Anatomy Of A Recovery

3/7/2011


On March 9, 2009, the S&P 500 Index closed below 677 for the first time in more than 13 years. At that point, the index had fallen 58% from its October 2007 all-time high. About 19% of the index's constituents had lost money in the previous 12 months, and consensus estimates projected 2009 profit declines for more than 60% of index companies.

But in the nearly two years since plumbing that low, the S&P 500 Index has rallied 93%. Financials led the way, rebounding after the loss of more than three-fourths of their value from the start of 2008 through March 9, 2009. The S&P 500 Financial Sector Index has jumped 165% from the 2009 low.

Four other sectors — consumer discretionary, industrials, materials, and technology — also managed gains of at least 110%. All four sectors are economically sensitive, and the broad-based economic improvement has translated into strong sales and profit growth. Yet none of the four looks particularly expensive, with each earning average Quadrix Value scores of at least 54.

As illustrated in the table below, the picture looks far different today than it did two years ago. Only 5% of S&P 500 companies lost money over the last 12 months, and 88% are expected to grow per-share profits this year. Wall Street expects the index as a whole to grow profits 15% in 2011, after 47% growth last year.

THEN AND NOW
Today's S&P 500 Index looks vastly different from the one investors saw on March 9, 2009, at the market trough. Back in March 2009, consensus estimates projected the index's profits would fall 12%, with more than 60% of its components seeing profits decline. As evidenced below with data from the capitalization-weighted S&P 500 Index, today's market enjoys more operating momentum, higher profit margins, and greater growth expectations.
March 9,
2009
Today
10-Yr.
Average
12-Month Sales Growth (%)
2
6
3
12-Month EPS Growth (%)
(40)
47
7
Est. Current-Year EPS Growth (%)
(12)
15
NA
Trailing P/E Ratio
13.7
15.6
19.1
P/E On Current-Year Est.
10.9
13.6
NA
Dividend Yield (%)
4.2
1.7
1.9
Gross Profit Margin (%)
31.4
37.4
34.4
Operating Profit Margin (%)
11.8
15.3
14.5
% Of Stocks That Lost Money Over Last 12 Mos.
19
5
NA
% Of Stocks Exp. To See Profits Fall In Curr. Yr.
63
12
NA

The index as a whole is still reasonably valued — though not cheap — and we see a number of high-quality stocks with solid growth potential trading at attractive prices. Below we list one of our favorites in each of the five sectors with the strongest performance since March 2009.

• Consumer discretionary — DirecTV ($45; DTV).
• Financials — Aflac ($58; AFL).
• Industrials — CSX ($73; CSX).
• Materials — Lubrizol ($105; LZ).
• Tech — Altera ($41; ALTR).


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