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| Subject: PE) ratio of the S&P 500 to more than 25 times estimated earnings for the next 12 months | |
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Author: Jan12-13, 2002--4th quarter earnings due expectations lousy |
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Date Posted: 10:26:58 01/14/03 Tue http://www.bullmarket.com/daily/Jan02/011202W.php3#1 January 12-13, 2002 1. FOURTH-QUARTER EARNINGS COULD DISAPPOINT TODD’S TAKE: With an eye on a mid-year recovery, investors have spent the first few days of the new year snatching up shares in some of the biggest decliners of 2001, including EMC (EMC, $17, unch.) and Applied Micro Circuits (AMCC, $11, down 1). But with about 60% of the S&P 500 set to report fourth-quarter earnings over the next three weeks, the question remains: Have investors lowered their earnings expectations enough, or are they about to be disappointed by sluggish corporate scorecards? The upcoming earnings season, much like 3Q01, is probably going to be one of the worst of the last ten years. Everyone knows things have been bad, and everyone knows that fourth-quarter earnings are not going to be pretty. Yet over the past few months, investors have largely been looking past this quarter (and even next quarter), and instead have been pricing in the prospects for a long-term turnaround in corporate earnings. The problem is that while everyone expects 4Q01 results to be lousy, many companies have just begun to lower their current and future earnings expectations. This combination of rising stock prices and falling earnings expectations has pushed the price-to-earnings (PE) ratio of the S&P 500 to more than 25 times estimated earnings for the next 12 months, up from 24 just four weeks ago. And the bad news is that many more downward revisions are expected in the coming weeks. What we’re facing now is a short-term that could grow worse than already-lowered expectations. In addition, we are paying close attention to company forecasts for 2002 growth. But HOW will investors react to all of this news? Will they continue to hold their long-term view, or will they grow disillusioned over a rough and uncertain short term? Our view, of course, is that you should remain cautious and invest for the long-term, but be prepared for the short-term ups and downs. If you think the markets have gotten a bit ahead of themselves over the near term, then you might want to put a few sell stops in place so that you don’t lose your shirt if the market tanks. In addition, you may want to sell some covered calls in an effort to earn some additional income on your current holdings. However, if you’re like us and you fully believe that the economy will rebound in the latter half of the year, then you might still want to be buying now. But based on our analysis above, you should be buying VERY SELECTIVELY at the moment. Stick to Value, Income and bellwether stocks. A good place to start would be to examine our various recommended portfolios on our web site. (To do so, however, you’ll need to subscribe to our fee-paid newsletter: The Bull Market Report Daily. Please visit this link to sign up: http://www.bullmarket.com/signup.htm.) [ Next Thread | Previous Thread | Next Message | Previous Message ] |