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Exposure to the World Matters: Zacks NOV Strategy Update

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The following is an excerpt from Zacks Chief Strategist John Blank’s full Nov Market Strategy report To access the full PDF, click here.

World Growth in Focus

In 2016, S&P500 companies got over 43% of revenues from abroad. And in 2016, the percentage of S&P 500 sales from foreign countries decreased for the 2nd year in a row, after increasing for three consecutive years. The overall rate for 2016 was 43.2%, down from 44.3% in 2015 and 47.8% in 2014, at least an 11-year record high.
THAT’S +4.6% TO EARN BACK!!!

2017 will surely be better!

U.S. Market Outlook

In this month’s U.S. outlook, I want to show you how “uber” bullish stock strategists out there have pushed this bull market forward, using the Trump tax trade as fodder.
 

Paul Dietrich at Fairfax Global Markets in Middleburg VA, had this to say on Oct. 30th, 2017 in Seeking Alpha…
 

Is the U.S. Stock Market Overvalued? If Congress passes their tax reform legislation, it is expected that corporate tax rates will be lowered from a high of 35% to 20%. The savings in corporate taxes will flow directly to corporate earnings. Here is how the tax reform legislation could affect the average P/E ratio of the S&P500 Index:

  • According to FactSet, the current forward PE ratio of the S&P 500 Index is 17.9. (Source: FactSet 10/20/2017)
     
  • According to Standard & Poor’s data, S&P 500 earnings for 2018 are estimated to be $144.88 per share. (Source: S&P 9/13/2017)
     
  • The average S&P500 company currently pays 24.17% in taxes. If that rate is lowered to 20%, the average S&P500 company will receive a 4.17% reduction in taxes on revenues of an average of $12.21, that should go directly to increased earnings.
     
  • The result is a 2018 S&P500 forward P/E ratio of 15.9. if one adds the $12.21 to estimated 2018 S&P 500 earnings of $144.88 or $157.09.
     
  • A P/E ratio of 15.9 completely changes the valuation of the stock market. It no longer looks overpriced! According to FactSet the average forward 12-month PE ratio over 5-years is 15.6.
     
  • While the average S&P500 company currently pays 24.17% in taxes, many companies in the S&P500 make most of their revenues primarily in the United States and many of these companies pay the higher 35% tax rate. These companies will benefit the most from this tax reform and some will get a tax break of almost 15% on their revenues and that money will go directly to earnings and will change many companies price-earnings ratios dramatically.”
     

Want My Tax Cut Critique?

The latest S&P500 2017 earnings track $130.88. 2018 expectations are at $145.81. That’s a difference of $14.93. These usually get cut back over time.

Paul says $12.21 could come from tax policy. Take it away from $14.93? You get $2.62 -- for standalone earnings growth. That’s a scary evaporation downside. A 20% probability is what the Predict-It people have for a chance of tax passage by Thanksgiving.

Maybe cut that tax gain in half? $6.10. Offer +5% earnings growth, without a tax gain? That’s $6.54. Hence, 2018 earnings are set to be $136.98 without any tax gain. With the S&500 trading at 2575 right now? The corrected 12-month forward P/E is 20 without any tax gain. It is a forward P/E ratio of 17.94 -- with a tax gain added of $6.10.

November Sector/Industry/Company Telescope

November shows: Exposure to the rest of the world matters!
S&P keeps track of global exposure. And the 2016 data show the truth is this: the globally exposed sectors are heating up. The domestic ones are falling back.

According to S&P, the Energy sector maintained the title it took last year of leader in exposure to foreign sales, as its domestic sales fell. The sector reported 58.88% of its sales as foreign in 2016, up from 2015’s 57.88% and 2014’s 56.23%. Oil & Gas Conglomerates are the most globally exposed here.

Info Tech’s exposure declined to 57.15% in 2016 from the previous year’s 57.78%, both of which were a tick below energy’s; in 2014 the sector posted 59.39% in foreign sales. Semis are the most globally exposed here.

Go to the back of the pack. In terms of its sector-level representation of total sales, Consumer Staples represented 18.49% of all foreign sales, up from 14.08% in 2015. It was downgraded this month. ‘Nuff said there.

(1) Info Tech stays HOT, and Very Attractive. Semiconductors are the  leader of ALL industries across the board. Computer Software-services is also strong.

Top Pick: Cray

Cray Inc. is engaged in designing, developing, manufacturing, marketing and servicing the high performance computing (HPC) market, primarily categories of systems known as supercomputers.

(2) Materials rise to Very Attractive. The leaders are Metals Non-ferrous and Paper and Chemicals.

Top Pick: Kururay (KURRY - Free Report)

Kuraray Co., Ltd. engages in commercializing chemicals and resins, fibers and textiles, high performance material, medical products and others. It operates in three segments: Chemicals and Resins; Fibers and Textiles; and High-Performance Materials, Medical Products, and Others (HMM). Headquarters is in Tokyo, Japan.
 
(3) Consumer Discretionary stays a Very Attractive. Leaders are Other Cons-Discretionary, Apparel, Non-Food Retail/Wholesale, and Leisure.

Top Pick: Lion’s Gate (LGF.A - Free Report)

Lions Gate Entertainment Corp. is an entertainment company with a presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution and new channel platforms. This company is based in Santa Monica CA and Vancouver BC.


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