Amid Earnings, Transports Stall

8/1/2016


Stocks have moved mostly sideways amid a deluge of earnings reports, with the Dow Transports still unable to surpass their April 20 closing high of 8,109.19. Without confirmation from the Transports, which have been hurt by some downbeat earnings reports, we will probably keep a bigger-than-normal proportion of our equity portfolios in a short-term bond fund.

Reflecting this week's earnings-related rank changes, our buy lists have about 23% in a short-term bond fund. The remainder is in stocks, with an emphasis on attractively valued growers. While such stocks have lagged this year, recent trading points to a rotation into such names — and out of the low-volatility defensive names that have led since the start of 2016.

Sales trajectory

June-quarter earnings season has begun reasonably well, with higher-than-normal proportions of companies exceeding consensus estimates for sales and earnings. Looking ahead, the number of profit warnings for the third quarter roughly matches long-term norms.

For the June and September quarters, consensus estimates now call for modest declines in per-share earnings for the S&P 500 Index. But sales are expected to be flat for the June quarter and grow about 2% for the September quarter.

A rebound in overall sales growth would be unmitigated good news. But it's worth noting that results for the energy sector skew sales for the S&P 500 Index. In the sector, sales are expected to be down 28% for the June quarter and 10% for the September quarter, according to FactSet.

Six of the S&P 500 Index's 10 sectors are expected to report sales growth for the June quarter. For the September quarter and full-year 2016, all but energy and materials are expected to report higher sales.

The median S&P 500 company reported 4.3% year-to-year sales growth in its most recently reported quarter, meaning one-half of S&P 500 members delivered at least 4.3% sales growth. While that pace lags the norm of 5.9% since 1994, it's high enough to allow us to build a portfolio of growers.

For the 14 stocks on our buy lists that have reported June-quarter results, 12 reported higher sales and 11 posted higher per-share earnings. Including this week's downgrades, the stocks averaged sales gains of 10.3% and per-share-profit increases of 16.3%.

Conclusion

With a close above 8,109.19 in the Transports, our equity exposure will increase, probably to at least 90%. For now, we intend to watch the averages while looking for buying and selling opportunities on a stock-by-stock basis.


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