Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is cautioning that weak first-quarter results could trigger a stock market correction.
“Stock markets are only as healthy as their stocks—or, at least, they technically should be. Despite its stellar year in 2013, the S&P 500’s component stocks weren’t supporting the market with strong revenue and earnings growth,” says financial analyst John Whitefoot. “The fact of the matter is that the S&P 500 was fueled by the Federal Reserve and its $85.0-billion-a-month quantitative easing efforts and artificially low interest rates, as well as the fact that businesses were streamlining operations and implementing aggressive share repurchase programs.”
When it comes to financially engineering quarterly results, Whitefoot says, companies on the key stock indices logged a record high for share buyback activity. In fact, in 2013, share buybacks amounted to $460 billion, the highest amount since 2007.
“Companies on the S&P 500 embraced cutbacks and share repurchase programs because their earnings were nothing to talk about,” he explains. “Despite a year full of all-time highs, a larger percentage of companies on the S&P 500 revised their earnings guidance lower each quarter—a seemingly obvious disconnect.”
During the first quarter of 2013, 86 of S&P 500 companies, or 78%, revised their earnings lower; 88 (81%) did so in the second quarter, and a record 92 (83%) of firms offered lower earnings guidance in the third quarter. The fourth quarter, meanwhile, saw 94 companies (88%) revise their guidance lower. (Source: “Guidance,” FactSet web site, December 31, 2013; http://www.factset.com/websitefiles/PDFs/guidance/guidance_12.31.13.)
Whitefoot says that in spite of the earnings disappointment, the S&P 500 continues to march illogically higher. The index might have gained 30% in 2013, but did it come at a cost? To keep growing, stocks actually have to start posting legitimate earnings.
“Going forward, investors will not be content with the sleight-of-hand cost-cutting measures companies have been using to boost earnings, and they don’t look like they’ll take just solid returns in stride, either,” he adds. “They’ll be looking for strong gains to justify the high valuations that stocks have been enjoying over the last couple of years. It’s time for companies on the S&P 500 to wow investors and justify their lofty valuations.”
Though that might be a tough task, he notes. Not only is the U.S. economy perched precariously, but so are the major global economies: China and India have both seen their manufacturing bases weaken, production in Britain is at the same level as it was in July 2013, and Canada’s December purchasing managers’ index declined to its lowest level in 23 months. These are important indicators to take into consideration, especially considering that almost half of the firms that make up the S&P 500 generate revenues from outside the U.S.
“Investors need to protect themselves against any correction in an overvalued market by finding undervalued companies with great upsides. It may sound obvious, but given how much people are willing to pay for some equities, it isn’t,” Whitefoot concludes. “As investors finally begin to turn their attention to fundamentals and earnings, value stocks could offer the greatest potential for solid gains.”
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.LombardiPublishing.com.
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Name: Wendy Potter
Organization: Lombardi Publishing Corporation
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