With nearly 90% of the S&P 500 having reported
earnings, now seems to be the perfect time take a look at the earnings scorecard
for the 3rd quarter of 2014.
While it’s been a while since anyone really got themselves worked up too
much over earnings season outside of big names like Apple, the end of QE3 means
that the financial media will have to find a new topic to gravitate towards and this week is going to be light on major economic news.
If there’s been one sector that surprised all forecasters
with its performance in 2014, it's utilities where the Utilities Select Sector
SPDR (XLU) began outperforming the broader market in January and now is up
24.99% YTD versus 9.93% for the S&P 500.
In the third quarter, the utilities sector saw their earnings grow 2.8%
compared to the broader market’s 7.6% and while the market typically does not reward the sluggards, in this case it’s made an exception. If earnings are going to be more important
going forward, why are utilities outperforming so handily in 2014? Partly because among the companies that have
offered forward guidance, their expectations for future growth are among the
most stable.
So far 55 companies have offered negative guidance versus
18 with a positive outlook for the next quarter. The spread between positive/negative outlooks
is skewed with tech stocks having the widest ratio (7.5x) while the lowly utilities
sector has only one name offering forward guidance and of course, it’s
positive. Given that analysts have
trimmed their 4th quarter earnings forecasts since the end of the 3rd
quarter by 53%, this stability clearly offers a lot of attractions in this
brave new world without a backstop from the Federal Reserve but it comes with a
heavy price.
Factset now estimates that utilities are one of the most
expensive sectors based on the 12 month forward P/E ratio (16.9 versus 15.8 for
the S&P 500.) While this strong
performance, along with that of REITS, was attributed to either annual sector
rotation or a quest for yield, the Factset Earnings Insight Report leaves
little room for doubt that consistent earnings and expectations for more of the
same are also playing their parts.
Using a list of ETFs with the biggest fundamental % gain
last week shows another way to think about the power of dividends AND stable
earnings in this market. ETFs offering
exposure to preferred stocks and high dividends were among the biggest gains
with the PowerShares Preferred Portfolio (PGX) and iShares S&P US Preferred
Stock Fund (PFF) both making the short list and offering dividend yields in
excess of 5.5% compared to the 1.8% offered by SPDR S&P 500 ETF (SPY). They also have heavy exposure to financials
in common, 63% and 74% respectively and the earnings variability has weighed on
both.
While the financial sector
theoretically has the third highest earnings growth this quarter at 16.4%, if
you removed J.P. Morgan it would drop to 2.8% putting it in-line with the
utilities and even with a 5/4 positive to negative announcement ratio,
investors aren’t feeling too generous to the banks. Continuing uncertainty over future lawsuits
and settlements including the FOREX scandal has led to more cash hoarding to
build up reserves while also lowering investor optimism. Factset’s 12 month forward P/E estimate for
the financial sector is currently 13.5, the lowest for all the sectors of the
S&P 500. Clearly, dividends are still king.
Happy Veterans Day and thank you for reading ETFG Perspectives.
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