Perspective On the Year So Far
It’s certainly not the start to the year the bulls wanted, and it’s far from the year we thought we were going to get when things were humming in mid-January. It’s the year we’ve got so far though. However, and despite some pain over the last four weeks, the year isn’t a bust just yet. Investors simply need some perspective and navigation tips. So, here they are.
Reality Check
If you think the pullback from the mid-January peak was harsh, then bluntly, you’ve been spoiled. From peak to trough, the SPDR S&P 500 ETF (NYSE: SPY) only gave up 10.1%. Though ‘only’ can mean different things when you’re on the losing end of the table, that dip barely meets the threshold for a normal market correction, which tends to be in the 10% to 15% range.
That said, don’t interpret that as a suggestion the selling is over. Though stocks have been up in three of the last four days (counting today so far), it’s been a struggle, and the uptrend has been far from restarted. The SPDR S&P 500 ETF is still due for a dip to the $103 area, which translates into a move to 1030-ish area for the S&P 500 Index.
On the flipside, that’s not to say stocks won’t rally out of this current mess and back up to new highs. The high-odds and healthy outcome, however, would first be a nice capitulatory move to lows slightly under last week’s low levels…. about 15% below the peaks.
Earnings Results
Say what you want about the shape and longevity of the economy, but the current earnings numbers don’t lie. Of the S&P 500 companies that have posted last quarter’s results (mostly Q4 of fiscal 2009), 83% have reported earnings above analysts' expectations. Only 3% saw earnings in line with estimates, while 13% reported a net income under analysts’ expectations.
For comparison, the ‘a average’ quarter yields a proportion of 61% ‘beats’, 18% ‘mets’, and 21% ‘shorts’.
To put that into valuation terms, the S&P 500 – were it a company – is earning at a rate of $16.00 per share; the current P/E is right around 16.8 on an operating basis. (Note the chart displays EPS projections through 2011.)
But what about reported/actual (GAAP) earnings? The one-time charges still seem to be lingering. On an actual basis, the S&P 500 is earning about $10.20 per share, which translates into a P/E of 21.85. That’s not cheap exactly, but it’s not expensive either (and it’s below the long-term average).
If the earnings estimates remain as wrong (i.e. too low) for the rest of the year like they were for the fourth quarter of 2009, then the market is undeniably undervalued for 2010… as long as we don’t back-pedal on the economic front; the economy's strength is the fuel for the earnings rebound.
Of course, this full-year outlook doesn’t guide the near-term. In the near-term, things are still rocky to the point of being bearish. See the “Reality Check” above (again), for a reminder of why.
Surprising Leaders
Most investors won’t be surprised to learn the year’s leading groups so far include regional banks and automobiles. Both represent solid longer-term opportunities. A couple of arenas have surfaced as leaders, however, that few would have thought could muster any real upside…. homebuilders, and consumer electronics. Though both are riskier than average, both also offer some significant upside potential as surprise/contrarian plays.
The S&P 1500 Homebuilders Index is up 9.7% for the year. Although construction capacity and the number of available homes still screams ‘excess’, the fact is, there will always be a market – no matter how minuscule – for new housing. There are few diamonds in the rough than not though, so pick carefully.
The S&P 1500 Consumer Electronics Index is up 17.1% for the year, hinting that shoppers are at least spending a little more on the gizmos they probably don’t need, but just want. Again, it’s hit and miss, so choose wisely.
To reiterate, both groups are values mostly because very few investors think either group is positioned to produce any kind of result at all. When some of them actually do generate profits (as they have already), the buyers will come out of the woodwork.
