|Written by Rob Goldman|
See 7 reasons why stocks are primed to have a solid summer. Plus, check out our phenomenal 1H16 results.
BOUNDLESS OR PERILOUS DAYS AHEAD?
Our country celebrated its 240th birthday yesterday, just days after the greatest trading week of the year, which followed the Brexit collapse.
Huge, short-term swings in the market often bring confusion, concern, and questions about market direction. I do not have a crystal ball. I am not a “seer” or possess any clairvoyance. However, by looking at history and comparing them to recent and current events, we can project with a good deal of confidence, the upcoming events for the market and specific sectors, and thus, stocks. Oh, and by the way, the future is so bright, I gotta wear shades.
Key Point #1: Election Year
We have frequently written on this topic. Stocks just don’t go down in election years. Yes, the mega caps are besting the small ones but look for that to change in 2H16 and beyond.
Key Point #2: Brexit, Shmexit
I admit that I got caught up in this crap last week. Two weeks ago I said it was much ado about nothing and got burned, which I admitted last week. However, I correctly predicted that stocks would be weak early and strong later, which they were—much more than I thought. Last week I also noted that the RSI’s of the indices could show a major buy signal. And, after Monday’s sell-off they did. Brexit may hurt stocks from time to time, but that’s it. It’s all about earnings now, not the externals.
Key Point #3: Q2 Earnings Estimates
Although Wall Street estimates declined from the beginning of Q2 to the end, the overall change is the smallest in several quarters.
Key Point #4: The 6 Month Rule
Current stock prices are designed to reflect changes/values six months out. With a return to broad-based revenue growth, along with the first quarterly year-over-year EPS rise in many quarters set to begin in Q4, good times are ahead.
Key Point #5: Little Brexit Fallout
Only one S&P 500 Index company even commented on the impact of Brexit on its financials, indicating that the panic that ensued was overdone.
Key Point #6: Consumers will be strong in 2H16
The consumer discretionary sector is expected to be the only industry to record double-digit earnings growth this year, and that figure, 10.9%, has increased from the end of Q1.
Key Point # 7: Next Year’s EPS growth should be huge
Aided in part by a massive increase in the Energy sector’s earnings, the S&P 500 Index could experience earnings growth of over 13% in 2017, according to Factset. The energy, financials, consumer discretionary, and information technology sectors are projected to all generate earnings growth of well over 11% next year.
The Stock Market Today
I happened along a blog by famed economist Dr. Ed Yardeni that was published on Friday, July 1st. Many of his sentiments are similar to ours but there are some very interesting data points. (http://blog.yardeni.com/)
In the previous section of the Guide, we focused a bit on earnings rather than revenue. Yardeni suggests that even low S&P 500 Index revenue growth expected next year of around 4-6% should serve as a market driver as such positive returns will be a great change from the negative revenue returns experienced since 1Q15. In the meantime, he expects a big market move post–November elections, which is a sentiment in which we agree. For now, we project a solid summer followed by a typically volatile Fall seen in election years.
Yardeni notes that valuations may remain high but low-yields on bonds are supportive of this actuality. Our due diligence demonstrates that the 12-month forward P/E on the S&P 500 is 16.4x. This compares with the 5 year historical average P/E of 14.6x. If Yardeni is right and earnings per share growth of the index is only 5-6%, stocks could still look expensive. However, if the figures are closer to the Factset forecast, (earnings growth of 13%+), than the market’s valuation will not really seem high at all, right?
Right now, the consumer staples, materials, and utilities segments trade at the biggest premiums to their 5- year average P/E. Taking into account 2017 earnings expectations and current forward P/Es, consumer discretionary may be the best value this summer.
Great info, insights, and hard-hitting stories make up this week’s Say What? feature...
The New York Post
Remembering how we got here as a nation.
Can’t take a stand, huh?
24/7 Wall Street
IPO performance can be a harbinger for market direction and sentiment.
The New York Times
ET, phone home.
Us Versus Them
Now that we are at the midpoint of the year, it is time to provide the returns of our non-sponsored ideas for the past six months. No matter how you slice and dice it, I would put our picks and profiles against anyone. Remember, the comparable indices are barely up for the year, which makes the returns even more remarkable.
To compare apples to apples, the tables below are divided into 3 sections with data priced as of the introduction date through 6/30/16: The 30-30 Report (only four months of data since it is a premium product), the Market Monitor blogs, and ideas espoused in The Goldman Guide. For the most part, we compared our results with the Russell 2000 Index. However, we also used the S&P 500, where applicable.
The 30-30 Report:
Our 12 picks rose an average of 21.8%, with a peak return average of 31.5%. Oh, and for May, the average peak return for the 3 picks is over 30%. It is too early to call our just released June report results.
The 17 stocks profiled here enjoyed an average return of 9% through June 2016. There were few losers and some big time winners in this group.
The Goldman Guide:
The choices (i.e., high flyers) we made in January just killed us for the year. We profiled 25 small/mid companies, including one “pan”, Chipotle (NYSE—CMG), which dropped by 13%. Interestingly, the small stock picks had an aggregate return that was barley negative. It is a bit deceiving because while our Q2 picks were down, the average peak return was over 14%.
By the way, if you thought we could only pick small caps, note that our 4 big cap picks were all up and scored an average return of 16.9% (excluding dividends) versus the 2.7% recorded by the S&P 500 Index during the same period.
The Returns: The 30-30 Report
The Returns: Market Monitor
The Goldman Guide
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