I don't need to tell you that's it tough out there. A pervasive
sense of gloom continues to dog many U.S. consumers, most of whom
still anticipate more tough times to come, according to consumer
confidence surveys. Some recent troublesome economic reports, led
by a sharp drop in
orders and an
may be early signs that 2012 may be another year of tepid U.S.
economic growth. Over in Europe the mood is downright black, as key
economies slip into
, and the weaker countries look headed for more trouble.
In that light, I expect a tough
in coming weeks and months -- perhaps as soon as
ends and we're no longer being fed a steady stream of good news.
Indeed, the six-month market rally that began in early October
appears to have cooled for now: The S&P 500 is on track to
finish slightly lower in April.
All of the headwinds have taken their toll with investors.
from the American Association of Individual Investors (AAII)
tallies just 27.6% of investors in the
camp. That's the lowest reading in seven months (though stocks tend
to rally sharply when that figure moves to around 25%, as was the
case this past October).
Yet even cautious investors (myself included) have to acknowledge
the stunning performance being delivered by corporate America.
Profits remain robust -- despite numerous headwinds -- and a case
is emerging that profits will keep rising well into 2013. I've had
a chance to dig through the updated profit forecasts for various
industries now that
are rolling in, and it's a good time to get an updated sense of the
By the numbers
Even as consumer spending remains well below the levels seen five
years ago (affecting retailers, lenders, and many other
industries), companies have managed to already exceed profit levels
seen back in 2007. And though it looked as if profit growth may
finally start to flatten this year as further
gains become elusive, first-quarter results imply that the era of
profit growth is not yet over. More than 75% of companies have
topped profit forecasts thus far. Here's what Merrill Lynch now
anticipates for profits in the S&P 500.
In fact, the 2012 and 2013 profit outlook would be even stronger
were it not for the precipitous plunge in natural gas prices, which
is pressuring profits in the energy sector. Mining firms are also
experiencing profit woes right now. Moreover, U.S. firms that
operate in Europe are reporting very weak demand (as
reminded us on Friday, April 27). Were it not for these headwinds,
current and projected profit growth would be nothing short of
What price for growth?
It's too early to think about what profits for companies in the
S&P 500 will look like in 2014, but if these just-noted
headwinds abate (i.e.
prices firm up and Europe gets off the floor), we may be
looking at $115 or even $120 in
earnings per share (
for the S&P 500 by then.
Let's focus on Merrill Lynch's 2013 profit outlook in the chart
above for now. Today, the S&P 500 trades at about 12.5 to 13
times projected 2013 profits, which is above the 2012-2013 earnings
growth rate of 5% to 6%, but below the historical mid-teens market
multiple. Merrill Lynch's forecasts are actually among the more
conservative views on the Street. The consensus 2013 forecast
stands at $119. But it's wise to focus on the low end of the
consensus when trying to see the bull case for the market.
I've seen a lot of commentary lately saying that it's specious to
argue that stocks are cheap compared to
(when earnings yields are compared to
yields). I disagree. Low interest rates (which will surely rise but
should stay relatively low in historical terms) are a key factor
why companies' profits are so healthy. Low rates enable these
companies to make ongoing investments with very low hurdles, since
cost of capital
is so low. And that solid-and-rising backdrop for capital spending
is what is fueling profits now -- and in the future.
What to buy?
With the various headwinds in place and corporate profit growth
showing no sign of letting up, your coming investment moves should
focus on stocks that have solid potential upside but with a
tangible degree of downside support. You already know my top ideas
in that context: you can find them in my
$100,000 Real-Money Portfolio
But in recent weeks, a host of other solid value/upside
opportunities have been emerging on my radar, including:
Charles Schwab (Nasdaq:
, which I profiled
in this article
Weatherford Industries (NYSE:
, which is a global oil services provider trading at a tangible
discount to larger rivals such as
, which is an inexpensive way to play rising tech spending
, which is managing the current pricey oil environment well, and
would be a clear beneficiary of an improving global
in 2013 and 2014.
None of these are hot stocks right now, which may actually be a
good thing. You need to be especially wary of holding any stocks
that have already made a strong run, as they are likely to be
punished most severely if the U.S., European or Chinese economies
create fresh market turmoil.
Risks to Consider:
The global economic headwinds noted earlier need to be closely
monitored. Europe in particular is showing recent worrisome signs
of a fresh crisis. Also, the looming expiration of the Bush-era tax
cuts, coupled with agreed-upon cuts in U.S. government spending,
are both expected to take root at the end of this year.
That "fiscal cliff" is starting to get on the radars of
market-moving fund managers. How that issue gets handled will
surely impact longer-term corporate profits in many sectors.
Action to Take -->
The next few months will be crucial for your investment strategy.
The near-term challenges imply that you should be harvesting
profits in specific stocks as gains emerge. Yet the longer-term
backdrop suggests re-investing funds into stocks that are out of
favor now but hold solid multi-year profit opportunities in a
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority owns shares
of F in one or more if its real-money or investment portfolios.
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