Tags: Sterman | stocks | S&P 500 | growth

StreetAuthority's Sterman: Time to Prune Stock Portfolios of Losers

By    |   Thursday, 18 September 2014 12:34 PM

The bull market has raised valuations for a majority of S&P 500 stocks whether they deserve it or not.

In the case of the current bull market, the rising tide has lifted all boats — even the leaky ones.

StreetAuthority columnist David Sterman noted many S&P 500 stocks have at least doubled since the market bottomed in 2009.

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"The problem with such an indiscriminate upward move is that tends to elevate shares of companies that are actually in the midst of slowing profit growth," he said.

Sterman said he plucked out of the S&P 500 those companies that analysts expect will show earnings-per-share growth will slow in 2015 and fall below 10 percent in 2016, but that also are trading for more than 20 times their projected 2015 profits.

"This equates to a robust price-to-earnings (P/E) ratio and anemic profit growth — which are not the ingredients for share price gains," he noted.

The subsequent list of stocks to avoid that he came up with are Yahoo, Brown-Forman, Iron Mountain, Sigma-Aldrich, Roper Industries, Paychex, Amphenol, C.H. Robinson Worldwide, Expeditors International and Hershey.

Sterman singled out two of those companies for special attention. He said document storage concern Iron Mountain has a 2 percent annual compound growth rate and its earnings are "stuck in the mud."

"In that context, it's hard to understand why [Iron Mountain's] shares trade for 25 times forward earnings."

As for venerable candy maker Hershey, Sterman said the stock is now worth more than $20 billion, even though the company has not managed to generate $500 million in free cash flow in any of the past five years. "That's not the kind of multiple that attracts value-sensitive investors like Warren Buffett," he said.

Sterman also came up with a second list of S&P stocks to shun, based on those with reasonable P/E ratios that analysts have also concluded will boost per share profits less than 5 percent in both 2015 and 2016.

That list consists of HCP Inc., Hess Corp., Campbell Soup, Garmin, CenturyLink, Apache, General Electric, Pitney Bowes, Pfizer, Exxon Mobil and Deere & Co.

Sterman said of his two "avoid" lists: "At best, these stocks have likely already generated all the upside that they can from this bull market, and at worst, they would be the first stocks to be sold in a shift toward a defensive market."

Meanwhile, Credit Suisse is the first big Wall Street player to say that the stock market correction many professionals have been awaiting will not come until 2015, CNBC reported.

Credit Suisse strategists predict in a client note that their year-end forecast for the S&P 500 is 2,050 and the 2015 target is 2,100.

However, they estimate that the 2015 level is expected to fall back from a high of 2,200 that the market will hit in midyear, CNBC said.

"We see a high probability of a second-half correction as the Fed raises rates and U.S. profit margins peak against a backdrop of full employment," the strategists wrote.

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The bull market has raised valuations for a majority of S&P 500 stocks whether they deserve it or not.
Sterman, stocks, S&P 500, growth
Thursday, 18 September 2014 12:34 PM
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