Monday, May 02, 2016
If one facet of the market that has become clear this year is that companies paying a dividend are being rewarded. The below table shows data reported by S&P Dow Jones Indices on the average performance of dividend payers in the S&P 500 Index versus their non-paying counterparts. Year to date through April the payers average return return equals 6.51% versus the non-payers return of .89%. The spread is even wider for the 12-month period with the payers returning 1.66% and the non-payers return equaling -7.29%.
Data source: S&P Dow Jones Indices
We have noted the propensity by investors to favor the payers over the non-payers of late. Yesterday's post on the Dogs of the Dow 2016 performance is a version of this theme. Not that all value stocks need to be dividend payers, but the iShare S&P 500 Value ETF (IVE) has a dividend yield of 2.35% versus the iShares S&P 500 Growth ETF (IVW) yield of 1.52%. As can be seen in the below chart, value is leading growth so far this year as well.
In this low rate world it seems dividend paying stocks are gaining some respect by investors. In a slow growth economic environment though, companies that can grow earnings in spite of the economy's anemic growth rate (growth stocks) have historically performed well. Since the end of the financial crisis both growth and value tracked pretty closely up until the end of 2013. For the last two plus years though, growth has led value in performance. Maybe the tide is beginning to turn in favor of value though.
Sunday, May 01, 2016
This year's performance of the Dogs of the Dow is indicative of investor interest in dividend paying stocks. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds them for the entire next year.
As can be seen in the below table, the average return of this year's Dogs of the Dow is 8.9% versus the Dow Jones Industrial Average ETF return of 2.8% and the S&P 500 Index ETF return of 1.7% through April 29, 2016. Particular strength is being seen in the energy and industrial Dow Dogs this year. Much of the year has yet to unfold; however, Intel's (INTC) current yield of 3.43% (yield of 2.79% at year end 2015) would qualify it as a Dog of the Dow at the moment. Year to date Intel's stock price has declined 12.1%. Intel would replace Wal-Mart (WMT) where WMT's current yield is 2.99%.
Saturday, April 30, 2016
With May just around the corner, articles covering the "Sell in May' phenomenon are not in short supply and this article will add to the list. Sometimes the strategy is referred to as the Halloween indicator as investors are expected to get back into the market after Halloween. On the surface, it seems pretty clear that a Sell in May strategy is one that bears fruit for investors. In an article from Chart of the Day from several years ago, it is noted,
"The stock market is about to enter what has historically been the weakest half of the year. Today's chart illustrates that investing in the S&P 500 during the six months of November through and including April accounted for the vast majority of S&P 500 gains since 1950 (see blue line). While the May through October period has seen mild gains during major bull markets (i.e. 1950-56 & 1982-97), the overall subpar performance during the months of May through October is noteworthy. Hence the saying, 'sell in May and walk away.'"
|From The Blog of HORAN Capital Advisors|
Source: Chart of the Day
The above chart provides pretty clear evidence of the strength of the market from November to April or the weakness from May through October. However, evaluating the magnitude of the performance difference between the two periods is important. Jeff Miller, PhD, the author of the Dash of Insight blog, has noted,
"The seasonal slogans often substitute for thinking and analysis. The powerful-looking chart...actually translates into a 1% monthly difference in performance. The "good months" gain 1.3% on average while the "bad months" gain about 0.3%.
To make a wise decision you need to make an objective quantitative comparison between the economic trends and the small seasonal impact. The Great Recession has been followed by a slow and plodding recovery. We have an extended business cycle with plenty of central bank support."The below chart displays the average returns for various intra-year periods.
|From The Blog of HORAN Capital Advisors|
Source: CXO Advisory Group
One aspect of the of the May to October period is the fact downside volatility is greater. According to a recent article from Charles Schwab, in secular bull market periods the May-Oct. performance range is -13% to 20%. The return range in the Nov.-Apr. period is -5 to 24%. Investors should note, the strategy is not full proof. In the same Schwab article just referenced,
"The “strategy” did not work for the three years from 2012-2014, or for the five years from 2003-2007, when there were gains between May and October in each year. In addition, as you can see in the [table in the article], there is a meaningful difference between how the market performs from a seasonal perspective in secular bull or secular bear markets. Average gains and the percent of positive cases have been higher in secular bulls than in secular bears (even if they are still lower than in the November through April period)."
So certainly, a "Sell in May" strategy has historical validity, but the weaker return in the May to Oct. period does not mean the returns will be negative. Take under consideration we are in a presidential election year, and yes, the May to Oct. period is the strongest.
The "sell in May' strategy is certainly not as clear cut as the adage states. Additionally, with all the focus on the strategy now, the market tends to enjoy proving the consensus wrong.
Tuesday, April 19, 2016
In our Spring 2016 Investor Letter published last week, we highlight aspects surrounding the volatile first quarter. Importantly, we discuss the year ahead and the silver lining of a slow economic expansion. There are newsworthy events on the horizon: the U.K.'s potential withdraw from the European Union (Brexit), timing of future Fed rate hikes and the U.S. presidential election. We discuss these topics and more in the Investor Letter.
For additional insight into our views for the market and economy, see our Investor Letter accessible at the below link.
Friday, April 15, 2016
For the week ending April 8, both the S&P 500 Index and the Dow Jones Industrial Average declined 1.2%. As this week nears a close, the S&P 500 Index is attempting to recover that loss and is currently up about 1.5% for the week.
Given the strength of the market advance from the February 11th low, up 13.9% at the time of this writing, surprisingly, individual investor sentiment remains cautious. In yesterday's Sentiment Survey report by The American Association of Individual Investors, bullish sentiment declined 4.3 percentage points to 27.8%. Most of this decline in bullishness was reflected in the bearishness reading that increased 3.4 percentage points. The bullishness reading came in lower than the average reading minus one standard deviation. Since the end of 2014, bullish sentiment has trended lower and now appears to be moving within a lower range.
Data Source: AAII
A similar result is reflected in the NAAIM Exposure Index. This index measures the actual adjustment active managers have initiated in their respective client accounts during the prior two weeks. This week's exposure of 63.97% is down from last week's 73.21%.
A healthy up market is one where a relatively high percentage of stocks are participating in the move higher. One way to obtain insight into this is to look at the percentage of stocks trading above their 50 and 150 day moving average. As the two charts show below, 88% of S&P 500 Index stocks are trading above their 50 day moving average and 73% are trading above their 150 day M.A.
Following the first quarter of 2015, the percentage of S&P 500 stocks trading above their 150 day M.A essentially did not rise above 50% during the remainder of 2015. The narrow market of 2015 saw a handful of stocks account for a large part of the market return. In particular, the FANG group of stocks alone generated a sizeable portion of returns in 2015. So far this year, the broader participation is a healthy sign for the market. Additionally, knowing sentiment measures are most predictive at their extremes and the AAII sentiment reading is not at an extreme yet, individual investors continue to approach this market with some caution. In other words, investors do not appear to be "all-in" at the moment and this could be one factor that supports higher equity prices. all else being equal.
Wednesday, April 13, 2016
I once raced a Thistle sailboat we named Good & Plenty, after the pink and white licorice candy treat. I digress but that Thistle was one fast boat when the winds were good. With all the focus on oil, and after the morning release of the EIA Petroleum Status report today, it is evident the world is awash in Oil & Plenty of it. The current price of WTI Crude has recovered to a level last seen in November of 2015. The rebound in the price of WTI to the $42 per bbl area has had a positive impact on the stock prices of many of the energy related companies. As the below chart shows, the energy sector within the S&P 500 Index has had the largest positive move off of the February 11, 2016 market low, i.e., up 19.6%.
The sustainability of the move in oil prices seems to be predicated on a potential for output cuts coming from a meeting in Qatar on Sunday. However, the decision point on Sunday seems to be revolving more around a freeze in production levels versus a direct cut in output. Absent from the meeting will be Iran. Saudi Arabia seems to be the producer with the most leverage as they can push prices lower by increasing production as they tend to maintain the most spare production capacity, around 1.5 -2.0 million barrels per day. Other Middle East and Russia producers are operating at near full production capacity.
In addition, with all the discussion about reducing supply, as the below chart of rig count displays, Saudi Arabia's rig count is essentially unchanged from January 2015 levels, while most other producers have dramatically cut production levels.
In spite of these rig reductions, and mostly outside of the Middle East, oil and gas supplies continuue to increase. The weekly EIA Petroleum Status Report for the week of April 8th was released this morning and Econoday notes, "Crude oil inventories resumed their climb to the tank tops in the April 8 week, rising 6.6 million barrels to a record-breaking 536.5 million barrels." Supply keeps coming and oil inventory continues to climb.
Econoday's analysis intimates oil storage has reached near capacity as they note supply has reached the "tank tops." A few articles from yesterday highlight the magnitude of the supply glut.
In summary, crude will likely continue to be volatile and we believe trade in a $25 - $45 per barrel range for the near term. Investors should note, oil does have a positive correlation to stock price moves and oil price weakness could translate to weaker equity prices. Although weaker equity prices are likely to be temporary, given the strength of the market since February, some consolidation of recent gains would be healthy and expected.
Monday, April 11, 2016
One aspect of the market over the past two plus years has been the outperformance of large cap stocks relative to their small cap counterparts. The below table compares the performance of the iShares Russell 2000 Small Cap Index (IWM) to the S&P 500 Index, both on a calendar year and annualized basis. The magnitude of the weakness in the Russell 2000 Index performance shows small caps are underperforming large cap as far out as 10-years on an annualized basis.
Our clients know we exited the small cap space at the end of 2013 primarily on a concern with the valuation of small cap stocks overall. The red line in the bottom portion of the below chart displays the relative P/E of the S&P 500 Index to the S&P Small Cap 600 Index. At the beginning of 2010 the relative P/E relationship indicated large cap stocks were cheaper on a historical basis. Now that large cap stocks have outperformed since the beginning of 2014 through April 8. 2016, large caps are beginning to look more expensive on a relative basis and trade at a relative valuation level present at the beginning of the 2008/2009 recession and above the average (yellow line) going back to 2004.
Valuation alone is not necessarily a cause for a stock or index to underperform. In some instances strong earnings growth can be supportive of a higher valuation; hence, the 'growth' category across different equity asset classes.
This week begins the official start of first quarter earnings season with Alcoa (AA) reporting after the market close today. Indications are we may be nearing a bottom in earnings weakness. Certainly the headwind from currency should lessen significantly on a year over year basis. Additionally, oil prices have seen some stability and earnings weakness attributable to oil should begin to lessen as well. As the below table shows, operating EPS comparisons on a YOY basis (first red rectangle) are expected to see growth. Significant growth is expected in the small cap space with YOY growth of 45%. For all of 2016 small cap operating earnings are expected to grow 76% over 2015 versus 17% for the large cap S&P 500 Index.
Source: S&P Dow Jones Indices
This growth in earnings brings the estimated 2016 small cap P/E down to 19x and nearly in line with the 17x P/E of the S&P 500 Index as can be seen below.
Source: S&P Dow Jones Indices
The market has enjoyed a strong recovery from the February 11th lows with the Russell 2000 small cap index up over 17% until the slight 2% pullback last week. It would not surprise us if a little more consolidation of these recent gains occurred near term. However, given the potential for strong earnings growth within small caps and their more reasonable valuation versus a few years ago, small caps are beginning to look more attractive and may be worth a harder look on a pullback.
Sunday, April 10, 2016
In a recently released report by S&P Dow Jones Indices, stock buybacks for S&P 500 companies declined 3.1% in the last quarter of 2015 versus Q3 2015. The biggest contributor to the buyback decline was the energy sector. Companies that comprise the energy sector reduced their buybacks by nearly 63% to $15,2 billion in 2015 versus $40.9 billion in in 2014. If the energy sector is excluded, buybacks for 2015 are up 8.7% versus a 3.4% buyback increase for the entire index.
Data Source: S&P Dow Jones Indices
The buyback activity is far from dead as 24% of the index constituents reduced their company share count by more than 4%. Prior to the quarter's start, buyback activity was expected to decline on a year over year basis, yet this was not the case. For investors, the magnitude of the buyback activity by those 24% of companies does serve to artificially inflate earnings growth by 4%. When combining the dividend yield with the buyback yield for the S&P 500 Index, the combined yield is 5.51% at 12//31/2015 versus the 2.29% dividend yield alone.
Finally, looking at buybacks on a sector and company specific basis, the S&P report notes:
- "On a sector basis, information technology continued to dominate buybacks even as its percentage of fourth-quarter buybacks decreased to 24.3% from 28.7% in the third quarter."
- "Energy continued to decline as the sector's expenditure declined 27.7% from the prior quarter. Consumer groups differed greatly as consumer staples increased its expenditure by 65.9% and consumer discretionary reduced its by 15.9%."
- "For the quarter, Apple Inc. again led with $6.9 billion spent on share repurchases, even though this is down 48.2% from its $13.3 billion third-quarter expenditure (which was the fifth largest ever posted by an index issue). United Technology Corp. came in second with $6.0 billion after buying back $1.0 billion in shares in the third quarter; Microsoft Corp. followed with $3.7 billion, down from $4.8 billion. Oracle Corp. and American International Group Inc. rounded out the top-five buyback spenders. ExxonMobil Corp. ranked 53rd, up from last quarter's 84th, with $0.7 billion (up from $0.5 billion last quarter), paling in comparison to $3.3 billion in the fourth quarter of 2014 when it ranked third."
Absent the energy sector, the silver lining is dividend and buyback activity remains relatively strong. Companies would not continue returning cash to shareholders if they believed business activity was nearing a decline. Certainly, we prefer to see healthy dividend growth versus buybacks as dividends are more of a longer term commitment by a company; however, cash generation continues to look healthy.
Despite the First Quarter's Shaky Start, the 2016
Market Outlook Remains Constructive
S&P Capital IQ
By: Michael Thompson & Robert Keiser
April 1, 2016
Sunday, March 27, 2016
The blog, The Fat Pitch, published a great article last week highlighting the issues currently impacting investors, Current Investor Concerns. Following is an excerpt from the article:
The US economy is stuck in one of the most sluggish recoveries in history. Growth is just 2% and it will remain slow as consumers and companies work off vast amounts of debt. The country has gotten off track and neither political party has any answers.
These sentiments were written in Time in 1992, the year one of the biggest growth eras in American history began. But these same words are often used to describe the current economic environment.
Not helping matters is the Fed, which appears to have boxed itself into a corner. It's policies have been ineffectual and have created record budget deficits. The consensus is that the Fed has overstayed its course. A new way of handling monetary policy is needed.
The year these words were written is 1982, when America was on the threshold of an 18 year bull market. But central bankers and their policies were as hated then as they are today (from the NYT).
As the author of the article notes in the conclusion, "The story in the stock market is almost always the same: the fundamentals of companies and the economy are weak, but central banks, corporate buybacks and earnings manipulation are keeping share prices artificially afloat."
The entire article is a worthwhile read for investors.
Sunday, March 20, 2016
Near the end of February we noted pessimism was being exhibited by both individual and institutional investors. In addition to this pessimistic view of the market, we noted some economic data was looking more favorable and combined, higher equity prices could result in the weeks ahead. True to form investors took advantage of the market pullback and added to their equity positions and the market has moved higher for five straight weeks. At the time of that post, the NAAIM Exposure Index was reported at 31.65. This past week's exposure index reading came in at 62.72 and notes NAAIM member firms have increased long equity exposure.
Interestingly, individuals continue to indicate a low level of bullish investor sentiment as reported by the American Association of Individual Investors. This is a contrarian indicator and leads one to believe individuals are skeptical about the market's recent advance. On the other hand, Better Investing Magazine tracks the voluntary reporting of most active stock transactions of its members. The below list shows the current ten most active stocks. New additions to the list since my last report on this at the end of December are Facebook (FB), Amazon (AMZN) and Netflix (NFLX).
These three stocks are apart of the frequently cited basket of FANG stocks. The FANGs strong returns in 2015 were a key reason the S&P 500 Index was able to generate a small positive return last year. If there is anything these three stocks have in common today though it is the fact they trade at high multiples of price to earnings. Certainly investors may find the stocks attractive given their pullback since peaking in December last year; however, the fact Better Investing members find these attractive is a 'risk on' mind set in my view.
And a look at one last sentiment variable, the 21 day moving average of the equity put/call ratio. At the end of January, the average of the put/call ratio peaked at .79 after reaching .60 in June last year. A downward trend in the 21-day M.A. is generally associated with higher equity prices and after its January peak this has been the case.
One should not look at anyone factor in determining the potential direction of the market. However, sentiment measures in January and February were decidedly bearish. Of potential concern near term is the short term over bought level of the market. The below chart shows 93% of S&P 500 stocks are trading above their 50-day moving average. This is the highest level reached in the last three years. Contributing to this high percentage is the fact many index stocks were in a sustained downtrend that pulled their 50 day moving averages down.
The three technical indicators in the below chart, the Money Flow Index, MACD indicator and the Stochastic indicator are all at levels indicative of a near term overbought market as well.
Of importance for investors is the fact the market likes to prove the consensus wrong. In other words the market tends to climb the proverbial wall of worry. There might be much not to like about this market, of which the biggest might be the lack of earnings growth. However, if the earnings weakness is centered in energy/material related segments, and companies see stability in this area. future earnings just might not be as weak as investors expect. The recent weakness in the US Dollar should also provide some relief to multinational company earnings. And given the market's strong returns over the last five weeks, it appears investors are not doing as they say. Although they indicate a lack of bullishness, their actions seem to be speaking louder.
Disclosure: Firm and/or Family long AAPL, SWKS