
q4 ’12: +6.4%
As the reader will note, the sector has suffered the last two years from negative earnings growth, and negative revenue growth, although that is expected to change for the rest of 2014. Here is the progression in expected Energy sector earnings growth for 2014 as of April 17th, April 1, and January 1, 2014:
q1 ’14: -7.1%, -5.4%, -0.4% ( q1 ’14 energy estimates still deteriorating)
q2 ’14: +12.4%, +12.7%, +19.1%
q3 ’14: +13%, +13.5%, +20.2%
q4 ’14: +9.1%, +9.7%, +14.1%
q1 ’15: +10.9%, +9.7%, n/a
As the reader can quickly see, forward estimates are looking for the first year-over-year growth for the sector in two years, as we move through 2014. Q2 ’14 is looking especially strong, although we don’t start seeing those earnings reports until mid-July, 2014. Again these are “forward estimates” and still subject to revision.
Our sole energy holding today is Halliburton (HAL) and if Baker Hughes (BHI) and Schlumberger’s (SLB) earnings were any indication, HAL should have a good quarter.
We’ve never been big fans of the XLE, given that Exxon-Mobil (XOM) and Chevron (CVX) are 30% of the ETF in terms of weighting. If I Had to pick one individual integrated oil stock right here and now, that we would be buyer of, both technically and fundamentally-speaking, it would probably be Chevron (CVX).
The commodity sectors and some of the stocks have been strong performers in 2014 thus far. Look at Alcoa’s (AA) year-to-date performance. Energy is its own sector, but is part of that commodity universe. Could be time for some outperformance for the sector.
The stock and bond markets are closed on Good Friday, April 18th, 2014, so we’ll have more thoughts for the blog as we move through the long weekend.
Trinity Asset Management, Inc.
Brian Gilmartin, CFA
Portfolio Manager