Crossing Wall Street Update (2/6/2015)

We have to love a newsletter update that starts out quoting all things Schlossian.

“When it comes to investing, my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night.” – Walter Schloss

A number of you have written me about the massive adjustments made to several of the energy stocks this week. No, you’re not imagining things. Expectations have been transformed — very notably for 2015 as year-end projections plummet. This week’s EXTENSIVE roll call of stocks that are “Materially Weaker” is not a hoax, either. We’re elated (and a little bit proud) about our energy sector message a few months ago when we suggested things seemed a little too good to be true and urged caution.

During the update, I was reminded of days when Ken Kavula and I would wince while crunching updates. Eddy captures that moment here:

The surging U.S. dollar and collapsing oil prices have dramatically changed the outlook for corporate earnings growth. Guidance from companies hasn’t been this poor since the depths of the Financial Crisis. At the end of the Q3, Wall Street had been expecting Q4 earnings of $32.24 (that’s the index-adjusted number). Now it looks like it will be about $27.64. That’s a big cut. At the end of Q3, the Street was expecting full-year earnings for 2015 of $136.07. That’s now down to $119.76. That’s a 12% cut in four months. Stock prices haven’t responded nearly as much. — CWS Market Review: February 6, 2015

Stock prices follow earnings. Rinse. Repeat.

Cycles are massively challenging. Memories are short. Trend trajectories are temptation embodied because collectively, we’re a bunch of optimists.

Cy Lynch has cautioned us many times in the past about cyclical hyperventilation and vulnerability from the likes of Value Line, Morningstar and NAIC/BetterInvesting. (Sam Stovall and his S&P minions seem to have a better handle on peak and trough chasing.) Step through a case study of Carbo Ceramics (CRR) and it comes clear. While soaring on wings of bubbles, it’s hard to remember the last trough and hard to believe in inevitable future troughs.

MANIFEST 40 Profitability Expectations

The condition that Eddy is talking about is pretty vivid when looking at the average net margin forecast for the MANIFEST 40. Keep in mind that this is a collection of relatively higher and more stable stocks … your favorites. But as we’ve shared from Barry Ritholtz (http://www.ritholtz.com) in the past, this time of year is historically packed with EXUBERANCE. Profit margin forecasts are elevated during the first quarter and generally erode as we tear calendar pages down.

It’s not easy to refer to the 2015 forecast as exuberant … as the collective forecast is starting the year close to recessionary levels last seen in 2008-2009.

Stock prices follow earnings.

Of course, the thrust of this is reduced expectations for stocks in 2015. As we’ve said many times lately, we don’t believe in 1-year crystal balls for individual stocks (or broader markets or baskets) but there can be an element of self-fulfilling prophecy to some of this. For the MANIFEST 40, the 1-year analyst consensus price targets and the average 2.1% current yield combine to produce a 1-year total return forecast of 10.9%. Using S&P 52-week target prices, the total return forecast is 9.7%. Nothing to “panic” about, particularly with our core stocks … but these forecasts are generally much more optimistic as the year starts … until the reliable Ritholtz earnings erosion removes a suitable amount of exuberance.

MANIFEST 40 Most Widely Followed Stocks (Tracking Dashboard)