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Bill Robertson is the Chief Executive Officer of Big River Capital Corporation, and he is ultimately responsible for the performance of each the firm's business units. Robertson launched Big River Risk Managers Fund, LP, a fund of hedge funds on January 1, 2008; Big River Real-Estate Partners... More
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  • Big River Report June River View 0 comments
    Jun 1, 2013 11:05 AM

    The May performance estimate is 3.1%, 17.4% year-to-date.

    The June Report is on the website. Log-in at

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    River View

    The S&P 500 stock market index was selling for under 12 times forward operating earnings at the beginning of 2012. A very attractive PE as the average in recent history has been around 17 times. Using $110 for 2013 S&P 500 operating earnings, at 1660, the S&P 500 was trading around 15 times current operating earnings projections.

    A couple of interesting facts: one, actual diluted earnings per share over the last four quarters are estimated at $87.50. Therefore, the S&P 500 is presently trading at nearly 19 times trailing twelve months (ttm) diluted earnings per share. Two, after reviewing Q1 earnings reports for many S&P 500 companies, we saw that revenue was roughly flat and diluted EPS was roughly flat versus the prior year.

    Operating earnings are going to have to meet optimistic projections for the balance of the year in order to reach $110. If the stock markets remain robust, $110 in operating earnings for the S&P 500 during 2013 is achievable.

    If the US stock markets have a severe correction, it would tend to dampen consumer confidence and the earnings would not be as likely to materialize.

    At $110 in operating earnings and a 17 PE multiple, the S&P 500 could be at 1870, nearly 15% higher than where we are presently trading at 1630. With operating earnings projected at least $120 in 2014, that could get the S&P 500 over 2000 within the next year-and- a-half, IF these earnings materialize.

    Analyst are notorious for being overly optimistic when it comes to forward earnings projections.

    At the end of the day, the value of a business is determined by the return on capital the business earns. At various times, investors are willing to pay varying prices (PE's) for those earnings. Fluctuations in investor sentiment determines what prices investors are willing to pay for businesses. At the moment, investors are optimistic about the future, and they are willing to pay more for expected future earnings than they were a year-and-a-half ago.

    The second component is the actual earnings per share that companies earn. Earnings per share also fluctuate with the economy and the industry fundamentals for each particular business.

    At present, the market is counting on the economy to improve, and more specifically, the market is counting on business profits to improve significantly in the future. IF profits improve, the bull market can keep chugging towards S&P 500 2000.

    However, given the present level of optimism regarding expectations for future earnings, if these expected profits do not materialize or if the perception that the profits will not materialize takes hold, the market could run into significant headwinds.

    The majority of the price appreciation in the S&P 500 over the last year-and-a-half has been from PE multiple expansion (investors feeling better about the future earnings potential for companies). While we could still have modest multiple expansion ahead, most of the multiple expansion is behind us, profits will need to meet expectations for the S&P 500 to keep moving higher.

    Hopefully we are entering a healthy consolidation phase for the US stock markets. If these markets can avoid panic selling, I believe we can escape without too much damage to consumer confidence. Especially since the US stock markets have already enjoyed significant appreciation this year.

    If the outlook for 2013 and 2014 earnings growth is revised materially lower due to rising interest rates, slowing economic activity or any other unlimited number of factors, the stock market would have to re-rate based on the revised outlook. For example, if analysts revised S&P 500 operating earnings for 2013 to $100 and for 2014 to $105 (more realistic numbers based on actual Q1 results), a 15 PE takes us back down to 1500 and a 17 PE to 1700 (only 4% higher than May closing level of 1630).

    Price paid for earnings received is all that matters in the long run, but in the short run, markets move more on investor sentiment (perceptions about the future). We aim to own companies where we believe the earnings are reasonably priced and likely to be realized.

    Our goal is upside participation during rising markets and capital preservation during declining markets.

    Thank you,

    Bill Robertson

    Disclaimer. is a financial newsletter publication relying on Federal exemption under Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-2(a)(11)) and individual State exemptions under Section 401(f) of the Uniform Securities Act. We do not provide any investment advice, nor do we make any investment recommendations. You are able to view the portfolio and all of the trades made for the portfolio in order to aid your research efforts, but ultimately the decisions you make for your portfolio are your responsibility. I believe the research and work that we are doing at will improve your investment performance, but there is no guarantee that you will be able to utilize the information for financial gain. In fact, you could incur financial losses. The portfolio is managed in a tax deferred account. Each individuals financial situation is different. Please consult your own financial advisors and tax professionals prior to investing.

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