VOL. 129 | NO. 74 | Wednesday, April 16, 2014
The Worldly Investor
Return to Value
By David S. Waddell
Last week, we discussed that the wrestling match between stimulus and global debt deleveraging will continue to create anxiety and volatility for investors. Viewing the world through this prism helps to clarify seemingly baffling market movements.
Last week’s volatility stemmed from measly international economic releases and more accommodative global stimulus talk. Ultimately, these two broad forces cancelled each other out. The tiebreaker became the continued and deserved punishment administered to the sexy techs and biotechs.
Social media, cloud computing and biotech stocks have ridden momentum waves for the past couple of years, defying fundamental investor logic as momentum traders (who eschew fundamental analysis) chased them considerably higher.
Operating as a thundering herd, when a bull changes direction, the cows follow. Consider these dramatic declines from recent highs: Facebook, -19 percent; Tesla, -23 percent; Netflix, -27 percent; Pandora, -34 percent; and Twitter, -39 percent.
Momentum works nicely on the way up, but gets dicey on the way down. We prefer to stick to the fundamentals and take a longer-term view. While we do not like to see market declines, we do like to see occasional bouts of market rationalization. The benign movements in bonds, commodities and volatility measures confirm the localization of the problem. This selloff appears to be a sign of a healthy stock market rather than a sick one as momentum fades and value reasserts itself.
Earnings Parade: With momentum out of style and fundamentals back en vogue, let’s evaluate the prospects for Q1 earnings season, which began this week. Don’t expect much. According to Factset, 111 companies within the S&P 500 have issued earnings guidance for the quarter. Of those 111 companies, 93 (or 84 percent), have guided lower.
Revenues for the quarter are expected to grow by slightly more than 2 percent, while earnings are projected to come in flat to negative. Of the few that have reported, 59 percent have beaten earnings estimates. Excuses citing the frigid climate, emerging market stress and currency fluctuations will provide some forgivable cover for poor earnings performance.
Since these conditions are temporary, analysts expect the second half of the year to be considerably stronger to meet full year growth estimates of 8-10 percent. Revenues will provide a purer gauge of corporate conditions, so focus in on the revenue data and guidance.
Encouraging revenue projections and CEO commentary should bolster markets, but expect performance to get more specific. Renewed interest in fundamental analysis should produce much greater differentiation between stock movements. An earnings beat by Facebook might boost Facebook’s shares, but their social media brethren may now need to substantiate their own value, rather than just basking in Facebook’s.
Bottom Line: The recent declines in the stock market center on high-flying names worthy of punishment. While this washout creates a feel of overall despair, the corroborating indicators like gold, bond yields and volatility show no signs of market panic. The most likely outcome of this decline is a renewed interest in fundamental analysis and the search for true value.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.