Erosion of 2015 Expectations

Eddy Elfenbein of Crossing Wall Street

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 ( 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)

Wall Street Walking: 2014 Challenge

And that walk is anything but random.

It’s the kind of walk you take after rolling out of bed, rejuvenated while practicing prudent and effective sleep-at-night investing. This morning Eddy Elfenbein rolled out for the SEVENTH consecutive New Year’s Day after watching his 20 Buy List stocks outperform the S&P 500 over the trailing year. Seven years in a row. How many funds have outperformed the S&P 500 every single year over that time frame?

Nada. Zilch. Eddy is officially an outlier.

Here’s the Final Scoreboard for 2013:

Eddy’s Crossing Wall Street “Buy List for 2013”: checks in with an overall performance for 2013 of 38.4%. We’ll be digging deeper into the landscape over the next few days, but suffice to say … beating the S&P’s 31.5% for 2013 wasn’t a walk in the park.

You can find Eddy’s commentary on the 2013 achievers here.

Our entries fared well also … the Expecting Alpha 20 crossed the finish line at 35.3% and our Walking Main Street collection came close at 27.6%. Keep in mind that the universe for Walking Main Street is our MANIFEST 40 — choosing the (20) best positioned stocks for the year. They’re higher quality and widely-followed by our community of long-term investors … and a little susceptible to the flaky stock madness where the lower quality stocks outperformed the bluest of the blue chips in 2013. Eddy’s 20 and our Expecting Alpha 20 are at least sniffing around in a bigger pool of stocks … accessing some of those expanding and promising opportunities.

Out With The Old, In With The 2014 Selections

Eddy’s 2014 Buy List, as always — is a low turnover (no changes permitted during the calendar year) — collection of 20 stocks. They’re predominantly core stocks with a few special situations. Our tracking dashboard for Eddy’s 2014 Buy List is available here:

Crossing Wall Street: 2014 Buy List

We sleep pretty well too. We’ll add our (20) selections from the MANIFEST 40 and our Expecting Alpha 20 for 2014 soon.