INSIGHTS

On April 27, 2012

Trying to “Earn” Some Respect

It seems lately, almost like clockwork, every time we enter earnings season we are inundated with the same sound bites. These have included but are not limited to: Margins have no place to go but down. Sure, a lot of companies are beating earnings, but that is only because the bar is set so low. Earnings gains are the result of cost cutting and not revenue growth. This earnings season, which began on April 10 with Alcoa’s release, has been no different yet once again we believe the results are very solid and worthy of some respect. With about 54% of the S&P 500 having reported earnings this earnings season is, statistically, above the long-term average, above the current bull market average and also above last quarter. The statistics we track are earnings surprise, year-over-year earnings growth, revenue surprise, and year-over-year revenue growth. Of specific note, is revenue surprise which currently sits at 67% well above last quarter’s reading of 54%. It tells us analysts continue to be under estimating the strength of business, and please understand this is not being driven by just a few standout companies. We have seen the likes of fast food companies, retailers, consumer electronics manufacturers, and the makers of industrial fasteners report record earnings and for the most part also discuss pretty optimistic outlooks. We continue to believe this will help drive modest gains for equities through the end of 2012.

Last month we discussed that we thought the equity markets were due for a mild pullback and they did just that with the S&P 500 pulling back by 4.26% (4/2/2012 – 4/10/12). We also highlighted the fact that the average dividend-paying stock in the S&P 500 was under performing the average non dividend-paying stock year-to-date and it looks like that trend is beginning to reverse as dividend-payers have outperformed by 3.02% since that post (3/22/12 – 4/26/12) while the S&P 500 has essentially treaded water (up .52%). We would expect that trend to continue and believe dividend-paying equities could help cushion the volatility as we move into a historically weak period (Sell in May and Go Away…). On the other end of the barbell we continue to favor areas that we feel could provide well above average growth and one sector that fits the bill is information technology (IT). IT was our favorite sector at the beginning of the year and so far is the best performing of the ten economic sectors year-to-date (IT’s total return is 20.22% and the S&P 500’s is 12.04% year-to-date (12/31/11 – 4/26/12)) and we believe there is still more to come. For the current quarter IT earnings (S&P 500 constituents) are up 23.22% (9.24% on an equally-weighted basis). In addition, they are projected to grow at 20.77% over the next year which is about twice the rate expected for the S&P 500 yet IT is only trading at an 8% premium based on trailing price-to-earnings.   

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at www.aamlive.com/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com