How many times have you heard some variation on the following words: The most critical¬†driver of underlying stock prices¬†are corporate earnings growth prospects. Would you say you’ve read a similar sentence 10 times? 100 times? 1000 times?
While I don’t disagree in principle, I do disagree in principal. (Note: Fundamental valuation fanatics need to look back at Forward P/Es circa¬†October 2007!)
In practical application, I won’t expose a significant percentage of client dollars to¬†stock assets in a downtrend. It doesn’t matter¬†if¬†forward earnings projections are “attractive” when¬†stocks are collapsing in a dot-com blow-up or a financial meltdown.
Similarly, I may expose client principal to market cap sizes or economic sectors on momentum, technical data¬†and macro-economics. I may do so… even if those market cap sizes or economic segments have “unattractive” valuations. For instance, I still¬†maintain some exposure¬†to U.S. Small Cap ETFs for a number of clients because: (1)¬†relative strength percentile rankings are¬†still better than large caps, (2) the overall economy has been improving,¬†(3) positions have not hit stop-loss limit orders and (4) the price of the Russell 2000 is¬†still above its 200-day moving average.
On the other hand, the Forward P/E for the Russell 2000 has been near 20x for the last 15 months. That’s pretty darn expensive. And it has consistently been¬†in the 20x forward earnings range while large-cap benchmarks have¬†remained in the 12x-14x¬†next year’s earnings estimates.
The fact that large-caps¬†offer¬†better fundamental value does have¬†sway — enough¬†sway that I have¬†allocated more to the large-cap space than the small-cap arena.¬†Nevertheless, one ought to consider a wider range of info —¬†technical data, history, contrarian indicators, macro-economic data — when identifying possibilities for his/her portfolio.
Recently, researchers at Bespoke posted¬†year-over-year Q1 2011 earnings estimates for all¬†economic sectors. I’ve listed the¬†anticipated rate of earnings growth alongside YTD performance.
Do the less impressive gains from tech and materials imply that the earnings estimates in those sectors may be less reliable? Or is it likely that valuations aren’t the only factor in asset selection?
|Sector ETF YTD Performance and Estimated Q1 2011 YoY Earnings Growth|
|¬†||¬†||¬†||¬†||Year-Over-Year Growth||¬†||Approx YTD %|
|Energy Select Sector SPDR (XLE)||26.7%||¬†||14.3%|
|Materials Select Sector SPDR (XLB)||25.6%||¬†||1.5%|
|Industrials Select Sector SPDR (XLI)||22.8%||¬†||5.4%|
|Technology Select Sector SPDR (XLK)||16.0%||¬†||1.2%|
|Financials Select Sector SPDR (XLF)||14.9%||¬†||2.0%|
|Consumer Discretionary Sector SPDR (XLY)||6.8%||¬†||2.4%|
|Consumer Staples Sector SPDR (XLP)||4.2%||¬†||1.0%|
|Health Care Sector SPDR (XLV)||-0.5%||¬†||2.7%|
|Utilities Sector SPDR (XLU)||¬†||-1.3%||¬†||0.8%|
|iShares Dow Jones Telecom (IYZ)||-5.5%||¬†||-1.8%|
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products and interested financial companies compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. Moreover, ETF Expert employees and Pacific Park Financial, Inc. representatives do¬†not¬†have the capability¬†to substantiate¬†performance or other claims made by advertisers.¬†You may review additional ETF Expert disclosure details here.