If you ever thought, "I never thought I would read a comparison between pirates and the financial markets," just think about this: Somali pirates actually set up an exchange, much like a stock market, to finance operations. That's right – at one time, you could invest in your favorite modern pirates and participate in the success of the venture.
Mohammed (a wealthy former pirate) told a Reuters reporter as he took him on a tour, "The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials ... we've made piracy a community activity." What happy thought: organized exchange-traded pirates!
Crazy as that is, it helps highlight this one key point – opportunity exists all over the place. Just because the news beats the bear drum, it doesn't mean there's not opportunity. Look at last fall and winter as an example. The rally from lows has been astonishing to say the least. Let's have a look here:
My key takeaway is this: growth has been leading us out of the ashes. That's a great thing regardless of the reason. By that, I mean, whether growth was unfairly punished heading into the fall of last year, if investors fled for fear or if consensus was saying that growth would grind to a halt – whatever the reason – it seems that those arguments were either wrong or have now been largely discounted to zero.
The small caps are king now. The U.S. dollar is hurting other currencies, and Europe is facing its fair share of problems. Brexit looms over an already worsening situation there. The flight from that landscape to U.S. small caps is clearly evident. The Russell 2000 Index has rallied more than 25% from Dec. 24 lows. The Russell 2000 Growth Index is up nearly 28% over the same time. The S&P Small Cap 600 Index is up 24.3% since Christmas. The value indexes are lagging, while the growth indexes are charging ahead.
As far as sectors go, we see a similar story – the four strongest sectors have been industrials, information technology, consumer discretionary and energy. There is a lot of growth embedded in these sectors. Safe sectors such as utilities, communications, staples and real estate have lagged their better-performing peers. With that said, their performance has been excellent nonetheless.
So when we think back to the headlines swirling around the end of last year, with all the big scary bears, how could they all have gotten it so wrong? Well, one interview I did recently pointed out that bear markets fall in stages, and the worst may be yet to come. But I beg to differ. There are countless examples of companies bucking the trend. Could it be just a technical rally sparking us into overbought territory?
I concede that this is a possibility – yet, while we are overbought, we have rallied for an excellent reason. Sales and earnings are largely working.
According to FactSet Earnings Insight, as of Feb. 15, 2019:
- Earnings Scorecard: For Q4 2018 (with 79% of the companies in the S&P 500 reporting actual results for the quarter), 70% of S&P 500 companies have reported a positive EPS surprise, and 62% have reported a positive revenue surprise.
- Earnings Growth: For Q4 2018, the blended earnings growth rate for the S&P 500 is 13.1%. If 13.1% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index.
- Earnings Revisions: On Dec. 31, the estimated earnings growth rate for Q4 2018 was 12.1%. Today, seven sectors have higher growth rates (compared to Dec. 31) due to upward revisions to EPS estimates and positive EPS surprises.
- Earnings Guidance: For Q1 2019, 59 S&P 500 companies have issued negative EPS guidance, and 19 S&P 500 companies have issued positive EPS guidance.
- Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.0. This P/E ratio is below the five-year average (16.4) but above the 10-year average (14.6).
The Street generally went and revised its expectations downward to prepare for the pending growth doom. Analysts did not want to be caught flatfooted when the world slowed down, and they had already issued rosy sales and earnings outlooks. Well guess what – they were wrong and are often caught flatfooted the other way! Can't win!
Here's a great example: The Trade Desk, Inc. (TTD). This is a company that has been on our radar for a long time – you should know it well by now. Last night, The Trade Desk came out and absolutely smashed earnings estimates:
- Reported EPS of $1.09, up from $0.54 a year ago and more importantly above consensus of $0.79 – a beat of 38%
- Reported revenue of $160.5 million, up from $102.6 million last year vs. consensus of $148 million – an 8.5% beat
- Guided full-year 2019 revenue of at least $637 million vs. consensus of $617 million – a 3.2 % beat
- Cited that growth is accelerating on its earnings call
This is what the chart looks like today, up +30%!
Naturally, our whole focus here is to identify names like this beforehand by trying to find unusual institutional buying signals, represented by the green bars here:
But for those who hate self-back-patting, what's important here is that growth is alive and well and attracting capital. The story here is that the market is fighting back with a vengeance, and equities are looking strong. We believe that we are entering a more selective narrow bull market in terms of opportunities, but the names are still out there.
As far as getting the market right in terms of bull or bear, remember Elbert Hubbard, who said, "Do not take life too seriously. You will never get out alive."
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, but we see a risk of a near-term giveback if institutional selling increases. Selling has been non-existent so far this year. We see the year-to-date lift in stocks as very constructive. As growth stocks gain on increasing volumes, we believe that earnings season could be better than overall expectations.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.