If you’re feeling confused about the market’s direction right now, you are not the only one.
As I discussed Saturday, we’re getting conflicting signals.
After the worst December since the Great Depression, we just finished the best January in more than 20 years. February got off to a hot start too but worries about trade negotiations with China meant we gave back a lot of those gains right away.
On the upside, this earnings season has been fantastic.
Sixty-six percent of the S&P 500 have reported results so far, and 71% of those have reported earnings above estimates, equal to the five-year average, according to FactSet. In addition, FactSet states that 62% of companies have reported better than estimated revenue so far.
On the other hand, guidance for the next quarter looks gloomy, and global growth is one of the biggest concerns.
Although there is some hope for a trade resolution with China, negotiators admit that there is not even a draft deal on the table yet.
But investor concern isn’t solely focused on China. More investors are concerned about problems in Europe – 46 days until the Brexit deadline with no deal in sight, a weaker growth rate in the Eurozone, recession fears in Germany, Italy’s government attacking the leaders of its central bank….
It’s time to ask yourself, how exposed is your portfolio to a global slowdown?
In its latest analysis FactSet notes that S&P companies with more global exposure have underperformed the rest of the market.
FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index) was used to answer this question. For this analysis, the index was divided into two groups: companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure). Aggregate earnings and revenue growth rates were then calculated based on these two groups.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for the S&P 500 for Q4 2018 is 13.3%. For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 16.6%. For companies that generate less than 50% of sales inside the U.S., the blended earnings growth rate is 8.4%.
The blended revenue growth rate for the S&P 500 for Q4 2018 is 7.0%. For companies that generate more than 50% of sales inside the U.S., the blended revenue growth rate is 7.2%. For companies that generate less than 50% of sales inside the U.S., the blended revenue growth rate is 6.7%.
And it turns out the same is true for earnings estimates going forward.
The estimated earnings growth rate for the S&P 500 for CY 2019 is 5.0%. For companies that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 6.7%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings growth rate is 1.9%.
The estimated revenue growth rate for the S&P 500 for CY 2019 is 5.1%. For companies that generate more than 50% of sales inside the U.S., the estimated revenue growth rate is 5.9%. For companies that generate less than 50% of sales inside the U.S., the estimated revenue growth rate is 3.1%.
But you really didn’t need FactSet to tell you this if you are a Navellier subscriber.
Louis has been making this call aggressively since the tail end of 2018. Even among the great results of this earnings season, Louis has been quick to note that international concerns are weighing heavy on results.
Here are Louis latest observations he shared with subscribers to our Breakthrough Stocks service.
The strong U.S. dollar continues to hinder many multinational companies’ ability to grow their top and bottom lines, especially those companies that are paid in eroding currencies like the Chinese yuan and euro.
In fact, big-name multinationals Caterpillar (CAT) and NVIDIA (NVDA) recently issued revenue warnings in light of strong currency headwinds. Since approximately 50% of the S&P 500’s sales come from outside of the U.S., I expect more multinational companies to issue revenue warnings in the upcoming weeks.
Concern about multinationals is spreading, as The Wall Street Journal confirmed this morning. In their story, the Journal cited IBM, Procter & Gamble Co and Johnson & Johnson all saying that the strong dollar is hurting earnings.
This is on top of what is already a concern about growth in 2019. Louis has been saying that market growth will be much more narrow and he reiterated that call late last week.
I should also add that the fourth quarter will likely represent “peak earnings” for many companies. Due to more difficult year-over-year comparisons, earnings momentum will decelerate in 2019. We’re already seeing this play out in several S&P 500 companies’ first-quarter guidance: 33 companies have forecast negative earnings growth.
So, I still expect the stock market to become increasingly narrow in the upcoming months, and institutional money will be chasing fewer stocks. In this environment, many investors will reallocate their funds to more domestic companies with superior fundamentals. Given that small- and mid-cap stocks are more domestic in nature, I look for money to pour into this arena, which is great news for our Breakthrough Stocks….
The bottom line: Institutional investors are moving away from multinational companies and refocusing on small- and mid-cap stocks that are less likely to be negatively impacted by the strong U.S. dollar and weak global growth.
Did you catch that last bit? Let me reiterate the point.
Louis believes institutional investors are moving away from multinational companies and refocusing on small- and mid-cap stocks…..
If you’re not familiar with Breakthrough Stocks, it features today’s best small- to mid-cap stocks from a variety of sectors. Louis specializes in uncovering the under-the-radar stocks that are about to emerge from the pack with unstoppable growth.
His portfolio is full of smaller stocks that you’ve probably never heard of, but that Louis has identified as ones with big potential.
One of the under-the-radar stocks Louis has held for quite some time is NMI Holdings, Inc.
NMIH is a domestic private mortgage insurance company. The company has licenses in all 50 states and the District of Columbia, which allows it to help its clients across the country realize their dream of owning a home.
Louis has kept the stock in his portfolio since April 2017, and it’s pretty easy to see why. Below is a chart showing the stock’s performance since Louis advised his subscribers to buy it.
NMIH is still a buy under $25.
But that’s a pick from almost two years ago.
A more recent pick is IEC Electronics Corporation. IEC develops complex electronics and full system assemblies, which are then used to manufacture advanced technology products. IEC Electronics Corporation has been in the business for more than 50 years—and its products remain in top demand, as evidenced by recent earnings reports.
Louis is calling IEC a conservative buy below $9.
To a richer life…
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com
