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CHICAGO, March 30, 2011 /PRNewswire/ -- Zacks highlights commentary from People and Picks Trader "JohntheWizard".

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Why the S&P Will Rise 10-15%

March 30, 2011 - RELATED TICKERS: Mobile TeleSystems (NYSE: MBT), Allegheny Technologies (NYSE: ATI) and Rockwell Collins (NYSE: COL).

I will try to show that the S&P500 may grow 10%-15% during 2011, but that this growth appears to me to be an artifact. This artifact depends only on two actions: first, on the update of the S&P500 with relatively high margin stocks during the current fiscal year, and secondly, on the coordinated share buyback program. People who are not afraid of some algebra may read the following blog.  

As you may know, I am in favor of giving separate earnings figures of the non-financial and financial sectors of the S&P500 as explained in several earlier blogs. However, this time, I will show how my EPS for the total S&P500 compare with the ones given by Zacks' Sheraz Mian, this morning. I then follow my own analytical thinking of where the S&P500 will go by the end of this year.

Last Sunday's dbcm Dbase gives you all recent earnings, sales, and outstanding shares' data of the current S&P500. The similarly updated dbcmhist gives you the data for the same stocks a year ago. Last year's March 28-2010 dbcm gives you the true historical data of the 500 stocks that constituted the S&P500 a year ago. There were 12 different stocks in the S&P500 a year ago. All percentages show y-o-y growths.

Just by changing 12 stocks in the S&P500 over the past year, the historical Sales and Earnings Growths were more than significantly pushed up. The reason that Sheraz Mian is even finding a higher EPS growth, probably results from his way of calculating it. Zacks usually calculate medians and means of all EPS's of the S&P500. I just follow the standard accounting rules for consolidating Income Statements of the 500 companies. Whether Zacks use the current or the historical S&P500 for its calculations is not clear to me.

In my opinion, the most reliable way to look at index development is to consider the Net Margin and its y-o-y growth. Present Net Margin of the S&P500 is 8.31% coming from 6.47% of the historical S&P500 a year ago. Net Margins topped at 9.32% in January 2007, pushed up unbelievably high by the more than solid 17% Net Margins of the financial sector. Net Margins have been increasing at a rate of about 0.3% per quarter during the past three quarters, and can be pushed upwards to 9.5% during 2011, thereby just surpassing its peak of January 2007. That amounts to  a Net Margin growth of 14.5%. Now the Zacks consensus estimate for Sales growth of the S&P500 is only 2.1%, but by changing the composition by a dozen or more stocks, the Sales Growth can easily be "manipulated" upwards to 10% as we saw during the past year.

Hence, historical Net Earnings growth follows as (1.10)*(1.145)-1=26%. Such a strong rise in historical Net Earnings growth is usually accompanied by a -15% drop in P/E, hence the historical index may be "manipulated" to rise by some 10% by the end of this year by purely changing its composition by a dozen or so stocks. The benefits of a coordinated share buyback program of say, 3%-5%, by the enormous cash reserves rather than investing that reserve in human capital will additionally push up the historical Index by another 3%-5%.

The most recent picks by «JohntheWizard» are:

A buy rating on Mobile TeleSystems - ADR (NYSE: MBT),

a buy rating on Allegheny Technologies (NYSE: ATI) and

a buy rating on Rockwell-Collins (NYSE: COL).

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