MAY 2, 2020

STOCKS – AAPL

MACRO – SPY

MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AAPL

MICHAEL KRAMER OWNS IWM AND SMH PUTS

MIKE READING THE MARKET PREMIUM CONTENT – 

• Earnings Continue To Detoratiate
• A Significant Number Of Uptrends Have Broken
• Volatility Rising – Morning Commentary

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Earnings continue to pour in at a furious pace. While it seems as if many companies are crushing estimates, it is essential to remember that these are significantly reduced beats. Additionally, the number of companies misses estimates has risen dramatically. 

Apple (AAPL)

Apple, for example, reported revenue of $58.3 billion and earnings of $2.55 per share, beating estimates. But the chart shows how much those estimates fell from the peak. I have owned Apple for a few years now, so I am picking on a stock that I own. 

 

Beat, Miss, Met

 

So far, data from S&P Dow Jones, shows that about 51.5% of the S&P 500 have reported results. Of those, 68% have beaten estimates, while 27.7% have missed, and just 4.2% have met. These are feeble numbers on a historical basis. 

(S&P Dow Jones)

Meanwhile, earnings estimates continue to decline and are now forecast to fall to $125.53 in 2020, and  $166.81 in 2021. The S&P 500 had earnings of $157.12 in 2019. 

One In The Same

We care about earnings trends because the S&P 500 closely mimic those earnings. The only thing that changes is the multiple investors are willing to pay for those earnings. Historically, the S&P 500 trades with a one-year forward earnings estimates of about 17-17.5, since 1988, with a range of 16 to 18. In good times, we can argue that the S&P 500 should trade around 18; in bad times, it should be closer to 16.

Nor Longer Cheap

As of April 30, the S&P 500 was trading at 23.2 times 2020 earnings, and 17.5 times 2021 earnings. Basically, as of April 30, the S&P 500 was already fully valued, and if the current trends of earnings persist and earnings continue to fall. The S&P 500 can either become even more overall or will never fall. 

How Far

Again, as I have shown, in the past, a typical recession results in a 30% decline in earnings and a 20% rebound the following year. The current estimates do not reflect the severity of this recession yet, and at down, just 20% are likely to drift to a decline of 30-40%. 

It means earnings of $110 per share in 2020, and if a robust earnings bounce of 25% in 2021 gives us earnings of $137.50 per share, and a fair value of 17 times one-year forward estimates valuation on the S&P 500 of 2385 or 15.7% below current levels. 

Anyway, something to ponder.  We will know more once the earnings season is complete. Regardless it suggests to me the risk isn’t missing out, but getting sucked in. 

Good Luck!

-Mike

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.