As a long-term investor, my focus is on long-term results. Long-term return on capital, trends in sales and profit margins and balance sheet strength are all more important than each quarter’s earnings results. However, given the incredible shifts in the economic and financial markets over the past few months, even I would be remiss to not acknowledge how interesting earnings results have been and are likely to be for the second and third quarters of 2020. Which businesses have thrived during the COVID-19 pandemic and resulting shutdowns? Which companies have struggled due to balance sheet stress during a lower sales and earnings period? From an investment perspective, 2020 is almost like a laboratory experiment or an acid test of the corporate world — highlighting each company's strengths and weaknesses.
Another factor clouding the results of corporate profitability and each company’s success or failure is the concentration in the stock market indexes, which has been well documented over the past few months. The strong performance of the big five (Apple, Amazon, Microsoft, Facebook and Google) is frankly obscuring the results for the vast majority of stock market participants, skewing the perception of what is actually happening for most publicly traded companies. This is why a keen eye on bottom-up fundamentals is critically important today. Just because the broad stock market is up does not mean that all companies are doing well. For example, according to FactSet data, large-cap company profits declined roughly 34% during the second quarter. But the total aggregate earnings of small-cap companies actually fell into negative territory. Accordingly, while the S&P 500 Index’s performance is now positive year-to-date, small-cap stocks remain negative.
Case in point, during the stock market decline earlier this year, analyst estimates became increasingly negative as multitudes of companies declined to give any earnings guidance for the remainder of 2020. And who could blame these companies given the uncertainty in their businesses and the economy? But this lack of guidance and ensuing analyst inaccuracy is leading to an incredible disparity in earnings results and earnings bets across the markets. Per SunTrust, the percentage of companies beating analyst estimates (84%) is the highest in more than 15 years. Further, we have witnessed earnings revisions in an incredibly wide range, as reflected in this week’s chart. In these revisions segmented by market sector, we can see a clearer picture of the impact the recent crisis is having on specific sectors and industries.
In closing, while the broad stock market continues to surge to new all-time highs, the concentration of the major indexes and the influence of just a few companies may not be telling the whole story accurately. As an analyst, it’s my job to attempt to see through the noise and to identify individual opportunities while also seeking to avoid pitfalls and market risk. Observing recent results and uncovering strong business models and management teams that are doing a good job navigating this period of uncertainty can help add value over the coming years. Bottom-up fundamentals and independent research will be my guide along this journey in interpreting this truly unprecedented time in the market.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.