The following is an excerpt from John Blank's Market Strategy for April. To view the PDF in its entirety, click here.
Zacks Strategy: April Markets Get a Bid
April showed investors a positive look on discretionary spenders. After that, look to sectors and companies where earnings and dividend streams from late-cycle profit growth are more certain. Valuations that are not too stretched get a bid. That’s Consumer Discretionary, IT, Utilities and the Financial Sectors.
Top-Down S&P 500 End-Of-Year 2014 Target
At 15 times forward consensus on earnings estimates, stocks look richly valued again. Consider the average stock market P/E is 15 to 16. Apply 15 to $119.5 per share analytic bulls expect for the S&P 500 in 2014. That computes to fair value at 1790.
At the time I wrote this, stocks were pricing well above that level at 1880. Raging bulls use $132.5 in earnings for 2015 and say 1990 is fair value by late summer.
After a range-bound winter quarter, early spring has warmed up forward-looking markets.
Zacks Valuation Model -- Returns for Small-, Mid- and Large-Cap Stocks
Using the Zacks Valuation Model (ZVM) in April, market-implied small-cap and mid-cap growth going out 12 months offer +12.2 and +15.7%, respectively, with dividends. It was +10.25% for large-cap blend. Overall, large-cap stocks earn +9.2 to +11.4%, with dividends included and without a valuation adjustment.
In other words, small-cap growth to year-end 2014 can hit a +17% annual return with little required from a valuation build.
Zacks Sector/Industry/Company Telescope
(1) Consumer Discretionary keeps the five-year long consumer bid alive. It is Very Attractive. Focus on Consumer Electronics and the old standby of
Leisure. Cyclical Autos look good once again. What’s the laggard? Home Furnishing-Appliance remains Very Unattractive.
Company to Look At: Lenovo Group
(2) Info Tech has four hot Very Attractive and Attractive industries. Telco Equipment and Electronics are Very Attractive. Computer Office Equipment and Computer Software-Services are next in line at Attractive. The Semiconductor sector is the only area at Unattractive.
Company to Look At: Ingram Micro
(3) Utilities are Attractive. The Water Supply industry is the most Attractive. All utility industries got an upgrade by early April.
Company to Look At: American States Water (AWR - Free Report)
(4) Financials show Zacks Rank strength in stock-market driven Investment Funds, and in the cyclical Insurance and Banks & Thrifts. Real Estate is close to being Attractive again. Major Banks stay on as the big laggards. Fines, heavy regulation, and over-scoped lines keep on as headwinds.
(5) Energy has a stellar industry space in Alternative Sources. The industry to look at is Solar. Oil-Misc. got an upgrade to its earnings outlook in April. At the end of the spectrum, Oil & Gas integrated looks Very Unattractive.
(6) Industrials? Take a look at Aerospace & Defense. Plane travel stayed hot. Metal Fabricating and Machinery are at the top of the Market weight column. That’s a first. They could be poised to move higher soon.
(7) Health Care is now just below Market Weight. That includes Drugs.
(8) Materials look mediocre or worse. Containers & Glass and Chemicals industries lead. Steel and Paper are in the Zacks Rank tank.
(9) Consumer Staples look Very Unattractive for the most part. In particular, stay away from Tobacco and Beverages and Soaps & Cosmetics. Industries that look Attractive are Misc. Staples and the Food industries.
(10) Telcos remain at the bottom, firmly in the Very Unattractive camp.