The following is an excerpt from John Blank's Zacks Market Strategy for August. To read the entire PDF, please click here.
August is here. This deep summer month started us off with investors taking profits, using worry on the Russia-Ukraine-Europe tug of war as an excuse to sell. Here at Zacks, we are forward focused on the underlying fundamental outlook for S&P 500 earnings in 2015.
In excerpts from the Zacks August Market Strategy report, shared below, we provide an up-to-date S&P 500 “fair value” calculation based on 2015 earnings, and labor productivity insight from the San Fran Fed.
Finally, don’t miss our three top-down Zacks Rank stock picks in the final section!
Zacks August Outlook on the S&P 500
After range-bound winter and spring trading, a low volume summer melt-up turned markets around. Lately, profit taking has taken a toll. In August, we surmise low volume markets melt up on a full year 2015 landscape. What’s invisible becomes visible in fits and starts. Fair value quants play ‘leapfrog’ each summer. 2014 disappears and 2015 appears.
Outside Zacks, bottoms-up strategists for 2015 priced S&P 500 earnings at $132.50 a month ago. Post Q2 earnings reports, this rose to $133.80. Tie on a 15 forward P/E to do simple math.
Hence, 2000 (+/- 10 points) on the S&P 500 is fair value into fall.
The Fed Looks Into Labor Productivity
“Labor productivity, or inflation-adjusted output per hour worked, is an important factor underpinning the sustainable speed limit for the economy.
-- San Fran “Fed” View in Mid-July.
From the early 1970s through 1995, productivity in the business sector rose only about 1½% per year.
In the next eight years, through 2003, that pace more than doubled. Considerable evidence links that acceleration to the production and use of information technology (IT).
However, over the past decade, productivity growth has returned to roughly its pre-1995 pace of about 1½%.”
Zacks August Sector/Industry/Company Telescope
In August, the North American oil production build is on. Add to that, facts that consumers globally are stepping up to buy Consumer Electronics. Global businesses are spending more on IT to drive up productivity and connectivity. Semiconductors lead all major Zacks Rank industries. That can only imply global IT strength on spending, both consumer IT and business IT.
(1) Energy is a Very Attractive sector. The big integrated oil & gas companies lead the way in August, followed by E&P, Alternate Sources and Drillers. There are no unattractive energy industries in late summertime.
COMPANY TO LOOK AT: Natural Gas Services -- It manufactures, fabricates, sells, rents and services natural gas compressors that enhance the productivity of natural gas wells.
(2) Info Tech is Very Attractive. The biggest leader of ALL industries is the semiconductor industry. Computer Software-services also looks attractive.
COMPANY TO LOOK AT: Sanmina Corp. -- It provides electronics contract manufacturing services.
(3) Financials are Attractive. The leader is Investment Banking & Brokering, with much M&A activity to fund. Insurance has more cyclical upside to play with. Banks-Major, Finance, and Real Estate remain at market.
COMPANY TO LOOK AT: Green Dot Corp. -- The company is the largest provider of prepaid debit card products and prepaid reloading services in the U.S.
(4) Health Care is Attractive. The leader is Medical Care, as enrollments in Health insurance are much higher now. Drug and Medical Products are market perform. A strong Gilead Sciences report is masking a lot of sideways performance.
(5) Industrials are Market. Leaders are in Railroads and Aerospace & Defense. Laggards are in Pollution Control and Electrical Machinery.
(6) Consumer Discretionary is Market to Unattractive sector. This spend your income group has just one outperformer: the Consumer Electronics industry. There are new deep underperformers like Home Furnishing-Appliance, and Leisure Services to note. Those industries used to lead. Now they lag.
(7) Materials are Unattractive. The Container & Glass industries rest at market perform. That’s the best spot here.
(8) Consumer Staples is a Very Unattractive sector. Stay away from Food, Food & Drug Retail, and Soaps & Cosmetics in particular. Want the attractive industry here? Just Beverages.
(9) Telcos are Very Unattractive. Take out Verizon and sector EPS stinks.
(10) Utilities are Very Unattractive. The best industry, Gas Distributors is market perform.
This is an excerpt from John Blank's Zacks Market Strategy for August. To read the entire PDF, please click here.