An Eye-Opening Chart on Commodity Performance and a Look At Basic Materials 2016 Earnings Estimates

Stocks Versus Commodities

The above link is a chart from “This Week on Wall Street”, a blog run by Doug McKay and Gary Morrow.

As soon as I opened the link, my first thought was “Nasdaq in the March of 2000” but the chart shows the relative performance of stocks versus commodities, charting the SPX versus the CRB.

That is an eye-opening chart.

The fundamental story to Basic Materials and Commodities: Sticking with the discussion of expected earnings growth for 2016, here is the trend in the Basic Materials sector, which includes commodity firms like Alcoa (AA), Freeport (FCX) and US Steel (X).

Basic Materials 2016 projected sector earnings growth:

12/4/15: +12.9%

11/27/15: +13.2%

11/20/15: +13.4%

11/13/15: +13.3%

11/6/15: +13.6%

10/30/15: +14.1%

10/23/15: +15.0%

10/16/15: +15.6%

10/9/15: +15.3%

10/2/15: +16%

9/25/15: +15.9%

6/26/15: +18.6%

For the Basic Mat sector, the real damage has been in the commodity companies like those noted above, but Monsanto (MON), and DuPont are the heavier earnings weights in the sector.

Here is a look at the history of Basic Materials earnings and revenue growth, going back a few years:FCSP500EPSrevgro(qtrly)

The sector generates little year-over-year revenue growth, and yet the “earnings delta” is formidable.

Yesterday’s reversal in crude was important in my opinion. It is hard to conceive how Commodities and Energy names produce the same fundamental horror-show that they have in 2015, next year.

Steel is an important commodity since it is tied to both Energy and China. I have clients who are scrap steel dealers. At this point in 2015, they feel like I did at this time in 2008: head on the desk, whiskey bottles littering the floor, a 2-week old beard, and lounging around in the robe and underwear.

At this time last year, according to Thomson Reuters data, Basic Materials were expected to grow earnings 19% in 2015, but today the sector is scheduled to grow earnings just 3.3%, and a lot of that 3.3% growth is not commodity related.

The commodity stocks will bottom before the earnings estimates turn.

Thanks to Doug McKay and Gary Morrow of “This Week on Wall Street”.


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