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It Is Simple Some Stocks Are Just Overvalued, It Is Obvious!
Michael Kramer and the Clients of Mott Capital own shares of GOOGL and UL
Volatility continues in 2018, and again the narrative around the reasons for the volatility continues to shift. Earnings have not been too bad so far, but still, the significant results continue to roll out the rest of this week and next. So it is yet to be seen what direction earnings will keep sending the market. But in some cases it is crystal clear why stocks are going, they are merely overvalued, and no I am not talking about the FANG’s, nor most of the Techs. I’m talking about staples and industrials like Boeing, McDonalds and Home Depot.
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Wait, What?
Listening to the TV all afternoon, I got the impression that investors seemed surprised that 2018 would be the peak regarding earnings growth from a percentage standpoint. It has always seemed fairly obvious to me that 2018, earnings growth was being aided higher by the one-year tax benefit, and that growth would return to “normal” growth rates in 2019. The rate of growth in 2019 is undoubtedly nothing to dismiss, because as of right now that growth is expected to be around 10 percent, and with an S&P 500 trading at roughly 15.5 times 2019 earnings estimates, the stock market seems relatively cheap.
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Economic Slowdown?
To this point, I see no evidence of an economic slowdown. A company like Unilever saw pretty good growth in its first quarter with sales growth and volume growth of 3.4 percent, which again is a pretty healthy number for a company of its size, while emerging markets grew at a much faster pace.
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Just Overvalued
I think in some cases, there are merely stocks that advanced so much ahead of these big earnings expectations, now it is time to sell the news.
Companies like Home Depot, Boeing, McDonald’s, Lockheed Martin, Caterpillar were all up tremendous amount from the start of 2017 through the end of January 2018, much more than the S&P 500. Boeing even now is up nearly 112 percent since the beginning of 2017! 112 percent! It and the others like it are trading at some of their highest earnings multiples in some time, and in some cases, those companies still need to see further multiple contractions.
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Slowing Growth
The market is also looking to the future, and while Caterpillar is seen growing earnings in 2018 by over 36 percent, those earnings are seen rising by only 13 percent next year, while Boeings earnings growth is seen slowing from 37 percent to just 18 percent next year, while revenue is seen climbing only 5 percent! Better keep buying back that stock or improving margins. Home Depot is no different going from 27 percent to only 7 percent.
BA PE Ratio (Forward 1y) data by YCharts
How do you feel about paying 20 times one-year forwards earnings for growth in the mid to high single digits? Yeah, they are expensive. I have been saying this about McDonald’s for quite some time, with its monster earnings growth of about 14 percent in 2018, on an 8 percent drop in revenue! Give me a break; the stock is up nearly 30 percent! And it is no different for any of the others, and these are just a few. The Banks may be another group in the same situation.
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Google or McDonald’s
Right now it would seem the selling is indiscriminate, but the cream will rise to the top, because companies like Alphabet are seen growing by 22 percent in 2018, slowing to 17 percent in 2019, on 11.5 percent revenue growth, while trading at only 21 times, so I ask, would you rather own Alphabet or McDonald’s? Alphabet every day of the week hands down.
If McDonald’s can trade at 19 times earnings than Alphabet must be the steal of a lifetime.
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Moving on then to other topics….
VIX
The VIX got right back to nearly 20 today, before backing off. Remember 20 has been a support/resistance line, and the fact that it backed off is at that level is good.
The S&P 500 also managed to find a bounce at least for today off its downtrend.
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Technology
The technology earnings are going to be extemely important the rest of this week, because the setup in the technology ETF XLK looks really bad. I’m hoping that is not a head and shoulder formation, because if it is then a fall back to $61 or further could be in the cards. With all the big results this week, those results could be a tipping point for the group.
The one piece of good news so far is that Texas Insrutuments appeared to report solid results and for now at least the stock is finding a bounce.
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The big one tomorrow will be Facebook, and the stock melted today, falling below support at $161.50. It could be headed back to retesting the lows around $150. The chart clearly shows the stock was unable to rise above resisntacnce around $168.
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Apple
Apple fell again today, and now sits at $163, and the company still has a week to go before results. Apple’s results can not come soon enough.
Micron
Micron staged a head fake breakout on April, 18 and it has been nothing but down since that time. Is there a rise in Micron’s shares in the future? I’m not sure, but the chart looks pretty weak, at current levels, and more declines may be in store.
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Amazon
Amazon shares continue to trend lower too, and they are expected to report Thursday after the close. The chart like the others looks fairly weak. The earnings will matter a great deal when they are released. We can see we back to within $1440 on the chart, and that again is an important level for the stock.
That is it!
-Mike
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