The following is an excerpt from John Blank's Market Strategy. To access the full report, click here.
Top-Down Fair Value for the S&P 500
The approach of spring has warmed up forward-looking markets in March. You didn’t need a groundhog to notice. Just look at your stocks.
At 15 times forward consensus on earnings estimates, stocks look fully valued again. Consider the average stock market P/E is 15 to 16. Apply 15 to $117 per share analytic bulls expect for the S&P 500 in 2014. That computes to fair value at 1755. At the time I wrote this, stocks were pricing well above that level. This number’s arrival would reflect deep pessimism on Federal taper unintended consequences, or more likely, a non-U.S. blow-up.
Raging bulls use $132 in earnings for 2015 and say 1980 is fair value in a short time.
Time to Buy in Spring?
Based on weekly March unemployment claims data and ISM and PMI numbers, yes. Federal non-farm payroll numbers from Dec and Jan created worry. After a two-year budget deal passed in DC, we got further onboard for a rise in U.S. stocks. DC games must stay sidelined.
Markets are robustly priced to full year 2014 -- with a more than a pinch of 2015 now.
The Fed Sees a Strengthening Recovery
According to a recent Fed Views, “Recent data continue to indicate a strengthening recovery.
“Fourth-quarter real GDP growth suggested a little less momentum than we expected in domestic demand. We expect a further modest dip in GDP growth in the current quarter, reflecting two main factors. First, firms are likely to reduce their accumulation of inventories following a sizable increase in the second half of 2013. Second, weak retail sales in January suggest somewhat weaker near-term growth in consumption. Some of this weakness is likely associated with bad weather and the termination of extended unemployment benefits.
“Nevertheless, we expect more solid growth overall for 2014.”
Zacks April Sector/Industry/Company Telescope
March showed investors a fresh mix. Sector leaders are Consumer Discretionary, Info Tech, Materials, and Industrials. Overbid Health Care and Consumer Staples take a step back. This is a cyclical call. Global growth led by business spending is on. Think planes, corrugated boxes, and autos.
(1) Consumer Discretionary keeps the consumer bid alive. It is Very Attractive. Focus on Leisure and Autos/Trucks/Tires. Apparel looks good too. The Home Furnishing-Appliance upside looks to be off now.
Company to Look at: Motorcar Parts America (MPAA - Snapshot Report)
(2) Info Tech has hot industries like Telco equipment and Computer Software-Services. This sector is Very Attractive.
Company to Look at: Datalink (DTLK)
(3) Materials look Very Attractive now. Containers & Glass, Building Products/Construction Materials, and Chemicals industries lead. There are no Very Unattractive industries here, a first for this beaten-up sector.
Company to Look at: Westlake Chemical (WLK - Snapshot Report)
(4) Industrials? Take a look at Aerospace & Defense, as plane travel is hot. Business Product and Transport-Air look solid. The dull spot is Machinery-Electrical.
(5) Financials have strength showing in regional Banks & Thrifts, and in the stock market driven Investment Banking & Brokering businesses. Major Banks look to be the big laggards. Fines, heavy regulation, and clumsy over-scaled businesses bite.
(6) Energy has a stellar industry space in Alternative Sources. The industry to look at is Solar. At the other end of the spectrum, Oil & Gas integrated look Very Unattractive.
(7) Health Care is now a solid block at Market Weight. That includes Drugs.
(8) Consumer Staples look Very Unattractive across the board. In particular, stay away from Tobacco and Beverages. Food/Drug Retail, Agri-business, and Soaps & Cosmetics are Very Unattractive too.
(9) Telcos are Very Unattractive.
(10) Utilities are Very Unattractive.
Summary: Cyclical growth in on. Defensives are off.
Happy Investing to All!
This is an excerpt from John Blank's Market Strategy. To access the full report, click here.