Monday, August 24, 2015

Our latest valuation of S&P 500 (8/24/15) ...

Given the volatility that we have seen the last few days, and the fact that it was about a year ago that we provided our 12-month S&P 500 valuation, we thought to provide an update.

First, as a reminder, on August 7, 2014, we published a 12-month target of 1776 for the S&P 500.  While on the 12th month the index was at 2077.57, we should point out that only 3 weeks after that (today, August 24, 2015), nearly on the 13th month, the S&P 500 closed at 1893.21, only 6.2% above our previous target.  We note that our valuation does not take into account the Fed's intervention in the market.  As mentioned a long time ago, the Fed finds itself in a bind now.  Sooner or later it will have to wipe its hands clean and let the markets operate without its 'very visible hand'. 

S&P 500 12-month target

We glanced over the latest S&P 500 earnings estimates (provided by McGraw Hill's S&P Dow Jones Indices, LLC) and realized that the consensus for CY '15 operating earnings (bottom up) has declined 18% since July of last year!  Yes, a big chunk of such a decline may be due to the big dump that oil has taken, but then again, one would expect such decline to result in significant top-line growth and margin expansion in other sectors.  Unfortunately, unlike what the 'experts' keep pitching, this has not necessarily been the case.  

Believe it or not, even with the latest significant market decline, we now think the S&P 500 can go lower, possibly to 1660 within the next 4 quarters.  The index is currently trading at 16.9x and 14.4x CY '15 and CY '16 operating earnings, respectively.  Our target represents a P/E of 13.6.  Given that the index covers a pretty broad market, we derived our forward P/E from a PEGY of 1.0 based on the 5-year earnings CAGR consensus of 11.33% plus the current dividend yield of 2.31%; and applied it to the CY '15 and CY '16 earnings estimates.

That operating earnings multiple gives us a 1527 - 1794 valuation range.  We are only in the second month of Q3 '15, and for this reason we took the median of that range, resulting in a 1660 valuation of S&P 500 for the next four quarters; 12.3% below where the market is currently.  We note that applying the same multiple to total earnings over the next 4 quarters (2H '15 and 1H '16), results in a 1674 target, comparable to our 'official' 1660 target.  

Yes, as many say, this time it may be different from the Great Recession.  However, the difference is that nearly all central banks globally have intervened, so there may not be too many options left on the table.  We are not saying that the market and the economy are doomed, but we still believe until the 'central bank premium' gets priced out, there remains significant downside.

Performance of AMBlog Index

Lastly, we thought to display the performance of our long recommendations compared with a couple of indexes/benchmarks (below).  We've been fortunate to have outperformed the market even with the latest 10%+ decline from the all-time highs. 


Tuesday, February 17, 2015

Update ...

It is a bit late, but we thought to share with you the performance of our picks that required in-depth research.  We note that while we continue to think the overall equity market is overvalued; as displayed below, our individual picks certainly outperformed the market.  

  • The AMBlog Index is a market-weighted index consisting of our long calls. 
  • We have also included information regarding when we made certain calls and how they performed during that period, in the table below.
  • Lastly, we went pretty much 1 out of 2 on our short calls.  Facebook's (FB) overall performance, which went completely against what we had projected, offset what appeared to have been a good short call on Twitter (TWTR).  We note that we discussed these two companies and their valuations before their IPOs.

We are in the process of updating our models on these companies as they report their latest quarterly earnings results.  We will provide updates regarding our view of the companies' stocks over time.  We are also in the process of stock screening, which will be followed by detailed fundamental research, and if 'worthy', will be posted on this blog.

Friday, February 6, 2015

Our Jan. '15 NFP change guesstimate ...

We expect approx. 200K jobs to have been added during Jan. '15.  Our estimate is below the 230K consensus, yet again.  Most regional Fed survey employment sub-indexes were lower than last month.  However, the New York Fed survey employment sub-index increased by nearly 50%.  As everyone knows, the ADP number released on Wednesday was disappointing.  Combined with lower employment indices in both manufacturing and service ISM numbers, the not so impressive increase in online job postings in Jan. indicates what we believe will be a disappointing figure released by BLS on Friday morning.

Lastly, this weekend we will finally do what we kept promising the last couple of months, which is update most financial models of the companies that we recommended.  We will also provide some figures showing how our recommendations performed in 2014 and since they were published.