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Initial Quarterly Earnings and Valuation Thoughts – 2016

By Justin McNichols, CFA
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While equities markets continue to gyrate daily, it is sometimes easy to forget we are actually in the middle of the fourth quarter earnings season.  As markets fret about the strength of the dollar, economic growth outside the United States, and whether commodities prices will continue to be dragged down by currency, over 40% of the S&P 500 companies have released earnings.  What have we learned, and what do earnings say about present valuations in the domestic equities space?

With over 200 companies in the S&P 500 releasing earnings as of February 2nd, approximately 70% of those companies have beaten estimates.  The headline figures for revenue and earnings appear to be weak, however once the recession in the energy sector is removed, the growth rates are not as dire.  On the revenue line, although revenue has fallen 3.5% year-over-year, the fall excluding energy is only about 1%.  A similar situation is seen on the earnings line where earnings have fallen 5.8%, but only 1% when excluding energy.  These figures show how much the energy recession is skewing the overall picture for the S&P 500.  It appears full year 2015 earnings will fall 1% (increase 3% ex-energy), and present estimates for 2016 are in the $122-126 per share area.  Internally, we are using $118 per share for 2016.  Finally, margins are topping out, and will  likely post the first year-over-year fall in many years.  Count on a net margin of about 10% for the S&P 500 for the fourth quarter – near record highs.

On the U.S. equities valuation front, it appears many sectors are attempting to price in a recession similar to 2011.  Using the recent S&P 500 low of 1812, our five preferred valuation metrics point to an asset class that is now slightly undervalued after a 15% correction from summer highs.  Although the average small-capitalization stock fell nearly 27%, we continue to avoid this market capitalization area due to continued high valuation.  Comments on our five valuation metrics, three of which are proprietary, are below:

Justin McNichols, CFA

Justin McNichols, CFA

Justin is the Chief Investment Officer for OPCM, and has over 25 years of experience. Justin is a member of the OPCM Investment Management Team, and became a principal of the firm in 2000. Justin is a member of CFA Society San Francisco and CFA Institute. Justin received a Bachelor of Arts degree in Economics in three years and a M.B.A. in Finance from the University of California at Irvine. Additionally, he is a CFA Charterholder.
The opinions expressed herein are strictly those of Osborne Partners Capital Management, LLC ("OPCM") as of the date of the material and is subject to change. None of the data presented herein constitutes a recommendation or solicitation to invest in any particular investment strategy and should not be relied upon in making an investment decision. There is no guarantee that the investment strategies presented herein will work under all market conditions and investors should evaluate their ability to invest for the long-term. Each investor should select asset classes for investment based on his/her own goals, time horizon and risk tolerance. The information contained in this report is for informational purposes only and should not be deemed investment advice. Although information has been obtained from and is based upon sources OPCM believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. Past performance is not indicative of future results. Inherent in any investment is the possibility of loss.