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My View on Next Year - Voice of the People

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Zacks highlights commentary from People and Picks Member «JohntheWizard».

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My View on Next Year

During the Internet Crisis, the S&P500 Index was bottoming in Q3-02, with Net Earnings at their lowest half a year earlier . In the Credit Crisis, the Index was bottoming in Q1-09, while the Earnings were at their lowest half a year later . During both crises, Earnings of Non-Financials drew down by over -50% as did the Index.

Apparently, during the Credit Crisis, Earnings followed Prices, all the way down and up. That is contrary to conventional wisdom where Prices are assumed to follow Earnings. The present reporting cycle (Q3-11) showed some deceleration in Net Earnings growth of Non-Financials and the onset of a turning point in margin growth. Net Margins of Non-Financials came down from its historical high of 8.5% in Q2-11 to 8.3% in Q3-11. P/E dropped from 15 in Q3-10 to 13 in Q3-11.

That is a significant drop in the valuation of Net Earnings: while Net Earnings rose 17% year-over-year, the Index declined by -1% from Sept-10 to Sept-11. I did not see any projection of a lower P/E a year ago. I don't think it ever happened during the past 12 years although P/E gradually decreased from 30 to 12 over those dozen years.

At the end of the year, I wouldn't be surprised when the Index closes where it started (at 1255). In March of next year, I expect to see the Q4-11 reports of Net Earnings to grow by 13% over the full present calendar year. The present deceleration of Earnings Growth may continue over the full next calendar year, turning into a decreasing EPS during the second or third quarter of next year. At that time, I expect Earnings will still follow Prices, with an Index hovering at roughly -10% under the September - November lows of this year.

Nobody really knows...

My outlook is not optimistic for next year. In terms of Stock Picking, I set up a few watch lists of 100 to 250 safe stocks and timely pick one or two dozen of those equally weighted with rebalancing periods between 1 week and 1 quarter. I let my laptop calculate the portfolios and timing thereof. Safe stocks are for instance stocks that came out of the two past crises with minimum drawdowns. I showed in April - May how to arrive at such a list of some 85 stocks using Research Wizard combined with some ideas of Mo and JaiH.

I also showed how to make the weekly selections of the 12 best out of that watch list. During the past 50 weeks, this year, the 12 best weekly selections out of this watch list of 85 stocks with daily dollar volumes in excess of $10 Million accumulated 17%, compared to -1% of the total returns (including dividends) of the S&P500. Every week, you had to exchange about one quarter of these safe stocks, amounting to a total of transaction costs of $1240, which is a -5% loss on an initial investment of $25,000, leaving a total net gain of 12%.

I know now much better how to compose watch lists of safe stocks, and how to back and forward test various selection rules over a time span of 32 years. I came to the conclusion that there is no better Indicator for stock picking than the back and forward tests of the portfolios of your choice composed from a watch list of your choice. I also came to the conclusion that fundamentals may be instrumental to combine forces between large Institutional Investors or hedge funds, but that they do not serve me as a retail investor as I appear to be always too late.

The same conclusion held for Technical Indicators. My back tests over 32 years show that longevity, survivorship and risks (maximum drawdowns) play a much more important role in timely picking profitable long positions than any fundamental or technical indicator could give me.

Good Investing,

John

The most recent picks by «JohntheWizard» are:

A buy rating on Charles Schwab ( SCHW )

a buy rating on Royal Gold ( RGLD ) and

a buy rating on Polypore International ( PPO ).

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POLYPORE INTL ( PPO ): Free Stock Analysis Report

ROYAL GOLD INC ( RGLD ): Free Stock Analysis Report

SCHWAB(CHAS) ( SCHW ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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