Stock Picking Will Be Key In The Second Half of 2018- Bad For ETFs
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN SHARES OF NFLX, GOOGL, AND VZ
On July 19 I will be one of three panelists talking about the state of the stock market and where it is going at the StockTwits Future Forum.
The outlook for stocks continues to look strong, as economic growth continues to ramp higher. GDPNow is estimating economic growth in the second quarter at 4.7 percent. Earnings growth for the year 2019 continues to look robust, with forecasts for the S&P 500 earnings at $164.77 per share based on data compiled by S&P Dow Jones Indices. It leaves the S&P 500 trading at just 16.7 times estimates 2019 earnings estimates.
When we look at operating PE and growths, we find that many sectors are still cheap when compare to their historical operating PE of 2016 and 2017. The only group that appears to be trading at or near the levels of previous years are the consumer discretionary, and reasons should be obvious with the outperformance of Amazon and Netflix.
But there is a good reason for multiples contracting when looking at earnings growth rates of the sectors. For example, Healthcare, Banks, Materials, and Telecom sectors saw a tremendous bump in earnings in 2018 and are expected to see a significant slow down in 2019, perhaps leading to the steep decline in PE multiples. Interestingly, the Technology group is expected to have a material slow down as well. But one of the few groups that are expected to have equal or better growth is the discretionaries, which is perhaps why the sector has been on such fire recently.
But it also worth wondering that perhaps sectors like the discretionaries and IT sector are not correctly reflective of the fact that companies like Facebook, Alphabet, Netflix, and Amazon are all part of these two groups, trading with lower multiple, slower growing stocks like Broadcom, Verizon, and AT&T which are expected to see earnings slow in 2019.
Remember stocks like Netflix, Alphabet, Disney, Twitter, and Facebook will be reclassified starting at the end of September into the Communication Services sector, along with companies like AT&T and Verizon.
Why does this matter?
I think this may be another reason why we are seeing some stock outperform by such significantly wide margins versus their sectors and other parts of the markets. 2016 and 2017 saw a big jump in earnings growth in the entire sector, and for that reason, I think to be stock specific mattered less in those years, and why but this year it matters more.
Stocks like Facebook, which appears to be in a potentially stretched IT sector, is growing much faster than the overall group, along with companies like Alphabet, Microsoft, Amazon, and Netflix. The divergence in growth for stocks within sectors is likely another indication why we can’t paint a broad brush across an industry or the entire market, and why the stock market is likely to remain, much more than last year, a stock pickers market in the second half.
Anyway, hope it helps.
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