Why the S&P Will Rise 10-15% - Voice of the People
March 30 2011 - 5:30AM
Zacks
Zacks highlights commentary from People and Picks Member
«JohntheWizard».
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The Earnings Season and why the S&P500 will rise
10%-15% by the end of this year
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.
Sales
EPS
Q4-EPS
Shares Outst
Current
S&P500
2%
24%
29%
3.8%
Historical S&P500
11%
31%
32%
3.6%
Sheraz
Mian
--
45%
31%
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
(MBT),
a buy rating on Allegheny Technologies (ATI)
and
a buy rating on Rockwell-Collins (COL).
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