CHICAGO, Sept. 20, 2011 /PRNewswire/ -- Zacks Research
Equity Strategist, Dirk Van Dijk
says that S&P 500 earnings are continuing to show red ink. He
tracks companies on the Zacks.com web site, naming names, while
forecasting trends for the months ahead.
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
Outlook Murky, Valuations Compelling
The year-over-year growth rate for the S&P 500 is 11.9%, way
off the 17.1% pace posted in the first quarter. However, it you
exclude the financial sector, growth is 19.3%, actually up slightly
from the 19.1% pace of the first quarter. At the beginning of
earnings season, growth of 9.7% was expected, 12.2%
ex-financials.
The outlook for the third quarter now looks very similar to the
outlook for the second quarter three months ago, with net income
growth of 11.4% expected for both the total and excluding the
financials. We will need another season where positive earnings
surprises far outpace disappointments if we are going to match the
second quarter growth rate. On the top line, growth is also
expected to slow sharply, to 5.59% in total from 11.05% in the
second quarter, and excluding the financials to 9.18% from
13.16%.
On balance I remain bullish. My year-end target remains at 1325
for the S&P 500. Getting there is going to be a bumpy ride.
Strong earnings should trump a dicey international situation and
the drama in DC. Valuations on stocks look very compelling, with
the S&P trading from just 12.6x 2011, and 11.1x 2012
earnings.
Put in terms of earnings yields, we are looking at 7.92% and
9.03%, while T-notes are only at 2.05%. The old "Fed Model"
suggested that the forward earnings yield (call it 8.45%) should be
in line with the 10-year note. Instead we have the dividend yield
on the S&P 500 higher than the 10-year.
Since the early 1950's that has happened only twice, in early
November of 2008 and in March of 2009. The second incident was
followed by a doubling of the S&P 500. From a long-term
perspective, stocks look extremely undervalued to me.
Long-term investors should start to take advantage of the
current valuations. However, I would not be shooting for the stars.
Look for those companies with solid dividends (say, over 2.5%), low
payout ratios, solid balance sheets and a history of rising
dividends, which are still seeing analysts raise their estimates
for 2012, or are at least not cutting them aggressively.
Currently, firms like Abbott
Labs (NYSE: ABT), Aflac (NYSE: AFL), Genuine
Parts (NYSE: GPC) and Johnson & Johnson (NYSE: JNJ)
would fit that description. I don't know if you will be happy doing
so next week or even next month, but I am pretty sure that you will
be quite satisfied five years from now if you do so.
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Contact: Dirk Van Dijk, CFA
Company: Zacks.com
Phone: 312-265-9211
Email: pr@zacks.com
Visit: www.zacks.com
SOURCE Zacks Investment Research, Inc.