The pundits in the financial media now calling for a correction has hit unheard of levels, but still the SP 500 seems to find a bid on every sharp pullback, frustrating the general market wisdom.
According to ThomsonReuters, the “forward 4-quarter” estimate for the SP 500 as of Friday, February 15th, was $112.37, down $0.04 from last week, and down about $1.00 over the past 5 weeks.
The earnings yield on the SP 500 is 7.39%, and the year-over-year (y/y) growth for the forward estimate now stands at 5.97%, up from last week’s 5.91%. (See our blog post from 2/9/13 on the importance of the y/y growth of the forward estimate.) If our readers are wondering how the forward estimate could be falling but the y/y growth rate rising, it is because the forward 4-quarter estimate one year ago was being reduced at a faster rate. Last year at this time, AAPL had reported a monster quarter and was still in the process of generating a very strong fiscal Q2 ’12 (remember, AAPL’s fiscal year-end is 9/30) ended March 31. For this reason (a very tough comparison), we think AAPL will be a back half of 2013 story.
Our earnings premise is that 2013 will be the opposite of 2012 in terms of earnings growth: 2013 will be softer in the first two quarters and finish the year stronger. 2012’s earnings pattern was decent y/y growth in the first and second quarters, and then tapered off in the back half of the year.
With roughly 80% of the SP 500 companies having reported Q4 ’12 results, actual y/y earnings growth is +5.6%, while revenue growth is +4%.
The one red flag that we see is Q1 ’13 earnings estimates which are now expected to grow just +1.6%, down from 4.3% as of Jan 1, ’13, and +7% as of October 1.
Stat of the week:
The first column is the SP 500 sector, the 2nd column is the “expected” y/y growth rate as of Feb 15, the 3rd column is the expected growth rate as of Jan 1, and the last column is the expected sector earnings growth rate as of Oct 1, 2012:
Consumer discretionary: +9.5%, +13%, +16%;
Consumer staples: +4.4%, +4.7%, +7%;
Energy: -5.1%, -3%, +0.3%;
Financials: +9.3%, +9.6%, +8.4%;
Health Care: -2.8%, +1.7%, +2.3%;
Industrials: -0.9%, +1.7%, +6.7%;
Materials: +0.9%, +8.3%, +15.6%;
Technology: -1.6%, +2.7%, +9.0%;
Telecom: +7.5%, +9.8%, +4.1%;
Utilities: +1.4%, +4.2%, +4.5%;
SP 500 +1.6%, +4.3%, +7.1%;
So what is this telling us ? Financials continue to be a safe haven if you are looking for a sector where earnings growth is relatively stable, which is something given the sharp downward revisions in the other sectors. Telco looks pretty solid too as a place to put money between today and mid-April, when q1 ’13 earnings reports start.
The two sectors with the sharpest negative revisions are materials, which has seen a 1,500 basis point (bp) slashing, most of it since Jan 1, and technology which saw most its revisions between Oct 1 and Jan 1, and you have to figure a lot of that was Apple and the PC -related businesses.
Just from perusing the numbers and noting these patterns over the last 10 years, my guess is Q1 ’13 will probably turn out a lot like Q4 ’12: low expectations, slashing of estimates, and then when we start to see the numbers in mid-April, the world will probably look a little better.
We are watching that “forward 4-quarter” estimate though, as well as the 10-year Treasury yield. Those are our key tells in terms of what happens with the sequester and the always-evolving drama in Washington, and whether that forward estimate starts to reflect real economic weakness.
Security / Sector / Market commentary:
Wal-Mart (WMT) reports their fiscal 4th quarter financial results Thursday morning, Feb 21, before the open. The poor price action on Friday in WMT had to with leaked memo’s from Wal-Mart corporate detailing a weak start to February revenues. In my opinion, WMT is the best real-time economic indicator we have since the company is the USA’s single largest employer, and represents about 10% of total US retail sales. We have an earnings preview coming up shortly but at 8(x) cash-flow, I am prepared to buy weakness for client accounts. I really do think WMT is the best run and best managed business in America today, decade in and decade-out. These guys are a retailing and merchandising juggernaut. That being said, the payroll tax reinstatement and higher healthcare costs hits both their client base or low to middle income demographic, as well as their corporate cost structure given how many people they employ. We are prepared to buy more WMT lower. (Long WMT). Here is an article from WSJ’s @marketbeat blog on the WMT issue.
January’s retail sales data which was released this past week, wasn’t too bad, and certainly didn’t represent an early warning tell for WMT. Ex auto’s, which WMT doesn’t sell, retail sales rose +0.2%.
PC sector – we hear from Dell and Hewlett-Packard this week. Our October call on the “PC sector trading for scrap value” looks better today, although we are still predominantly long INTC and MSFT. We went long DELL and HPQ in one long-term client account in December and have since sold DELL but are still long HPQ. We would buy more on a pullback. PC’s saw their worst year of sales since 2001 in 2012, particularly Q4 ’12 and we think that gets better as payrolls and the job markets improve. Tablets are here to stay, but it is hard to believe that with the installed base, PC’s go away forever. How DELL plays out will be interesting. The dissident shareholders think DELL was sold too cheaply at $13 and is worth another $10 per share. (Long MSFT, INTC, HPQ).
10-Year Treasury yield: some think that the sequester and sharp deficit reduction will spark another rally in the 10-year. Perhaps I’m very naive, but if the massive stimulus and deficit hasn’t produced sharply higher yields in the last 4 years, why would it suddenly do so now ? For those expecting economic weakness, the 10-year Treasury yield is telling you otherwise, although it needs to trade above the March ’12 high of 2.40%.
Gold was ugly on Friday. The macro trade the last 10 – 12 years was to be long gold, long Treasuries, short the dollar, and short stocks. Could we be in the early stages of this macro trade ending? Almost no one is projecting faster economic growth in 2013 – more muddle through.
GE had a big week, trading to a multi-year high on the news that Comcast will buy the rest of NBC Universal from GE. GE upped their share repurchase with the proceeds from the sale, and CNBC immediately started groveling to Brian Rogers during the on-air interviews. I wonder how long it will take the CNBC crew to turn on GE and start being critical of stock performance, etc. Seriously, GE’s previous high was $23.18 on October 5th, 2012. We had the breakout above that level with the Comcast news, although GE is overbought here and needs some time to consolidate the rally. We are long GE, but it is still lacking revenue growth.
Moody’s publishes a Bond Quality Covenant Index with one of their monthly commentaries and this week noted that “North American Bond Quality Covenant Index Continues to Slide.” This probably isn’t a shock given the huge issuance we have seen in corporate and high yield bonds, but it is worth noting. We sold our high yield ETF’s and put the money into funds such as PIMCO and JP Morgan and let the manager select individual securities. It is an interesting report and a good read, if you can get a hold of it. A lot of pundits have turned negative on high yield credit, but we think that a lot of how the economy fares in 2013 will determine how well high yield performs. In a strong economy, high yield will hold its relative value better.
Municipals are a puzzle. I wonder if the tax exemption gets put on the table. The MUB (muni bond ETF) is testing its 200 day moving average.
Alcoa (AA) excellent relative strength of late. Been a horrid performer of ours for 2 years. Here is our ‘Chart of the Week” from this past week on AA. Waiting for a breakout.
Norm Conley, a sharp advisor out of JA Glynn in St. Louis, notes tech’s poor relative strength in this chart. We think this gets remedied back half of 2013.
Ryan Detrick, a Xavier grad, and a great technician commenting on the 7-week SP 500 win streak.
Wal-Mart (WMT), DELL and HPQ will be the higher profile earnings reports in the coming week. Wal-mart (WMT) is by far the most important tell of the 3 in terms of the state of the general economy and the consumer. Nordstrom is a look at general merchandising retail, and they report Thursday.
For the next 6 weeks we get a smattering of retail earnings, but the big flood is over. By the end of this coming week we’ll see about 90% of companies reporting. Earnings and revenues were a pleasant surprise for Q4 ’12 and despite all the hand-wringing, we think the same will happen in Q1 ’13. Stay overweight in financials – the positive and stable earnings estimates portend good things.
Thanks for reading and stopping by!
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager
312-751-0996