Keep Looking To Growth And Cyclicals

S&P 500 Fair Value
December holiday season is here.  And the unemployment rate is 7%.  That is spreading holiday cheer.

Raging bulls use a $121 earnings number for 2014 and say 1815 is fair value now.  Apply 15 to $118 per share analytic bulls expect for the S&P 500 in 2014. That computes to fair value at 1770.

If you say 2014 earnings projections are too high, trim back to a conservative $109 per share for a backward look into 2013.  That gives the S&P 500 a fair value of 1635, seen as a very low number now.  This number’s arrival would reflect deep pessimism on ongoing Federal budget negotiations, or a non-U.S. blow-up.

Q4 Earnings Outlook
For Q4, projected total earnings stand at +6.7%.  Four sectors look for double-digit growth in Q4:  Financials (25.3%), Telcos (14.1%), Industrials (14.3%) and Materials (10.1%).

After 494 companies reported, we saw Q3 earnings up +3.4% on +2.9% growth in revenues. In early August, forecasters anticipated +3.3% total earnings growth. S&P 500 earnings in Q2 were up +2.5% on +1.9% growth in revenues. S&P 500 earnings in Q1 were up +2.5% on barely positive growth in revenues.  

Zacks Company/Industry/Sector Telescope for December
A distinct but subtle ranking leans towards cyclical sectors and growth areas. Why?  U.S. discretionary spending is well.  Materials are further off their bottom. Finance is gearing up and showing stability entering the New Year.  Industrials have a broad set of drivers.  IT mobile is a key story.
Airlines are the best example of what works this December.  They benefit from low oil prices, high stock prices, the holiday travel season, and more plentiful jobs.

(1) Consumer Discretionary is the Most Attractive sector.  Leisure leads by a wide margin, then Autos-Tires & Trucks, Media, Apparel, and Other-Consumer Discretionary.   Consumer Electronics is at the bottom.

• Company to look at:  Home Inns & Hotels Management Inc. (HMIN)

Home Inns is a leading economy hotel chain in China, based on the number of hotels and hotel rooms, as well as the geographic coverage of the hotel chain.

(2) Materials keep up a big upgrade. The influence of China is heavily felt. Steel, non-Ferrous Metals, and Chemicals are all Attractive now.

• Company to look at:  Alcoa Inc. (AA).  

Alcoa Inc. is the world's leading producer and manager of primary aluminum, fabricated aluminum and alumina facilities, and is active in all major aspects of the industry.

(3) For Finance, a stable show of winners and losers sustains.  The winner is Finance with its emphasis on the consumer.  Investment Banking & Brokering come up pretty well.  Insurance remains strong.  Banks & Thrifts, Major Banks, Real Estate and Investment Funds stay at Market.

• Company to look at:  Euronet Worldwide (EEFT).

Euronet Services Inc. is an industry leader in providing secure electronic financial transaction solutions. The company offers financial payment middleware, financial network gateways, outsourcing and consulting services to financial institutions and mobile operators.

(4) Industrials have four winners, two fence sitters, and six losers. To go long here, look to Aerospace & Defense and Airlines.

(5) Info Tech remains a sector with shifting sands. Telco Equipment looks Very Attractive.  Misc-Tech and Computer Software-Services look Attractive. Electronics is at Market.  Semiconductors sink to Unattractive.

(6) Consumer Staples gets a downgrade. Just Soap & Cosmetics remains Very Attractive.  Strength is luxury.  Beverages and Food is Unattractive.  Agri-business remains in the dumps at Very Unattractive.

(7) In Health Care, a Market weight. The Drugs industry goes down to Market.  Medical Products and Medical Care Industries stay at Market.

(8) Energy is a solid Market Weight... at best.  The only attractive industry is Energy-Alternate Sources.  North American Bakken production continues to ramp up and oil prices fall towards $90 a barrel.

(9) Telcos goes to a Market weight.

(10) Utilities are not interesting across the board.

This is an excerpt from John Blank's full Zacks Market Strategy Report.