FintekNews is pleased to launch our new feature “The Zigmont Report (Daily Market Recap)” today. We will publish this right after the market close, and each feature will appear the following morning on our M/W/F newsletter as well.
Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending shortly after the market close.
The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.
FYI I am taking a couple days off. No Recap Friday and Monday. See you Tuesday.
Dull selloff. The bears officially won the session but the bulls deserve an attaboy. Overseas markets were weak and our premarket was weak in sympathy. The S&P opened down about 15 handles (~0.6%) and wiggled around until the tape began lifting at 11 AM (as European trading began winding down). Bulls kept pushing over the course of the day and a modestly down start of the day finished with a trivially down finish. There were no major headlines or data bombshells either. So there’s little to say and conclude from today’s trading.
So let’s tackle big-picture valuation issues.
Here’s the final result of earnings season.
2017 Q1 Earnings season:
95% of the S&P 500 reporting (+16% vs 5/9 data)
Surprise vs Estimates
· Sales: +0.7% (-0.2% vs 5/9 data)
· Earnings: +5.5% (-0.1% vs 5/9 data) Growth vs Prior (Y/Y)
· Sales: 7.9% (-1.0% vs 5/9 data)
· Earnings: 14.7% (-0.8% vs 5/9 data)
The changes in the past month are disappointing but the narrative of the season was already established and these revisions at the tail of the season aren’t going to change attitudes. What we should focus on are the raw growth numbers. Both sales growth and earnings growth are good numbers. The bulls win the season, no doubt about it. The pudding had proof.
Let’s see what the analysts think.
Show me the money
Bottoms up estimates vs. 14 weeks ago
Earnings…
'16 earnings were $118.73
'17 estimates are $129.71… up $0.63
'18 estimates are $145.15… up $0.60
'19 estimates are $159.86… up $0.78
with the S&P ~2,432:
'16 PE is 20.5
'17 PE is 18.7 and earnings growth is ~9% YoY
'18 PE is 16.8 and earnings growth is ~12% YoY
'19 PE is 15.2 and earnings growth is ~10% YoY
and revenues…
'16 rev were $1,252
'17 rev estimates are down $5 to $1,326… rev growth +5.9% YoY
'18 rev estimates are down $2 to $1,395… rev growth +5.2% YoY
'19 rev estimates are unch @ $1,457… rev growth +4.4% YoY
Book value is up $14 to $765
'16 PxBE is 14
'17 PxBE is 12.9
'18 PxBE is 11.5
'19 PxBE is 10.4
Profitability
'16 profitability was 9.5%
'17 profitability is up 0.1% to 9.8%
'18 profitability is up 0.1% to 10.4%
'19 profitability is up 0.1% to 11%
ROB
'16 ROB was 15.5%
'17 ROB is down 0.2% to 17%
'18 ROB is down 0.2% to 16.2%
'19 ROB is down 0.1% to 15.4%
The analysts see a very positive future. 10-ish percent earnings growth and 5-ish percent revenue growth is something to get bullish about. I think valuations are a little high but you could say I’m splitting hairs. It’s a 20 trailing PE, but if things go as expected (big if), you’re paying a 15 PE on ’19 earnings.
Value is obviously in the eye of the beholder.
What I continue to worry about is how a 2% GDP world (which is what the Fed sees for a while) can generate 5% sales growth for the S&P 500. Some will say that we should look at the global growth rates… ok, global GDP for ’17, ’18, ’19 is expected to be 3.3%, 3.4%, 3.2%.
The S&P 500 has annual revenue about 11 trillion… global GDP is about 85 trillion…. So S&P 500 revenues are about 13% of global activity. How the heck can the S&P grow significantly differently than the world?
I don’t think it can. Either the US GDP (and the rest of the world’s) will ramp or the S&P results will disappoint.
One scenario is great for the bulls. The other is not.
Valuations imply the GDP ramp is in the cards. I don’t feel as certain. Am not willing to short US equities because that’s been such a widow-maker… but no way am I buying here. Am very underweight US equities and am waiting (for what feels like an eternity) to be a buyer.
I confess I’m a dip buyer. No shame in that. I just need the dip to be meaningful. At these valuations, I think that’s going to take more than a 10% decline. Yikes. I’m not predicting that correction by the way. I’m just saying that I don’t see value in any run-of-the-mill selloff.
I might be on the sidelines for a long time.
See you Tuesday, have a great weekend.
-Mike
