While Micron led in projected earnings, it has a bit more downside risk (along with substantially higher volatility) than the others in this generally low-risk roster. By the same measures, Applied Materials, KLA, Oracle and TE Connectivity (10.42% projected annual EPS growth) have the lowest risk levels.
Notably, all the companies in the high-projected-EPS group in late February had 12-month trailing P/Es below the S&P 500’s P/E of 24.3, as of 2-24-2022. So did Cisco, Texas Instruments, IBM, Intel, Dell and Hewlett-Packard. Yet each of these six lower-risk companies have lower projected annual EPS growth, too—all below 10%.
Ironic Comparisons
The earnings dispersion has produced the ironic result of making TARP a better value opportunity than materials or energy. And considering the historical volatility of tech, that’s saying something. Yet materials and energy can also be quite fickle. And their regulatory risk makes them inferior long-term investments to TARP.
There’s also a lot of talk these days about financials, but studies show that this sector tends to peak about a year before interest rates do—timing that doesn’t bode well these days as the Fed cranks up for a series rate increases.
Lastly, it’s hard to overstate the impact of the digital revolution, which may prove the most impactful industrial revolution ever. It will drive the overall market higher as we move through this century’s third decade.
Of course, the impactful nature of digital advancement has never been in doubt. The problem has been valuation and now, this problem is at an advantageous pause. Many investors wouldn’t stop pouring money into the sector when P/Es were much higher. Why would they back off now that some names are in the sweet spot of lower prices with high earnings?
As TARP prices are pushed up, the current valuation window, naturally, will soon close.
David Sheaff Gilreath is CIO and a partner of Innovative Portfolios, an institutional money management firm, and of Sheaff Brock Investment Advisors. Based in Indianapolis, the firms managed about $1.4 billion as of December 31, 2021.