Earnings / Market Update – November 24, 2012: SP 500 bounces off its 50-week moving average (again)

The “forward 4-quarter” earnings estimate for the S&P 500 is $109.44, down from last week’s $109.61. The earnings yield on the S&P 500 is now 7.76%, down from last weeks 8% level, and year-over-year growth for the forward estimate has started to slow down again.

The SP 500’s p.e ratio using the current forward estimate is now 13(x) those forward estimates with 4% year-over-year earnings growth expected in 2012 for the S&P 500, and 11% expected next year.

The SP 500 rose 4.5% this week, once again bouncing nicely off it’s 50-week moving average as it did the last week of May, the first week of June this year. (See the chart below, under “Market Update”.)

Click to Enlarge.

Per ThomsonReuters, with 487 companies reporting earnings already for the 3rd quarter, year-over-year earnings growth is expected to be 0.1%, versus the -2% expected on October 1, while revenue growth is expected to come in at -0.8%.

3rd quarter earning and revenue expectations have been subdued for some time: this should not be a surprise to anyone closely scrutinizing the data each week.

How predictive is (are) forward earnings estimates for the S&P 500 and the various sectors ? Although I can’t put my hand on the exact blog post, my friend Jeff Miller, at “A Dash of Insight” wrote about this very topic a few years ago, and I thought he concluded that there was some predictive power to forward estimates. (Here is Jeff’s post from last week, http://oldprof.typepad.com/.)

I was wondering what last year’s week of November 25, 2011 was telling us about the 3rd quarter, 2012, and here are the numbers: (First column is the sector, the 2nd column is the year-over-year earnings growth as of November 23, 2012, and the 3rd column is the expected year-over-year earnings growth for q3 ’12, as of November 25, 2011):

Cons disc: +12.3%, +13.4%

Cons stpl: +2.6%, +8.7%

Energy: -16.4%, -3%

Financials: +7.5%, 10.9%

HlthCare: +1.7%, +2.3%

Indus: +5.4%, +10.9%

BasicMat: -26.6%, +14.3%

Tech: +2.3%, +11.7%

Telco: -0.2%, +2.2%

Ute’s: -7.7%, -4%

SP 500: +0.1% +7.1%

As the reader can quickly discern, Energy and Basic Materials have seen the sharpest reductions in earnings in the last 52 weeks, and as of early last week, of the 10 sectors comprising the S&P 500, the three worst performing groups were Basic Materials at +5.8%, Energy which was up just 1% on the year, and Utilities, which were down year-to-date -1.4%. (All of these returns were “pre” the Thankgiving week rally.)

Here are two more quick earnings data comparisons for readers. Although this is somewhat geeky, the next table compares how analyst consensus was changing for q3 ’12, back in q3 ’11. In other words, how did the one year forecast change for q3 ’12, between 10/3/11 and 11/25/11: (First column is sector, 2nd column is expected earnings growth for q3 ’12, as of 11/25/11, and the 3rd column is the expected earnings growth by sector, as of 10/3/11):

Cons disc: +13.4%, +16.1%

Cons stple:+ 8.7%, +10.5%

Energy: -3%, +13.3%

Fincls: +10.9%, +26.7%

HlthCare: +2.3%, +4.9%

Indust: +10.9%, +17.9%

Basic Mat: +14.3%, +20.9%

Tech: +11.7%, +15.4%

Telco: +2.2%, +11.2%

Ute’s: -4%, 0.2%

SP 500: +7.1%, +14.7%

The point being (and readers can draw your own conclusions and inferences too) is that the way I see this data, in just the 7 weeks between 10/3/11 and 11/25/11, analysts were already slashing their q3 ’12 expected year-over-year growth numbers pretty markedly, for the SP 500, which in hindsight proved to be pretty accurate.

So what does this tell us about the 2013 and the forward estimates ? The way I read the data, 2013 still looks pretty stable in terms of expected growth. (Here are the numbers for 2013 by sector both as of 11/23/12 (first column) and as of October 1, 2012 (2nd column):

Cons disc: +14.2%, +15.3% (est)

Cons stple: +9.7%, +9.9% (est)

Energy: +4.3%, +7.8% (est)

Fincls: +14.7%, +12.6% (est)

HlthCare: +7%, +8.1% (est)

Indust: +8.7%, +11.4% (est)

Basic Mat: 22.4%, +21.9% (est)

Tech: +13.1%, +13.2% (est)

Telco: +20.6%, +23.3% (est)

Ute’s: +1.3%, +2.5% (est)

SP 500: +10.9%, +11.6% (est)

2013 (at least from an earnings perspective), could turn out to be a pleasant surprise. The Fiscal Cliff (sorry, I used that term again) could impact earnings if the payroll tax subsidy is removed (or maybe it is already factored into analyst estimates) but so far, at least from the data, we have yet to see analysts slashing numbers like they were a year ago, despite the plethora of bad news and punditry commentary around the recent reports.

Keep an eye on Financials and Basic Materials. Why ? Look at the above 2013 table – those are two sectors that have seen analysts INCREASE their expected earnings growth estimates for the year already,  despite worries about Dodd-Frank, and China. (The Basic Mat growth revisions might be telling us the re-acceleration of Chinese economic data could be sustainable. )

To conclude, forward earnings data is “muy importante” and shouldn’t be ignored, and take the skeptics and Cassandra’s with a grain of salt, but also do your homework on the company level estimates too. Although I’ve been called an idiot before, right now from my perch, and from spending a lot of time looking at this data every week, earnings estimates for 2013 look pretty stable. The S&P 500 is trading at 13(x) the forward estimate with 11% growth expected – not too racy, and cloaked in pessimism and negativity.

We’ll have a better feel for 2013 after January 15th, when 4th quarter earnings reports allow managements to start guiding for full year 2013. Maybe more importantly, we’ll have a feel for what Washington will likely do with taxes by then.


Market / Sector Update:

* The SP 500 bounced right off its 50-week moving average this week, as it did during late May, early June, 2012. This week was an oversold bounce on pretty low volume, though. Here is the chart:

* Utilities – we’ve never been big utility investors, since as a sector, it is only 3% of the S&P 500. However, the high for the year for the XLU was hit on July 30. The low yield tick for the 10-year and 30 year Treasury’s were July 24th or so – coincidence ? The Ute’s have been a House of Pain (to borrow a Jim Cramer expression) since late July – is there any way that UTE’s could be forecasting a higher rate environment, and does the correlation between utility’s and interest rates still stand  ?

* Retail in December: http://talentedblonde.com/. Love this post from Kristen Bentz, who was actually one of my many editors at www.thestreet.com for a cup of coffee I think. Note in the 6th paragraph, the 4(x) difference between Cyber-Monday and Black Friday shoppers. Frightening, or maybe quite pleasant given that we are long Amazon (AMZN). Retail stocks typically underperform during the month of December. Mainstream and financial media punduts usually ALWAYS under-estimate holiday season shopping strength. It has been that way for years, or maybe they are simply practicing UPOD (under-promise and over-deliver). (Long WMT. Want to own more. )

* Intel and Microsoft – Note the technology sector estimates for 2013 in the above earnings section. Not helping INTC though, one of our long’s. Could be a Dog of the Dow for 2013, with its 4.6% dividend yield currently. We’ve written about Intel on www.seekingalpha.com, and thought the stock was good value at $23. 2012 will be the first year-over-year decline in PC sales since 2001. I just dont think that decline is sustainable, or that the PC is that obsolete. There are laptops and servers with Intel chips and those aren’t going away yet. Microsoft is still above its 200-day moving average. MSFT repurchases about $1 billion in shares every quarter. However as of 9/30/12 they had something like $8 billion left in the current share repurchase plan, which was due to expire on 9/30/13, so look for a new program announcement or a doubling of their current pace of repurchases. Either way – good for the stock. MSFT has $66 bl in cash on the balance sheet as of 9/30/12, but only 20% is domiciled in the US. Still a $15 billion ASR (accelerated share repurchase) would be a nice holiday gift for investors. How likely ? Not so much. (Long INTC and MSFT)

* Financial sector earnings estimates make me a believer in the sector unless Dodd-Frank gets ugly. We remain overweight financials.

* Industrials are our doggiest sector this year in terms of the overweight, with it being up just 7.50% as of early this week. Even tech was doing better year-to-date at +9%. Industrials could get a lift if China continues to rebound. China’s PMI released early Friday morning showed a 50 level, the first growth in 13 months, I believe. PMI’s are diffusion indices – meaning that a level over 50 indicates growth, and a level under 50 indicates contraction. The Basic Materials earnings estimates might be the best leading indicator for China’s economy that we have…

* Home Depot nearing its late 1999, early 2000 high of $69.75 in early Jan, 2000. Not that far away now in terms of price. We added some homebuilder exposure last week, by buying TOL, which is down 10% from its recent highs, and corrected a bit more than  Lennar did with the market correction. LEN’s relative strength is impressive. (Long HD, TOL, LEN)

* Gold was thought to have a big day on Friday, technically. It has been a long time since GLD has busted out to an all-time high. It has been a 12-year bull market for the metal. We have a small position in GLD, nothing meaningful.

* Verizon was up 4.84% this week, and T was up 2.81%. We talked about the estimate revisions for telco last week. 2013 is looking for 20% growth for the sector. We dont have any exposure yet. Not too bright…

To wrap up the weekly missive, we don’t think earnings are an issue for 2013. The prospects of the Cliff are spooky, but as of yet I dont see it in the estimates. I wonder how many analysts today were around in the 1990’s ? Might be why there seems to be a cloud of pessimism around earnings despite a pretty reasonable valuation for the SP 500, and a high quality earnings in terms of cash-flow, etc.

Thanks for stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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