More than 7 months ago, I laid out what seemed like a long-shot call but now is looking very likely: 1500 on the S&P 500 in 2011. The premise of my argument was that the S&P 500 would likely benefit from earnings growth and a little bit of multiple expansion. Earnings projections for 2011 have held up and earnings are headed to a record level.
To me, the question has now become: When will we take out the all-time high on the S&P 500 (1576)? The NASDAQ has already moved past its 2007 high, as has the Russell 2000. It seems to me that we are likely to achieve 1600 at some point in 2012.
click to enlarge images
To get a little more confidence in my outlook, I decided to screen the S&P 500 to find companies that are already printing record earnings but have yet to reach their recent pre-crash peaks. I actually set the bar a little higher than that, requiring the following:
- Market Cap > $10 billion
- 3-year Annualized EPS Growth > 2%
- 5-year Annualized EPS Growth > 6%
- 10-year Annualized EPS Growth > 8%
- PE vs. 10-year Median < 1X
This kicked out 75 names that I needed to review for the current price relative to the prior peak in the 2006-2008 time-frame. I ended up with a nice list of blue-chips that are below their old highs but earning more than ever. 45 have yet to take out their old highs, but these seem very likely to do so in the coming months and quarters:
The group has a PE of just 13.2 on average, suggesting that valuation won't be an impediment to realizing the gains I am suggesting. For some visual examples of what I am talking about, here are 4 mega caps from the group (MSFT, WMT, PG and JNJ):
So, if you are trying to imagine how the market might keep advancing or are stuck in the 10-year trailing average earnings mentality, I suggest that you consider that there are lots of cheap stocks in the S&P 500. I have shared 45 big ones still trading below their old highs yet earning more than ever (with an average PE of 13.2). I tend to traffic in smaller names, but I have set aside a portion of my models at InvestByModel for over 10% of this list (disclosed below), with all of them in my Conservative Growth/Balanced model portfolio and two in my Top 20 model portfolio.
I expect that investors will drive these to all-time highs and power the S&P 500 to one too, similar to my thinking I expressed a few months ago when I discussed Mega-Cheap Mega-Caps.