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What a wild
three weeks for stocks. As of Friday, April 23rd, the sky was the limit.
As of Monday, April 26th, there was no floor. Were earnings the culprit,
or was it just time? And more importantly, where are we now?
The end is in
sight, and there's some fairly good news once we get there. The 'when',
however, is still a question mark. Since nobody else is doing the honors,
we'll offer up this much-needed (and blunt) assessment of the market's
current condition and valuation. First though, a couple of notes from the
blog....
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Market
Update: The Pendulum's Almost to the Other Side Now |
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Though
it's not over yet, the bulk of the market's companies have reported their
earnings results for the first quarter of 2010. Of the 3031 major names
that posted Q1 numbers since April 12th (the unofficial kick-off to
earnings season this year), 58.8% have beat earnings estimates, while
32.4% have fallen short of EPS forecasts. That leaves 8.9% that posted
numbers in-line with expectations.
 While
more beats than misses would sound encouraging, it's not this time around
- the low-balling is usually enough to translate into a 'beat' rate of
about 65%, and a 'miss' rate of about 25%. So, by historical standards,
last quarter was quite disappointing.
One has to wonder
just how much this shortfall is the reason for the big pullback from stocks
that got started a little over three weeks ago. Don't dismiss the idea.....
up until that point in time, the market's earnings results were
much closer to being in-line with the 2/3 'beat' and 1/4 'miss' rule of
thumb; the shortcomings really started to roll in on the 26th. Take a look
at the nearby table to see for yourself.
Yikes? Maybe
not. Once again, there's more to the story that investors aren't hearing.
But the S&P
500's Marketwide Estimates Were Raised ?!?!?!?!?!
That's right.
The S&P 500 - were the index a stock - is now on pace to 'earn'
$19.12 per share in Q1 on an operating basis, and earn $17.38 per share
on a GAAP/reported basis (90% of companies have reported their numbers,
so that's a pretty good guess). That's actually up from S&P's
forecast from April
8th, when the numbers were $17.16 and $15.81 (respectively); it's leaps
and bounds better than the February
25th versions of those numbers, when they were $17.10 and $14.96 (again,
respectively).
And to plainly
say what you're not sure if you're reading right, yes, the market lost
ground despite far better-than-expected earnings for the first quarter
of the year.
 [The
next semi-obvious question is, if earnings were so strong, how come so
many more companies than usual fell short of estimates? The answer is two-fold.
(1) Analysts are throwing darts. (2) Though they were fewer in number,
the companies that did beat estimates managed to beat the living daylights
out of estimates. So yes, it's possible for this disparity to materialize.]
That's not even
the interesting/compelling part of the story though.
Price/Earnings
Ratios Back to 'Not Crazy'
Remember our
April
8th commentary that simply suggested the ridiculous February-April
runup had inflated P/E ratios to unsustainable levels? The trailing operating
P/E for the S&P 500 at that point was 18.56, while the GAAP P/E was
coming in at 20.01. On a forward-looking (2010) basis, those ratios were
projected to be 17.25 and 19.10. Any and all of those price multiples have
been seen before, but they've never been supported this soon after a
recession.
Well, the market
figured that out.... unfortunately a little too late for most.
The 'corrective'
move that began back on April 26th was pretty much a deserved and fair
correction. Stock prices plummeted, and earnings came in better than expected.
The P/E ratios, however, met in the middle, and are back to more nominal
levels as a result. The trailing-twelve month operating P/E for the
S&P 500 now stands at 17.24, while the GAAP P/E stands at 18.67. On
a year-end (2010) basis - based on Monday's closing prices - those
earnings multiples are 13.96 and 17.37, respectively. Each of those are
a little more in-line with norms at this stage of the economic rebound.
(Click here for a full-screen
operating earnings chart, and here
for a full-screen GAAP earnings chart.)
 With
that being said, between tumbling stocks, the growing crisis in Europe,
and an earnings scoreboard that at first glance seems weak, investors may
well have been distracted from the fact that overall earnings were not
only stronger than a year ago, but they were also (net) better than expected.
Even better, estimates for the reminder of 2010 and through 2011 were raised
- again.
In other words,
the market's 'value' is still growing, while prices are back to palatable
levels (lower P/E ratios). Read "here's an opportunity."
Timing is
Still Everything
None of this
is to say you absolutely must pile into stocks right now, or forever hold
your peace. In the same way the market got - and stayed - overvalued
through April, the market can become undervalued via further selling.
As we've said
before, even long-term investors need to pay attention to the short-term
technicals, as wars are won with the battles over nickels and dimes. Right
now, we're still in a short-term, technical correction that has nothing
to do with earnings. Yet, it's still affecting stock prices (sending them
about 11% lower at one point). That won't change earnings though - just
P/E levels. And, if P/E levels can get low enough (and we're getting
close to there), you can bet we'll see a rebound move that will be as abrupt
as the pullback over the last three weeks has been. If not, we'll continue
to search for other signs of a short-term technical bottom.
Either way though,
the
bigger earnings picture is still a positive one. Don't lose sight of that
- just pick and choose your spots.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
