Q4 estimate cuts still to come

The market's more richly valued than you think, writes Jack Hough in Barron's, as Q4 S&P 500 (SPY) earnings are expected to rise 10.5% on just a 0.6% increase in revenue. "Where's that margin growth going to come from," asks S&P's Howard Silverblatt. "Most of us aren't exactly napping on the job as it is."

Avoid sectors particularly prone to estimates cuts like consumer discretionary (XLY) and telecom (IYZ), suggests Hough, but favor safer groups like tech (XLK, though Cisco last week calls "safe" into question) and health care (XLV).

A stock screen scoring companies by free cash yield as well as ability to still boost margins yields 5 top picks:

Pfizer (PFE) trades inline with a slow-grower like Merck (MRK) but maybe deserves a multiple closer to a fast-grower like Bristol-Myers Squibb (BMY).

Danaher (DHR) - it trades at what seems like a pricey 18x earnings, but just 15x projected free cash.

Lear (LEA) at 10x earnings is growing faster than the auto market as a whole as it picks up market share and electrical content in cars is rising.

Oracle (ORCL) and Qualcomm (QCOM) have both seen earnings growing faster than their share price of late, leaving them attractively priced.

The screen also yielded 3 to avoid:

Tiffany (TIF) at 20x earnings is pricing in faster earnings growth in 2014. Praxair (PX) expectations are for a near-doubling in earnings growth to 13%. Lennar (LEN) with 32% projected earnings growth remains pricey even as the housing recovery appears to be slowing.

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Comments (3)
  • Ajayyy
    , contributor
    Comments (326) | Send Message
    A few down days, far cry from an overall correction and all these analysts can't stop making bear calls when just 2 weeks back all one could see were upgrades and how undervalued the market still was. Shows how much the experts know(/revreal).


    Looks like the market still got a lot of fight for next few weeks. Then all these valuations will disappear because fundamentals don't matter right now.
    17 Aug 2013, 11:53 AM Reply Like
  • Joe2922
    , contributor
    Comments (519) | Send Message
    Looks to me like market has much farther to fall either fast or in an up/down fashion. All the bearish elements have lined up including a cluster of hindenburg omens with an 85% hit rate:
    17 Aug 2013, 12:38 PM Reply Like
  • Ted Bear
    , contributor
    Comments (712) | Send Message
    Two weeks ago they were all bullish.


    One down week, and now they are all cautious.


    What is Walmart, the biggest retailer in the world, a huge percent of US GDP, and a seller of hard goods? Yet analysts couldn't come close to making an accurate earnings forecast. Ditto IBM., Ditto Apple. And throw in Coke and McDonalds just for good measure.


    Stock analysis employs a lot of people. And they are well paid. I guess that makes it worthwhile to someone. Certainly not investors.
    17 Aug 2013, 04:14 PM Reply Like
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