Where Stocks Are Headed And Why |
Written by Rob Goldman | ||||||||||||||||
For those of you that like me had to contend with digging out of nearly 30 inches of snow, I hope all is well. With the snow and the horrible market, could this year start off any worse? We provide insights, data, and info on a variety of topics in this issue. However, in our most important topics, we discuss:
WHERE STOCKS WILL GO AND WHYIn case you missed it, we did not have an issue of The Goldman Guide last week. In fact, our publishing schedule has ben out of whack on/off for several weeks now due to your truly battling a series of illnesses that have packed as much of a wallop as the 30 inches of snow we just received this past weekend. While the market drops did not impact my health it surely hurt my mood. With that aside, we can try get caught up and go on with our regular schedules beginning with this publication. An Unemotional Perspective Without going into grand detail on information and insight that you may have already heard, it is important to take stock of the current situation. Equities in he U.S. have been hammered due almost exclusively to economic factors rather than fundamental issues. Fears of oil company collapses amid the oil drubbing, currency swings, and the unending sale of emerging markets stocks will not abate anytime soon. Migrants in Europe appear ready to ransack the Continent’s political, societal and monetary coffers which does not help, either. At home, a lack of favorable data has not helped with stock weakness exacerbated by slowdowns in key names that drove stocks to begin with. For the near term, it appears that where oil goes, stocks will follow. The good news is that as of intra-day Wednesday, we reached the corrective phase for all major indices and then bounced sharply from those lows. That is a very good sign. What to Expect From StocksThe bad news is that it did so without reaching the capitulation/concession stage, which indicates we could test these lows and then some. For the record, the Dow and S&P 500 both reached a 2016 drop of over 11% since the end of 2015, while NASDAQ and the Russell 2000 dropped intraday by 14% and over 15%, respectively. As indicated in our table on page 1, only the Russell 2000 remains down more than 10%. Look, we have been champions of small caps stocks for forever and a day but the fact remains that we are in a bear market for this group. In fact, when the low hit on Wednesday, the index had declined by 26% since June of 2015. Ouch. I am confident that at a P/E of 15x the group is cheap and offers the greatest upside. However, aside from short term trading action, it may be a few quarters before this group comes back—-and it will—with a vengeance. For now, we still need outflows from mutual funds (which are $24 billion month-tot-date) to continue and breach the $50 billion mark for capitulation to set in and “suckers” to sell at the low only to see a snap-back return, much like what we saw last week. (Although we do not put a lot of stock in the legs it has just yet.) We noted two weeks ago that twice tice in the past 6+ years, the 12-month forward P/E on the S&P 500 dropped below 11x for a blip and then roared back. That would mean a drop to the 1300+ level, a 35% decline. This is possible but highly, highly unlikely. A 10-15% drop from here though is definitely possible, as the first couple of weeks this year have shown us. If you have some profits, take them. If you can buy puts on a long position, do it. But don’t do any wholesale selling. That is foolish. Earnings will drive stocks when things turn. Now, it may not be until we see the reports for 1Q16 earnings before we have positive comparisons and we may not see sustained oil price increases until then as well (I am thinking May-ish). Still, opportunities will present themselves both in sectors, groups, and individual stocks. Just stay away from emerging markets stocks and ETFs, along with oil-related plays, for a while. If it is any consolation, January is almost over. Plus, if the Panthers win the Super Bowl, it could portend a good year for stocks—and the market has never dropped when the Broncos have won, either. Last, stocks rarely decline in an election year. So, there’s that…. The Stock Market Today AAII Sentiment Survey (figures rounded)
Clearly investors are getting more Bearish, and understandably so. However, according to data produced by Birinyi Associates, in the past 20 years, there is no correlation between the performance of stocks for the first week of the year and the full-year returns. In fact, only half of the time was the direction for the first week and the full year even the in the same direction! The table below is a little scary. As much attention as the big stocks are getting, a new 52-week low was reached by the Russell 2000 Index, and this small stock index is now down nearly 20% from its 52-week high. Regardless, sure feels like a bear market for all the indices right now. I am not calling a low here, but tice in the past 6+ years, the 12-month forward P/E on the S&P 500 dropped below 11x for a blip and then roared back. Barring a real crisis, which I think is unlikely, I think ultimate downside is to the 13x level, which means we could drop another 7-8% before a big uptick occurs, in the worst case. ![]()
Say What?
Investor’s Business Daily http://www.investors.com/politics/editorials/al-gore-runs-global-warming-racket/ A fun piece after getting nearly 30 inches of snow this weekend. The Wall Street Journal http://blogs.wsj.com/briefly/2016/01/22/5-things-to-watch-on-the-economic-calendar-103/ What lies ahead... The New York Times A welcome diversion about Alphabet and a neat feature story to boot. Marketwatch I agree—but only with big caps, not small caps. ZeroHedge http://www.zerohedge.com/news/2016-01-24/what-charts-say-similar-topping-process-2000-2007 If you like tons of charts, this is for you. A bit too apocalyptic for me. VCRA Is Up This YearJust because the Russell 2000 Index is down 10% year-to-date does not mean that all small cap and microcap stocks are down sharply. Some stocks are actually up. In fact, we have identified one stock that while not profitable, is up for the year, is just a tad under its 52-week high and appears primed to rise 25% or higher in the coming months. Vocera Communications (NASDAQ—VCRA—$13.76) is a leading healthcare communications company that provides enterprise-class communication solutions that help care teams collaborate more efficiently by efficiently delivering key information on the right devices, to improve outcomes. Vocera solutions are installed in more than 1,300 organizations worldwide. The company recently raised its revenue guidance for 2015 and Wall Street consensus forecasts call for $102 million and $111 million in sales for 2015 and 2016, respectively. Plus, Vocera also announced its largest booking and backlog to date. Add in the fact that the company has beaten the Wall Street consensus loss per share estimates for the past four quarters, and confidence in future growth is high. Our target price for these shares is $18 which represents 5x 2016 forecasted sales of $111 million and is the high end of the traditional price/revenue range for companies of this size and standing. ![]() 1498 Reisterstown Road, Suite 286 Baltimore Maryland 21208 Phone: 410.609.7100 [email protected] www.goldmanresearch.com Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, unless noted, With some exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. 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