The forward 4-quarter earnings estimate for the SP 500 took a hit this week, dropping to $114.01 from last week’s $115.04, according to the ThomsonReuters “This Week in Earnings” data, which is a harsher than normal decline.
The p.e. ratio on the forward estimate is now 13.9(x), while the earnings yield for the SP 500 is currently 7.21%.
The year-over-year growth of the forward estimate has now slowed to 3.75%, so the yellow light in terms of the slowing growth of the forward estimate is now blinking yellow, and has slowed more than we thought it would.
The SP 500 rose 1.74% this week, led by homebuilders +6%, metals and mining +3%, Financials +2.5% and Industrials +2.10%.
Consumer Staples fell 0.29%, after their scorching hot run, and healthcare also slid -0.15%, as these two sectors look very extended.
If there is one theme that seems prevalent through three weeks of earnings season, it is to sell what has been strong into earnings, and buy what has been weak. Note the action in Caterpillar (CAT) , Freeport (FCX), Intel (INTC) and Microsoft (MSFT), versus the Staples like Procter & Gamble (PG), Large-cap Pharma, Amgen (AMGN) and other previous leaders. (Long all – added some PG, and CAT this week, post earnings.)
Stat of the week:
Per Bespoke’s data, here is the % of the sector’s stocks selling above their respective 50-day moving average as of Thursday night, and the sector’s p.e. ratio:
Consumer Discretionary: 88%, 19.7(x)
Consumer Staples: 93%, 18.4(x)
Energy: 35%, 12.5(x)
Financials: 81%, 13.5(x)
HealthCare: 75% 16(x)
Industrials: 52%, 15(x)
Materials: 53% 16.8(x)
Technology: 56% 15(x)
Utilities: 100%, 17.5(x)
Telco: 100%, 22(x)
Two things struck me about this data: given the forward p.e ratio for the SP 500 is 13.9(x) (see the second sentence in the opening paragraph), only two sectors listed above, currently have lower p.e ratio’s than the SP 500, and those sectors are Energy and Financials. The 2nd thing that struck me was that Utilities and Telecom are remarkably overbought and expensive as sectors, although both sectors have been market leaders year-to-date.
Technology surprises me with its 15(x) p.e. ratio, given how cheap Apple (AAPL) is, as well as Intel (INTC) and Microsoft (MSFT). You can buy all 3 of these market-cap giants for less than 10(x) earnings, and well under 10(x) cash-flow. (Long all 3 names)
We are looking to hold steady on our Consumer Staples, and Healthcare weightings, with no exposure to Telco and Utilities currently as these 4 sectors are very overbought.
We would be looking to add to Consumer Discretionary, Financials, Industrials, (maybe) Basic Materials and Technology as these sectors are oversold. Energy has the least number of oversold stocks, with the most reasonable sector p.e ratio.
We remain very partial to Financials, which has been the ONLY sector within the SP 500 that has seen steady to slightly higher estimate revisions the last 6 months, per the ThomsonReuters data. We added the XLF and Schwab (SCHW) this week in client accounts. The challenge in financials today is finding oversold stocks – there just aren’t a lot to be had at lower-risk buy points, as evidenced by the above stat with 81% of the sector trading above their 50 day ma’s.
Three of the large-cap tech leaders off the ’09 lows have been Apple, IBM, and Amazon. Apple and IBM started to fade last fall just as Financials started to outperform. Amazon now flat for 2012 and underperforming for the year. SP 500 leadership is changing. (Long all 3 names.)
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Many heart-felt thank you’s to guys like Jeff Miller of “A Dash of Insight”, Jon Najarian of OptionMonster.com, Gary Morrow of Yosemite Asset Management, a great technician, Todd Harrison, Jim Cramer, Scott Rothbort, Cody Willard, and Drexel Hamilton, a wonderful brokerage firm with a great mission of hiring disabled American vets, and able-bodied veterans, who have given a substantial part of their lives serving our country, Dr. Mark Schoenebaum, the ISI bioetch and large-cap pharma analyst for his great calls on the sector, not to mention all the great ISI research material. When you are a small shop like Trinity, you appreciate all the help you can get. Also, I have to give a shout-out to clients, many of whom have stayed with me through 12 – 13 tough years, suffering through two brutal bear markets.
Gratitude is not often a quality found in abundance on Wall Street, but as is so often the case, somebody at some point gives you an opportunity. Opportunity is THE best gift you can get in life, and it is up to you what you do with it, and if you f–k it up, well, that is your problem.
Is the SP 500 seeing a triple-top, with the March, 2000 peak at 1,555, the October, 2007 peak at 1,576, and the recent peak at 1,597 ? Could be, but I think any pullback is going to be well-contained, given that so many are expecting a correction similar to what we saw in 2010, 2011, and 2012 this year. Given the bearish sentiment, I think we take out the recent highs and head through 1,600 in the not too distant future. The forward estimate on the SP 500 does worry me, but the sector rotation in the market is pushing the SP 500 forward even as it seems disaster is just around the corner.
What has changed since the market bottom in early October, 2011 ?
1.) Housing has bottomed, and auto sales continue to improve, and both have led the US economy out of every post WW II recession, albeit the recovery is much slower and subdued this post recession;
2.) Japan is in a full-blown recovery, since last summer. Japan is the world’s 3rd largest economy, so don’t discount what is happening over there. The yen has temporarily stalled at 100, but give it time, I believe it will continue to weaken;
3.) The recovery in the US banking and financial system continues apace. The banks are well-capitalized and credit losses have fallen dramatically, releasing reserves from the balance sheets. Eventually the Dodd-Frank fiasco will fade and despite the current “Too Big to Fail” legislation getting pushed through Washington right now, the financial system will exit this near collapse and once-in-a-century seizure in far better financial shape, with better, smarter managements, and better incentives (like claw-backs) that at least tempers the “blind-leading-the-blind” mentality that exists in the sector. A stronger banking system means more loan growth and credit availability.
4.) Despite the headlines, I think Europe is now stable, at least the sovereign credit spreads have improved to the point where, the EU can take a breath, and think that the first stage of the crisis is over. (That is not a widely-held opinion.)
5.) High yield credit spreads are continuing to hold firm or even improve. Bespoke noted on Thursday, that the average spread was now 466 bp’s over Treasuries. Credit is still cheaper to Treasuries per this graph from Norm Conley of JA Glynn out of St. Louis.
6.) It has been 9 months since the Treasury yield has made a new low yield, bottoming at 1.39% on July 30th, 2012.
Food for thought.
Moody’s is spending time talking loan covenant quality during this recovery and preparing analysts / investors for the inevitable downdraft in the corporate bond market when it does come. They are noting the erosion in covenant quality currently, which given the issuance volume is not surprising. That happens during this part of the cycle.
Great piece by Ryan Detrick on why he is still leaning bullish. One of the best technicians I know and a fellow alumnus from Xavier University. Deserves a shout out.
Two oversold names we added to this week, were Caterpillar (CAT) and FedEx Corporation (FDX). Both cheap, both very oversold.
We made a good call on Coach’s earnings release this week. Still long most of the name. Sold some small amounts just to lock in the gain.
Thanks for reading and stopping by. This is still a hated market, and Treasuries have rallied to 1.66% on the 10-year, in terms of the yield, but with all the pessimism still out there, it is hard to believe the stock market doesn’t work higher. One element to the market that has surprised me is the continued strength in retail. In the last year, Coach (COH), Tiffany’s (TIF), UnderArmour (UA), Abercrombie & Fitch (ABF) and Bed Bath (BBBY) have all sold off sharply on bad fundamentals news and then righted the ship in a few quarters, only to see the stocks pop again. We’ve made good money for clients trading COH, ABF, BBBY, etc. Retailers report en masse in May, so it could help SP 500 earnings, particularly Wal-Mart (WMT), Home Depot (HD), etc. (Long COH, WMT, HD).
Friday’s payroll report is expecting 160,000 jobs created in April per Barron’s. That would be almost double last month’s and in line with what jobless claims is telling us should be job creation. I usually defer to Jeff Miller of “A Dash of Insight” for his economic commentary and detail on reconciling jobless claims with the monthly Labor Department reports. This week’s Dash talks about that flash-crash we had this week on the phony AP headlines, and the use of stops.
Thanks again for reading and stopping by.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager