Why Don't Earnings Matter Anymore? 28 comments
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I've said for a long while now that fundamentals do not matter in this market. I've compiled a list of stocks below with P/E ratios of their 2009 estimates which, in most cases, are about 15 months out. I like to compare earnings versus growth rates. I use my estimate for the next 3 year growth rate, but what I used below is a 1 year growth rate. So while we hide under the bed about the death of the global economy (ex the USA) we see companies that should be slowing from 30,50,100% type of growth down to 20-30% over the coming years. Those are valued at forward PE ratios of 5.
Meanwhile at the bottom I listed companies which are reliant on the strong and improving US consumers - the so called sexy sectors, 1 homebuilder, 1 airliner, 1 retailer, and 1 bank. These are trading 3x the valuation (if they are profitable at all) the stocks we are fearing are going to tank from 50%+ growth rates to 30, 25, 20, heck 15%. 15% growth would be superior to just about anything the current 'sexy' stocks will be able to put up.
So again, I understand the rotation, I understand the thesis, I understand the liquidation. I can only hope one day valuations matter (and yes I realize commodity stocks are cyclical and someday they might have lower earnings than the previous year - but you can apply the same logic to housing stocks, retail stocks, airline stocks or banks)
I will be, as I stated earlier today, interested to see if M&A activity begins to really perk up if the "investor class" continues to value such merchandise at these prices - the "business class" obviously would have a different view on valuation.
But for us measly investors - the theme remains the same: Valuation means nothing. Fundamentals mean nothing. "Invest" on hope and rotation thesis of a 'recovery' in '6 months', no matter what the data says because everyone else is front running a 'recovery'. 
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This article has 28 comments:
When I look at home builders, retailers, and financial stocks, I find it difficult to understand the rational of buying these beaten down sectors on the hope that oil retreats to 80 dollars a barrel, the housing meltdown finally ends, and a tapped consumer decides to go on a full blown spending spree next year. Sooner or later things will get better, but how many times are we going to rotate into these stocks and get our heads handed to us before the move actually makes sense?
It seems to me that it's not just earnings that should matter in this type of market, but future earnings visibility. Several oil service, commodity, shipping, and infrastructure companies are not only printing money, but have huge backlogs of business.
Credit may be tight, but a lot of these oil, mining, and infrastructure companies are loaded with cash. The stocks of these companies have been mercilessly pounded over the last couple of months and look very attractive at these levels ---- especially to other companies in their industry that understand that the stock price does not even begin to reflect the fundamentals of these companies now and for years to come.
so...that's the theoretical possibility. i am still long POT, because i do not believe that would continue over the long haul...depends how long you are willing to wait.
I lived in China for several years. India as well. I doubt that the government in either country could go back to a lower living standard and politically survive. Better wages, food, modern amenities, and a drastically improved infrastructure are critical. Anyone who watched the opening ceremonies at the Olympics sensed that China was not just hosting an event, they were making a political statement --- and it was interesting to watch.
The world has changed dramatically. The global decoupling theory has proved to be wrong --- which may be a good thing at the end of the day. China was once a great power, faded, and seems to have risen from the ashes.
I do not believe that gold is a hedge against the current problems. You can't eat it, heat or cool your home with it, drink it, or build infrastructure with it. Wars are being fought over oil and other commodities because they are necessary to our survival and the key to a better quality of life --- especially when the demand outstrips the supply.
Ultimately, the fundamentals will matter.
CAT, BUCY also trading in the single digit PE (forward).
What do you think about sector rotation? What's it time for? Heavy equipment made it thru the first half, only to suffer their own hit last few weeks.
Thanks again Trader.
Low p/e, ROE of about 20% or more and a relatively nice dividend is my plan. I know it s early but I buy an extra 50 shares when their prices go down another 5$ or more. For now I stay away from the financials and technology, have been tempted to short those sectors but I don t have the nerves to do it on my own. Right now I am looking to start buying NUE and HAL any thoughts on those 2 stocks anybody? I would apprciate your feedback on those 2 companies.Thanks
tipalia
Hitting the nail on the head is what you gentlemen have done. I am long on Potash and several other commodity type or "tied to" stocks that have me down 40% before mediocre gains yesterday. The answer to how long does one remain long for this smallish investor is.....until these stocks return to their rightful places at or near the top of the heap...which they will do if for no other reason than they are great companies by any measurement except the volatility and freakish behaviors of the mkt. from time to time. As nearly everyone knows, when you are down a heap on stocks representing excellent management, high profits, good futures, etc. not too smart to sell because once gone, a very real loss has occurred, not just one on paper.
There was further good news today that the mortgage rates have decline to under 6% this week. This is great news for the real estate market and actually for the banking system. It generally means that it is easier to sell houses. This in turn would mean that there would be fewer foreclosures. This is good news for the banking industry. Hence it is good news for the equities markets.
These stocks are cheap, have earnings visibility, and tons of cash. They do not have to go, hat in hand, to the government for a bail out courtesy of the US taxpayer. They will take matters into their own hands.
The hedge funds should pay attention. It's just the beginning. There are plenty of other companies that are awash in cash and they know their space well. If the hedge funds reverse their positions and cover, the upside in many of these stocks will be realized and realized quickly.
I wrote
I like to compare earnings versus growth rates. I use my estimate for the next 3 year growth rate, but what I used below is a 1 year growth rate. So while we hide under the bed about the death of the global economy (ex the USA) we see companies that should be slowing from 30,50,100% type of growth down to 20-30% over the coming years. Those are valued at forward PE ratios of 5.