To OTC Journal Members:
 
 

Have Fun Sunday, But Be Ready to Roll on Monday

Happy Super Bowl Weekend everybody! I wanted to get this edition out to you today for a couple of reasons, one of them being I know most of you will be distracted by tomorrow's festivities. 

As of the last look, the odds-makers say Green Bay has a three point edge. Sounds about right, but more interestingly, it's the thinnest point margin predicted in the last ten years (Ravens vs. Giants, in XXXV, though it was a blowout anyway).

Either way, this year's game promises to be one of the best championship games we've seen in a long time... meaning it won't be a blowout, and could come down to a last-minute play. 

The other reason I wanted to get something out today was to let you know to be on standby after the market closes on Monday. There's a new penny stock pick coming then.... a good one. This company is literally entering a revenue-bearing stage in the current quarter, walking into a market worth more than $100 billion per year right now, and a market expected to be worth $140 billion by 2015. Yet, most traders are overlooking this budding company because they're more fixated on the past and don't fully understand that the future is actually now. Their loss is your gain. 

I can't say any more than that for the time being, but be sure to check your inbox after the market closes on Monday - it'll be there. 

On with the show. 
 

Earnings Scoreboard

No, there's nothing 'small cap', or 'micro cap', or 'OTC' about any of the S&P 500's stocks, but that doesn't mean we want to ignore the important details offered by these large caps; man can not live on small caps alone.

Specifically, I want to do something a little out of my normal character here and look at how earnings have been shaping up for all of the S&P 500's major sectors. And of course, since the data is right there, we can look at the broad market's earnings-based value as well.

First and foremost I want to look at the beat/met/miss ratios so far, ow that about 60% of the S&P 500's names having posted Q4 results. Though earnings growth itself is important, it's elation and disappointment that I've seen have a bigger impact on stock prices. Not that we can do anything about the stocks that have already reported, but this may be a good guide for what we can expect for the remaining 40% of stocks, and even a clue as to what we can expect next time around. (Companies that 'beat' tend to do so repeatedly, and companies that just 'meet' also tend to make a habit of it.) 

The nearby chart tells the tale.

A couple of things stick out right away. One of them is the fact that the utilities sector has really fallen short. Though only 9 of the 34 in the S&P 500 have reported, that's enough to know there were - and are - some real problems here. 

The other noteworthy detail is how well healthcare and technology have done on the beat/miss front. Though tech's success isn't a total shocker, healthcare's success in the fourth quarter may serve as notice that this long-dismissed sector isn't something to ignore any further. 

Though the industry-level detail doesn't appear on the chart, I can tell you that it's the healthcare equipment and services names (as opposed to pharma and biotech) that have been topping estimates so frequently. 

All told, of the 290 of the S&P 500's companies that have reported so far, 70% have topped analyst forecasts, 22% have fallen short, and 8% were on target. That's roughly the norm.

But how have earnings actually grown? I've got a chart for that too. 
 

Earnings Growth

Overall, per-share earnings are up 39.5% from Q4-2009's numbers. There's a major footnote to that detail though. Excluding the financial sector's earnings growth, profits are only up 20.0% on a yoy basis.

If you're wondering how that happened, it's simple... as well as the financial sector did in 2009 compared to 2008, most of these companies are still nowhere near their peak earnings from 2007. With that much room for recovery and improvement still ahead of them, near-term growth rates are going to look huge just because the base-line comparison is still quite low.

Just for the record, the finance sector's profits are technically up 564% on a year-over-year basis, as the financial meltdown of 2008 was still hitting bottom lines in late 2009. Most of that mess should have been burned off by now though, so that growth rate will taper in 2011.

The bulk of the earnings growth outside the financial stocks has come from - and this is a little surprising - the energy sector. On the flipside, it's not like that growth was a fluke. The energy sector is poised to be one of this year's biggest income growers even though few are really talking about it. 

The runner-up on the earnings growth front is the basic materials group, which really isn't a surprise. As long as the recovery maintains even this moderate pace, there's opportunity there... especially in the industrial metals, mining, chemicals, etc. arenas. 

On the flipside, no surprises about utilities actually losing ground.
 

Market Value

Finally, as of the latest calculation, the S&P 500 is on pace to earn $22.90 per share on an operating basis, or $21.67 per share on a GAAP basis. That's the slimmest the margin has been in quite some time, which is a good thing. 

As for what that means in terms of value though, it translates into a trailing (operating) P/E of 15.6. The GAAP trailing P/E is now around 17.0 for the S&P 500. Believe it or not, that's actually about as legitimately cheap as we've seen the market in quite some time, and it's well below the long-term norm as the nearby chart illustrates. 

And here's the coolest part...not only are earnings on the rise, but they're projected to continue rising through 2011. 

That's not to say the market will be able to sustain this blistering pace of progress we've seen over the last five moths. We're up about 23% since the end of August, which is just a lot of weight to put on stocks (and a big invitation to take profits) even if equities deserve to be at these prices. That is to say, however, that a solid dip is easily a long-term buying opportunity.

Don't forget to keep your eyes peeled on Monday afternoon either. I'll be sending out a new trading idea after the close, and I think you're really going to like it. It's just a huge jump-start story where revenue-production is going to be turned on like flipping a light switch. Should be fun.