James Bevan: Pick stocks, don’t buy indices
0Equity markets are focused on earnings (E) and how to value them (P/E). And, for the first quarter, there were lots of challenges including the strong dollar, financial market volatility, weak commodity prices, slow economic growth, and picky consumers. Yet the results of the Q1 earnings season for the S&P500 weren’t too bad.
That said, on a per-share basis, overall revenues were disappointing, being basically flat on a year-on-year (yoy) basis, up just 0.3%.
Progress has been slow since Q1 2012, up just 2.5% since then. However, much of the recent weakness was attributable to the energy sector and excluding energy, aggregate S&P500 revenues (not per share) rose to a four-quarter high of 2.0%yoy versus a fall of 1.2% including energy.
Sector Q1 revenues-per-share on a yoy basis were: health care (10.6%), consumer discretionary (10.4), industrials (4.5), consumer Staples (3.9), telecommunication services (2.8), information technology (0.4), financials (-1.5), materials (-4.1) utilities (-11.8), and energy (-32.5). We can note that only four of the 10 sectors’ revenues were actually down on a yoy basis.
The earnings story is more complicated than the one for revenues. We track three different measures of quarterly earnings. There’s reported earnings for the S&P500, which is the compilation of results reported by companies on a GAAP basis. Then there are two versions of operating earnings, which are often referred to as “earnings excluding bad stuff” (EEBS)–usually losses (sometimes gains) that are deemed to be one-time nonrecurring events.
The EEBS series compiled by Thomson Reuters is based on the non-GAAP results reported by the companies. It tends to be higher than S&P’s reported and operating series, especially during bad times when lots of bad stuff happens. The series tabulated by S&P is based on adjustments made by S&P (rather than the companies) to derive a more consistent measure across companies.
The Thomseon Reuters series has been declining on a yoy basis since Q3 and was down 6.0%yoy during Q1. We can expect a fourth consecutive quarterly decline of c0.3% during Q2 before growth resumes during Q3 (c1.7%) and Q4 (c5.0%).
Here is the performance for sectors based on data compiled by S&P for operating earnings per share: consumer discretionary (18.3%), health care (4.4), consumer Staples (-1.2), telecommunication services (-3.5), utilities (-4.7), industrials (-5.5), S&P 500 (-6.5), information technology (-8.2), financials (-11.5), materials (-46.0), and energy (a greater loss than the year-earlier loss). Just two of the 10 sectors had positive yoy earnings comparisons during Q1, down from six out of 10 in Q4.
The margin story is obviously as complicated as the earnings story. The S&P500 reported margin rose from 6.5% during Q4 to 7.9% during Q1 and remains below its cyclical peak of 9.4% during Q3 2014.
The measure of the margin based on the S&P’s operating earnings also edged up, from 8.0% during Q4 to 8.8% during Q1, down from its cyclical high of 10.1% during Q3 2014. The TR operating margin declined to 9.8% during Q1, down from 10.2% during Q4 and its record high during Q2 2015. Excluding Energy from both earnings and revenues, the margin was at 11.0%.
Within markets and sectors there’s plenty of action, exemplified by Amazon and the department stores and the S&P500 Department Stores stock price index, which peaked at a cyclical high in April 2015, was down 53% through the end of last week, when it lost 16.4%.
Some of the weakness in earnings will reflect unusual weather, but there is mounting evidence that Amazon is seriously disrupting the business model of department stores as more and more people purchase online.
Friday’s retail sales report for April confirmed that consumers’ purchasing power is growing and driving spending higher, and over the three months through April, real retail sales rose 6.2% (saar), the best pace since March 2015.
Excluding building materials, which are included in the residential component of GDP, real retail sales rose 5.8% over this period, while core retail sales (also excluding autos, gasoline, and food services) increased 9.0%, also the best pace since March 2015.
So there is growth in the US economy and in US corporate earnings – it’s just that investors need to pick stocks and not buy indices.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations.
You can follow James on twitter @jamesbevan_ccla
*CCLA is a supporter of Room151
