One of our best calls in 2013: http://finance.yahoo.com/blogs/big-data-download/home-depot-boosting-earnings-without-stores-153407840.html. We did a “Big Data Download” segment with Courtney Reagan and Aaron Task of Yahoo Finance. The date was May 20th, 2013: Home Depot closed at $76.76 on May 20th. Bank of America (BAC) closed at $13.51 on May 2oth. On 21/31/13, HD closed at $82.34, for a holding period return of 7.3% (excluding the dividend). BAC closed at 15.57 for a holding period return of 15% (excluding the dividend). I’ll take that again in 2014. Thanks to CNBC and Christina Scolaro (producer) for having me on.
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Per ThomonReuters, the “forward 4-quarter” estimate for the SP 500 saw its typical quarterly bump this week (as we rolled into the new quarter), increasing to $120.77, from last week’s $116.94.
The p.e ratio on the forward estimate shrank to 15(x), while the PEG ratio settled Friday at 2.51(x), the highest PEG since late July ’13.
The earnings yield using the forward estimate rose to 6.59%.
The year-over-year growth rate on the forward estimate fell to 6.05%, down from the high 7% – 8% the last 4 weeks of December ’13. This is the primary reason the PEG ratio is now at a 6-month high.
We need to see that forward 4-quarter year-over-year growth rate start to increase again.
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Q4 ’13 earnings start this week with Alcoa’s (AA) report on Thursday, January 9th, 2014, after the bell.
We are starting the 4th quarter reporting season at the highest level of earnings growth expected for a quarter since late, 2011, early 2012. Here is the chronology of the last 10 quarters earnings growth for the SP 500:
q4 ’13: +7.6% (est), expect final to be 10% or better
q3 ’13: +6% (if we add back JPM, actually earnings growth is closer to 8% – 9%);
q2 ’13: +4.9%
q1 ’13: +5.4%
q4 ’12: +6.3%
q3 ’12: +0.1%
q2 ’12: +8.4%
q1 ’12: +8.1%
q4 ’11: +9.2%
When q4 ’13 is complete, SP 500 earnings should have grown 10% y/y by the time we get to end of March ’14, which will be the strongest rate of SP 500 earnings growth since mid-2012.
Not to get too granular for readers, but for every quarters since July 1, 2012, we’ve started the quarter with SP 500 y/y growth expectations of 1% – 2%, only to see actual earnings come in much higher. With the q4 ’13 earnings growth expectations starting the quarter at +7.6%, you can see how the earnings growth is starting to accelerate.
However that could already be in the market: in 2012, the SP 500 grew earnings about 7% y/y, while the SP 5oo rose 15%. In 2013, with the SP 500 up over 30% on the calendar year, the SP 500 likely grew earnings just 8% – 9% for the same period, so readers can see the disparity between SP 500 returns and SP 500 earnings growth.
In the 2 years since Jan 1, 2012, the SP 500 has increased 45% – 46%, while the SP 500 grew earnings cumulatively 15% – 16% for the same 24 month time period. That is what has me worried about 2014, although in the next 2014 update we do, the reader will see how it is still pretty easy to get to 17% – 19% total return for the SP 500 again in 2014.
Time for some P.E compression, anyone ?
Like Barry Ritholz, I like to make to make fun of the predictors, and the predications. Seriously, I don’t have a clue, but I am guiding clients to expecting a lower return in 2014, than in 2013, even though we could see a stronger economy and better earnings growth.
Thanks for reading. One goal for 2014 is to do more frequent blog posts of shorter duration. Higher frequency, shorter length.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager