Tags: Wall Street Week Ahead

Stocks May Be Cheap, But They May Get Cheaper

Sunday, 25 September 2011 04:41 PM EDT

Someone is about to play the fool — Wall Street analysts or investors.

For months, analysts who write reports praising or panning stocks have been saying they were cheap. Investors were unconvinced, buying one day, selling the next. Last week, they mostly sold, and stocks got cheaper yet.

The Dow Jones industrial average rose slightly Friday but closed the week down 6.4 percent, its worst showing since the depths of the financial crisis three years ago. In the broader Standard & Poor's 500, the selling pushed down all variety of stocks — sexy high techs and staid utilities, risky small companies and cash-rich big ones.

Stock prices compared to expected profits are now nearly as low as they were in March 2009, a 12-year nadir that marked the beginning of one of the greatest bull markets in history.

Have investors sold too much, as they did back then?

"I'd be buying the market," says Citigroup's chief U.S. strategist Tobias Levkovitch, who warned that prices were too high in the spring. Says Harris Private Bank's Jack Ablin, who sold $6 billion or so of stock in August, "We're sharpening our pencils to figure out when to get back in."

Who's right — or who's about to play the fool — may turn on earnings, or rather, analysts' estimates of how fast they will grow.

Recently, they've been cutting them for companies in the S&P 500 as fears of another recession spread. But they're still predicting they will earn 13 percent more earnings in the three months through September than they did in the same period a year ago, according to data provider FactSet. That would mark the eighth straight quarter of double-digit gains. And for the full year, analysts say earnings will hit a record.

"You can throw toss (those estimates) in the garbage," says Peter Boockvar, equity strategist at brokerage Miller Tabak & Co. "Will Greece go bankrupt? What will be the extent of the global economic slowdown? I can't get that out of an analyst report."

If history is any guide, more cuts from analysts are coming.

One ominous sign: Those who changed their estimates this month chose to cut them more than six out 10 times, according to Citigroup. Early last month, raised estimates outnumbered lowered ones by nearly the same ratio.

Analysts are easy to bash. They usually tend to far too optimistic, cheering on stocks long after they've headed down. Now they want us to believe that companies can continue making record profits in the face of falling housing prices, tightfisted consumers, sputtering U.S. growth and a European debt crisis that is pushing a crucial market for U.S. exports closer to recession.

But it's worth remembering that it's been the naysayers, the investors, and not the optimistic analysts, who've mostly been wrong lately.

At the start of the bull market, investors worried that companies couldn't generate enough profits in such an anemic economy. Then companies cut expenses to the bone, and profits soared. Investors next worried that companies wouldn't be able to sell more, and that profits were bound to fall. And then companies defied expectations again with higher revenue, much of it overseas.

In fact, if anything, analysts haven't been optimistic enough. For several quarters, nearly three out four companies have posted profits greater than analysts had estimated, FactSet says.

At Friday's close, the S&P 500 was trading at 10.6 times analyst estimates for earnings over the next 12 months. That's low for this so-called earnings multiple, which could mean stocks are cheap. When stocks bottomed on March 9, 2009, they were trading at 10.4 times estimated earnings. The 10-year average is 15.

Of course, the multiple might not look so appetizing in hindsight if companies' results show the estimates were too high.

That won't be clear at least for another two weeks when companies start reporting third-quarter results. But already investors are getting a taste of might be in store.

On Thursday, FedEx Corp., the world's second-biggest package delivery company, met earnings expectations for the three months that ended in August. But it cut its target for full-year earnings, citing a slowdown in shipments from Asia. The stock fell to a two-year low.

Then, after the markets closed, some good news. Nike, the world's largest athletic shoe maker, posted surprisingly strong earnings. It cited robust sales in India and China. The stock rose 5.3 percent Friday.

"The highest growth for companies has been in the emerging markets," says John Butters, senior earnings analyst at FactSet. "We're getting mixed signals."

The good news is that even if analysts ended up playing the fools this time, stocks could still rise.

Harris Private Bank's Ablin says analysts are "out to lunch" with their cheery projections. But he thinks investors may have overreacted, too. He says they're selling as if earnings will fall 20 percent or so next year, which he thinks won't happen.

"Investors are so dour, reality could surprise," he says.

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Someone is about to play the fool Wall Street analysts or investors.For months, analysts who write reports praising or panning stocks have been saying they were cheap. Investors were unconvinced, buying one day, selling the next. Last week, they mostly sold, and stocks...
Wall Street Week Ahead
Sunday, 25 September 2011 04:41 PM
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