S&P 500 Earnings: Filling In Some Blanks

In 2013, our best call for clients this year was our Facebook (FB) long, which we detailed here and our best sell decision was exiting the homebuilders in late May, 2013, which we wrote about here, and here. We are seeing a good opportunity now to buy homebuilder stocks lower (which we haven’t yet done). We’re still waiting for better valuations on the homebuilders. We like both Lennar (LEN) and Toll Brothers (TOL) at the $25 area. (Have remained long a very small position in both in one account…)

As you can see from the analysis, both the Facebook (FB) and the homebuilder calls were driven by fundamental work, and earnings and revenue-based analysis, with an eye towards technical analysis too. (We’ve had a few lemons as well, which will be discussed later.)

An early look at 2014
Jeff Miller wondered aloud last week about Q3 ’13 and what 2014 earnings might look like for the S&P 500, and while we think it is a bit early to make any one sector bet based on the earnings growth trends for 2014, we wanted to put up the numbers to give readers a feel for what 2014 MIGHT hold at this point in 2013.

We are in a grey area for earnings both over the next month, as we await Q3 ’13 earnings results starting around October 10th, and for 2014 as well. Jeff Miller and I have talked about this at length the last few years, wondering how portfolio managers (such as ourselves) value stocks and the S&P 500 using the P/E ratio: the full-year 2013 earnings per share number is probably pretty concrete at this point, while the 2014 earnings per share estimate is still subject to some revisions.

The point is, using the “forward 4-quarter estimate ” as an “in-between” metric for both individual stocks and the S&P 500 gives us a solid data point, when the end of 2013 is a little too close, and the end of 2014 is a little too far.

Last week, we looked at Q3 ’13 and Q4 ’13 earnings by sector here, with little change in the last 7 days. (See half way down the report.)

2014 Earnings Growth Estimates by Sector:

(First column is as of 9/6/13 and the 2nd column is as of July 1, ’13):

Cons Disc: +18.7% and +17.8%

Cons Spls: +10.7% and +10.3%

Energy: +10.7% and +9.6%

Fincls: +8.9% and +9.3%

Hlthcare: +9.0% and +9.6%

Industrials: +11.1% and +11.6%

Basic Mat: +17.9% and +20%

Technology: +12% and +11.7%

Telco: +11% and +20%

Ute’s: +4.4% and +4.7%

S&P 500: +11.3% and +11.4%

Consumer Discretionary continues to look solid, while Financials are expecting much slower growth in 2014 than 2013, hence our comments from last week. However, nothing is jumping out at us in terms of sector bets for 2014, as Financials were last year at this time.

My own opinion is that for full-year 2014, we won’t get a decent read on the 2014 numbers until company managements give their initial guidance on the January ’14 conference calls. Analysts will start asking about 2014 on the October conference calls, but most management’s will defer on an official 2014 guidance opinion until the January – February ’14 time frame.

Another look at Q3 ’13 and Q4 ’13 S&P 500 earnings growth expectations:

First column is Q3 ’13 and second column is Q4 ’13, as they’ve tracked over the last 8 – 9 weeks:

9/6/13: +4.9% and +11.1%

8/30/13:+5.0% and +11.2%

8/23/13: +5.1% and +11.3%

8/16/13: +5.4% and +11.4%

8/9/13: +5.6% and +11.5%

8/2/13: +6.0% and +11.6%

7/26/13: +6.6% and +11.8%

7/19/13: +7.8% and +12.4%

7/12/13: +7.9% and +12.4%

7/5/13: +8.4% and +12.8%

So far, this pattern is quite normal and what we’ve seen over time, based on our weekly analysis.

Around October 10th, I’d expect that Q3 ’13 will reach its nadir of +1% – 2% just as the 2nd quarter’s estimates reached its low of 2.9% on July 5th, and then actual Q3 ’13 estimates will likely be similar to Q2 ’13 in that year-over-year growth will likely be in the +5% to +6% range.

It is Q4 ’13 that in our opinion has the potential to be +10% year-over-year growth, for the first time since late 2011, led mostly by the Financials. (See last week’s post for details.)

We’ve just spent a lot of the reader’s time to conclude that the earnings estimates and data for the rest of 2013 and an early 2014 are “steady as she goes” with mid-single digit expected growth for Q3 ’13 and better for Q3 ’14. Don’t expect big surprises over the next few months.

What really should be done for readers is to take a much longer view of the S&P 500 earnings data, to give readers some feel for how current S&P 500 earnings growth compares to other cycles and periods, over the long-run.

Forward 4-quarter S&P 500 estimate:

The “forward 4-quarter” S&P 500 estimate slipped a whole $0.02 this past week to $115.69 from last week’s $115.71.

The P/E ratio on the forward estimate is now 14.3(x).

The S&P 500 “earnings yield” is 6.99% and continues to gyrate (or should I say twerk?) around the 7% area.

The year-over-year growth rate slipped a little last week to 7.10%, down from last week’s 7.12% and the week prior’s near-term high of 7.28%. Still, the trend remains higher, which is very much a positive for the S&P 500.

A better explanation:

2014 S&P 500 EPS estimate: $116.45

Forward 4-Quarter EPS estimate: $115.69

2013 S&P 500 EPS estimate: $109.01

2014 P/E ratio: 14.2(x)

Forward 4-Quarter P/E: 14.3(x)

2013 P/E ratio: 15.3(x)

2014 expected S&P 500 earnings growth: +11%

Forward 4-Quarter expected S&P 500 earnings growth: +7.10%

2013 expected S&P 500 earnings growth: +6.4%

Pretend we are watching CNBC and we see one of the numerous guests, commenting on the S&P 500′s P/E ratio:

• A case can be made that the S&P 500 is expensive (use 2013′s P/E of 15.3(x) compared to the 6% expected growth rate for a 2.55 PEG);

• Or cheap (compare the 2014 P/E. ratio of 14(x) with the expected 2014 earnings growth rate of 11%, for a 1.27 PEG);

• Or Goldilocks (forward 4-quarter P/E of 14.3(x) with a forward estimate growth rate of 7.1% fora 2.0 PEG);

I expect the S&P 500 earnings growth rate to gradually improve over time, and move back towards the 10% annual growth range. At 7% currently, S&P 500 earnings growth is pretty much inline with the post WW II average of 7%. Watch that forward estimate growth rate - it is a metric that rarely gets talked about and it really matters.

As the old saying goes, “Like a good lawyer, I can argue it either way…”

• In the back months like March, June, September and December, we get to hear from companies like Oracle (ORCL), Nike (NKE), Micron (MU) and FedEx (FDX), all of which have August quarter ends. We don't hear from these companies for another few weeks, but their commentary and guidance do matter. (Long all 4 mentioned, with largest position being FDX.)

• Norm Conley, lead investor at JAG Advisors out of St. Louis, is a long-time friend from our days together at TheStreet.com. This past weekend, Norm tweeted about the PCE inflation measure, which we follow as well. Late this past week, Jeff Kleintop of LPL Financial tweeted that the 10-year Treasury is nearing fair value given the 1.7% ”real” growth rate of GDP and 1.2% inflation rate. Seriously, this stuff will drive you nuts and by that I mean, all the various inflation forecasts and measures out quoted by the financial media. Jeff thinks the 10-year Treasury is fairly valued at 2.90% while I’ve thought the 10-year Treasury was fairly valued at 3.5% – 4% given the long-term “real” return desired from Treasuries of 2% plus the current inflation premium of 1.5% – 2%. Why use 1.5% – 2% when valuing bonds / Treasuries? Well, we just finished the worst deflationary period in US economic history since the Great Depression with the collapse of US equities and national real estate values, and I do believe both the Fed and the rest of global central banks around the world (look at Japan) want a little inflation. A 1.5% – 2% inflation premium might be too low. Only time will tell. (P.S. – if you aren’t following Norm and Jeff on Twitter you should be… Great tweets every week.)

• Corporate high yield bonds are getting significantly oversold, on daily and weekly charts. The SPDR Barclays High Yield Bond ETF (JNK) is already trading below the 200-week moving average, while the iShares iBoxx Dollar High Yield Corporate Bond fund (HYG) is still a tad above the 200 day moving average located at $89.91. Need to see the HYG hold this coming week. (Long HYG);

• From Josh Brown’s blog this past week: thought this would happen too. Thinking we will see a really strong NFP report before year-end ’13, and by that I mean 275 – 300k. However the high-yield spreads are always the early warning indicator…

• Consumer staples – 10% of the S&P 500 by market cap – remain oversold.

• Healthcare is the top performing sector this year, led by biotech. In 2012, the Market Vectors Biotech ETF (BBH) was up 53%, and in 2013 the BBH is up another 46%. It looks like the BBH made another all-time closing high on Friday, Sept 6th at $80.90.

Healthcare: +26% YTD return, 0% full-year earnings growth expected; (Biotech revenue growth is more than 2(x) the S&P 500 and healthcare growth in general);

Cons Disc: +23% YTD return, +9.5% full-year earnings growth expected;

Financials: +21% YTD return, +21% full-year earnings growth expected; (The only sector where earnings growth resembles YTD return);

Industrials: +17.5% YTD return, +6% full-year earnings growth expected; (Having General Electric (GE) as your largest component can’t help);

S&P 500: +17.5% TD return, with 6.4% full-year earnings growth expected;

Cons Spls: +15.5% YTD return, with +5.8% full-year earnings growth expected;

Energy: +15% YTD return, with just 1% full-year earnings growth expected;

Technology: +11% YTD return, with +1.7% full-year earnings growth expected (Apple (AAPL) still dominates, so glad we are long FB);

Utilities: +9% YTD return, with a -1.4% full-year earnings decline expected;

Basic Mat: +10% YTD return, with +1.4% full-year earnings growth expected; (The mining stocks, of which we are long a few, are killing the sector)

Telco: +5% YTD return, although Verizon (VZ) was down 3% on the week. Mostly an irrelevant sector now;

The theme this year is location (stock picking), location (stock picking), and location (stock selection).

Thanks for reading and stopping by. Sometimes there just isn't much to say on the earnings front, so we try and fill in the blanks with some earnings-related issues like PEG valuation, and S&P 500 and sector returns vs. earnings growth to give the reader some perspective.