The headline is a somewhat of a play on something read over the weekend in one of the papers, where the infamous Yogi Berra quote of “Deja Vu all over again” was seen, since it sure feels like we are headed for a market replay of 2010 and 2011, where the S&P 500 was strong through the first quarter of this year, and the last two years, only to see a nasty correction spoil the summer.
Here is the catch: corporate earnings in 2012 – just like 2010 and 2011 – continue to hold up and once again are not the reason for the market turmoil. Given that then, should we still worry ? If Greece worries and the recession in Western Europe and a slowing China and Southeast Asia have yet to do us in, can we assume then this is a normal correction in an ongoing bull market ?
As of Friday, for q1 ’12, y/y growth in S&P 500 earnings were 8%, versus the +2% expected coming into April, but if Apple is excluded the growth is just 5.7%.
The “forward 4-quarter” estimate for the S&P 500 as of Friday was $108.97, down slightly from last week, but a number that leaves the S&P 500 with a whopping 8.41% earnings yield on the S&P 500, fully 670 bp’s ahead of Friday’s close on the 10-year Treasury of 1.71%.
For those readers who believe in the Fed model, as Alan Greenspan did in the late 1990’s when he referenced the difference at that time between the earnings yield on the S&P 500 and the 10-year Treasury as a sign that stock market values were likely too high, we have swung to the other extreme. In the late 1990’s the “forward 4-quarter estimate” for the S&P 500 hit a high of $55 in March 2000, versus the price of the S&P 500 at its peak of 1,550, resulting in a 3.5% earnings yield, when the 10-year Treasury was yielding approximately 6.5% in March, 2000.
As we move through this week, we will try and post on the course of S&P 500 earnings over the last 12 years, and show how “p/e compression” can result in wealth destruction, even when corporate earnings are at an all-time high.
Yes, corporate earnings are at an all-time high, at least the “forward 4-quarter estimate” anyway, which at $108.97 is higher than the July ’07 peak of $102 – $103, even though the S&P 500 remains well below the March 2000 high of 1,550 by a healthy 16%.
This week, Lowe’s (LOW) the home improvement retailer, Best Buy (BBY), Dell (DELL), Toll Brothers (TOL), Oracle (ORCL), and Costco report earnings. (Long LOW, TOL, ORCL, COST)
Lowe’s reports Monday morning and will likely track Home Depot’s results which were pretty decent. The early spring, particularly in the Midwest, has boosted housing, and homebuilders, and LOW will reflect that. The key issue with the do-it-yourselfer’s is that “big ticket” comp’s are still flat to slightly negative. However LOW and HD have created operating leverage during this housing depression so just a tiny bump in big ticket comp’s and the retailers will outperform. (Long LOW and HD, looking to add more lower)
Best Buy and Dell are very cheap on a cash-flow basis, as you’d expect in value stocks like this. Best Buy at $20 per share has a whopping 34% free-cash-flow yield and 0.14(x) price to sales ratio. Still we dont own the stock yet. I’m nervous with it below $20. Dell has a free-cash-flow yield of 18% and a 8(x) p/e ratio, and looks much better technically than Best Buy.
Toll Brothers (TOL) is our stock of the week in terms of the biggest tell on the economy. Toll has the best balance sheet of all the homebuilders and some of the highest margins. Our two homebuilder longs are Toll and Lennar and although both look extended after gigantic runs off the October ’11 lows (Lennar has run from $13 to $28), there does look to be better news coming from the homebuilders.
We’ll have more on Oracle and Costco later in the week. (Best to keep the blog posts short and sweet.)
One final important fact: guess which sector of the S&P 500 is expected to have the best y/y growth in 2012 ? Bet you didn’t guess financials, and what is even more intresting, earnings growth estimates have improved since April 1, from +21.5% to 26.8% as of Friday, even with the Jp Morgan fiasco.
Technically, the S&P 500 is nearing its 200 day moving average. We need the fort to hold this week.
Thanks for reading.