Eavesdropping on Louis Navellier’s market update podcast … a strong earnings season for some, but not all … the economy still faces still headwinds … get ready for a stock-picker’s market

There’s big money to be made in this stock market, but the opportunities are narrowing.

That’s the broad perspective of legendary investor, Louis Navellier.

We’re now beyond the halfway-point of what is shaping up to be a strong earnings season — fundamentally-superior stocks rooted in quantitative strength have popped higher.

But not all stocks …

Our economy isn’t firing on all cylinders. Many service-sector stocks are still languishing. As Louis said in his market-update podcast to Growth Investor subscribers, “it’s very, very hard for the economy to recover when the service sector is this weak.”

Today, let’s continue eavesdropping on Louis’ podcast to see how he’s sizing up today’s market. There are gains to come, but not across the board. That means making sure you know exactly what’s in your portfolio will be critical as move deeper into 2021.

Let’s jump in.

 

***A strong earnings-season is helping support the market

For newer Digest, readers, Louis is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively strong stocks. Forbes named him the “King of Quants.”

This numbers-approach has helped Louis produce decades of triple-digit winners for his private clients and subscribers. Given this, when Louis provides a market forecast, we pay attention.

So, what is Louis’ forecast today?

In his latest Growth Investor podcast, he begins by discussing the state of the Q4 earnings season we’re now in.

From Louis, last Friday:

I’m pretty ecstatic. This is earnings week for us. We had a lot of good earnings come out …

The average stock in the S&P, about half of them have announced, sales have beaten estimates by about 3.2%, and earnings have beaten estimates by about 19.4%.

Building on Louis’ statistics above, FactSet, which is the data analytics company used by the pros, provided more color on this earnings-season last Friday.

In short, 59% of companies have reported (as of last Friday). Of them, 81% of S&P 500 companies have reported a positive earnings-per-share (EPS) surprise, and 79% have reported a positive revenue surprise.

If 81% ends up being the final EPS percentage, it will tie the mark for the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking it in 2008.

Given these positive surprises, many stocks have surged. But Louis tells us that we should be prepared for the market to slow down and digest these gains.

… when stocks pop in response to earnings, then they’ll have to back up, fill, and rest a bit. And you may see more of that in the upcoming weeks, especially in late-February.

A 3% consolidation would be normal and healthy. So, don’t be surprised if you see that.

Louis then points toward another reason why the market might pull back …

Volume.

Volume is big for Louis. Heavy volume is a sign of conviction. After all, you’re seeing many market participants making a move.

On the other hand, light volume means we’re only seeing limited market participants. So, whatever market move we’re witnessing may not represent how the majority of investors are feeling. Big moves on light volume can reverse quickly.

Here’s Louis with more:

… volume isn’t that high right now. Volume peaked several days ago.

So, this market is getting more narrow and more fundamentally-focused.

 

***The biggest issue to keep on your radar comes from employment data

Though earnings are shaping up nicely for fundamentally-superior stocks, Louis is keeping a sharp eye on some data points:

The economic news (last) week was not as good as I wanted. (Last Friday’s) payroll report was a disaster.

To make sure we’re all on the same page, last Friday, we learned that nonfarm payrolls increased by only 49,000.

While economists surveyed by Dow Jones had been looking for growth of 50,000, many Wall Street analysts had been expecting far higher numbers. For example, Citigroup was looking for a gain of 250,000.

Back to Louis:

It wasn’t so much that we only created 49,000 payroll jobs, it was that there was a big downward revision for November and December of 159,000 jobs.

And just so you get a feel for how bad it is out there, the leisure and hospitality sector lost 61,000 payroll jobs in January, but a whopping 536,000 in December.

Clearly, we have to get the shots out there. We have to get the (COVID-19) caseloads falling, which they are now. And we have to get back to normal …

Hopefully people will start to travel and get out-and-about a little bit more.

It’s very, very hard for the economy to recover when the service sector is this weak.

There was one more aspect of the jobs report that caught Louis’ attention …

Even though we’ve had job losses and downward revisions in recent months, the unemployment rate actually fell from 6.7% to 6.3%.

How can you have anemic job growth and downward revisions yet have the unemployment rate fall?

Here’s Louis with the answer:

The labor force shrank.

And the reason the labor force is shrinking is largely due to the fact that some people that are collecting unemployment are losing their long-term benefits. Plus, there are a lot of working moms that can’t go to work because the kids are being homeschooled because not all schools across the country are open.

Building on Louis’ point, we’ve learned that the overall labor force declined by 406,000 as people simply stopped looking for jobs.

Obviously, this isn’t healthy. We need the economy to reopen so that these people can get back to work. Falling unemployment numbers mean nothing when they’re based on would-be workers simply giving up.

***Translating all of this into today’s stock-outlook, it’s all about quantitative strength

We’re living in a tale of two stock markets.

You have one group that has adjusted to this pandemic world. Here, profits are still flowing, driving up stock prices.

The second group continues to face an existential threat — or minimally, huge headwinds — the longer the coronavirus suppresses economic activity.

This points toward the need for one, underlying trait to be present in any stock you’re considering today — fundamental strength, rooted in numbers.

This type of stock is still out there, but the opportunity set is narrowing.

Back to Louis:

Right now, they’re still forecasting healthy first-quarter GDP growth for us, but we’re not hitting on all cylinders. Not all parts of the economy are working.

But as far as earnings are concerned, folks, we have easy year-over-year comparisons. And I have no problem finding stocks that are going to continue posting great sales and earnings.

On this point, I would add that I’m looking at Louis’ Growth Investor portfolio as I write, focusing on recommendations he has made no earlier than the fourth quarter of last year (over this time period, the S&P climbed 16%).

I’m seeing gains of 32%, 42%, even 97%, among other winners. One is up 23% since Louis recommended it just 11 days ago. If you’d like his help in finding fundamentally-superior stocks as a Growth Investor subscriber, click here.

 

***If you’re more of a do-it-yourselfer but you’re interested in Louis’ quantitative approach, check out Louis’ free tool, the Portfolio Grader

As noted earlier in this Digest, Louis is a quant investor. In other words, he bases his market activity on cold, impartial numbers instead of hunches or guesses.

In doing this, Louis analyzes eight key fundamental factors:

* sales growth

* operating margin growth

* earnings growth

* earnings momentum

* earnings surprises

* analyst earnings revisions

* cash flow

* return on equity

The Portfolio Grader is a diagnostic tool that evaluates the earnings strength of a stock you’re considering through these metrics.

It’s the next best thing to calling Louis up and asking for his opinion on a stock.

As an example, here’s the report card for Vipshop Holdings, one of Louis’ Growth Investor recommendations which is up 141% in less than a year.

Give the Grader a spin by clicking here.

Bottom line, though the opportunity set for big-gain-stocks is narrowing, you still have options if you’re focusing on fundamental strength that translates into earnings growth.

Here’s Louis’ forecast for investors who make this the center of their market approach:

Hang on. Enjoy the ride. Don’t worry about any consolidation, that’s normal …

By the time May rolls around, we’re going to be a lot higher than we are today.

Have a good evening,

Jeff Remsburg