23 Sep 23rd September 2024
Weekly Index Movement
| S&P500 | +1.4% |
| Nasdaq | +1.4% |
| Aussie All Ords | +1.4% |
You would think I would have learnt by now that the market is always right and I should just listen to it.
I was quite convinced the Fed would only drop by 25bps but the market had 70% odds on a 50bps drops. No way they do 50 I say. They only do that just before a recession.
The Fed dropped by 50bps and Powell said the economy is “basically ok”.
Whilst stocks initially fell on the news, the next day they added +1.7% and finished the week at new all-time highs.
To me a 50 drop is a statement the Fed is worried the economy is slowing too fast. I thought this would worry stock traders. But it did the opposite which shows the market is not worried about a slowing economy at all.
Maybe I will learn a lesson and just listen to the market next time. All worked out ok though. I thought stocks would rise. I just didn’t think they would rise this far.
Which begs the question………
How high can stocks get to?
In the long term the answer is a lot higher than this. But you are more interested in the short-term.
Let’s do some number crunching……
The S&P500 index is at 5702. What would it take to get to 6,000?
6,000 is just a 5.2% gain from here. Hardly a stretch during a period of rising earnings and lower interest rates.
The average earnings for the last 4 quarters is $231/share.
Over the next 4 quarters, Wall Street analysts earnings estimates bubble up to $258/share.
At their peak in 2020, the S&P traded at a PE of 23.2.
So, 258 x 23.2 = and index at 5,986 which easily rounds to 6,000
Therefore, 6,000 is an easily achievable target and could also easily happen before the end of the year.
What about 7,000? Can we get there?
The maths here is a little different.
Start by assuming S&P earnings can grow by 10% per year over the next 3 years.
This would take them to $307/share from the previously noted $231
Apply the same 23.2 PE multiple and you get an S&P at 7,122.
Seeing as stock prices look 6-12 months forward, it is reasonable to assume a time frame of around 2 years to get to 7,000.
As long as a recession remains a remote possibility in the next 2 years, an S&P at 7,000 is also a reasonable target and certainly not unachievable.
Which Sectors to Buy
I am confident stock prices will continue higher for the foreseeable future. But which sectors should we concentrate on?
The FactSet chart below shows analyst’s current sector-level 2025 earnings growth expectations.
Analysts are always too optimistic so don’t get too hung up on the numbers. But it does give us a roadmap to which sectors to concentrate on. It is the cyclical sectors that stand out
Energy and Materials in particular lead the pack, after losing ground in 2024. If the analysts are right, it means 2025 shows continued worldwide economic expansion. Industrials are also expected to show a pronounced acceleration.
I always maintain an exposure to energy and materials, mainly as a hedge against inflation, but if you don’t have any, then now would be a good time to add them in. The Oil sector in particular is cheap right now with oil hovering around $70 a barrel. You never buy these sectors when prices are rising. Only buy them when no-one else wants to. Like now.
Here are a couple of ideas for you.
Occidental Petroleum (OXY) – Warren Buffet thought it was good value and bought a large position at $59. It is now $51. You get outperform Warren here.
Whitehaven Coal (WHC.AX) – I was not a big fan of Whitehaven as they took on massive debt to buy the assets from BHP. However, they have recently sold another asset for way more than it is worth which means dividends will be reinstated a lot sooner than I expected and make this beaten down price a buy again.
Now on to something not to buy.
Commonwealth Bank (CBA)
Long term readers will know I cannot understand the CBA share price.
$143???
PE of 25?
The most expensive bank in the world??
I just don’t get why anyone would buy it. A 5% yield even with franking credits added in?
Why take equity market risk for 5% when you can get the same with no risk from a term deposit?
A PE of 25 is the same as Google. Pray tell me, which company do you think has more growth prospects? Google or Commonwealth Bank?
The latest financials displayed falling profits and lower margins.
Yet still people buy it.
If it dropped by 50% I’d still think it was expensive.
Confuses me more than Trump’s answers to questions from the media.
Undervalued Stock to Buy
Aptiv (APTV) sells components and technology used in the automotive sector, especially EVs. It gets nearly 30% of its revenue from China. It has a division that offers signal and power solutions, which you can think of as the brains and networking architecture in today’s smart cars. It also has an advanced safety and user experience division that develops software and computing platforms and it sells things like connectors, wiring assemblies, harnesses, and systems that handle electricity and data distribution.
On August 1 the company reported a 3% decline in quarterly revenue to $5.1 billion. Sales were hit by lower production volumes at several customers, including a European OEM with a large truck and SUV presence in North America, a global EV-only OEM and two multinational OEMs in China that are experiencing significantly lower production volumes. The company assumes overall global vehicle production will be down 3% in 2024, compared to its prior outlook of down 1%. It projects North America production will be down 1%, Europe down 5% and China flat on a year-over-year basis driven by lower production at multinational OEMs China.
The stock has been severely beaten down because of the current cooling demand for electric vehicles and also the slowing Chinese economy, its major market.
Which is why it came up on my radar. It is now exceedingly good value.
I’m not the only one that thinks this. The CEO just bought $1.9million worth of shares on market. This is unusual because CEOs tend to receive shares as part of their compensation package so rarely add their own funds on top. To buy more means he is convinced the market is mispricing his company.
It’s not all bad news. Aptiv was able to expand operating margins and boost EPS by 26% in the most recent quarter where operating income and EBITDA were at record levels. The company is growing.
And here’s the good bit. This stock is dirt cheap. It trades on a PE of just 5.
The market always thinks short-term. It isn’t interested in what happens in 12 months or 2 years. About 6 months time is as far forward as it looks.
I see things differently. I see a growing company in a growing industry that I can buy very cheaply. Electric vehicles are not going away and at some point demand will increase again. If you wait for that, the stock price will already be a lot higher.
Buy it now and come back in 12 months to see where it is.
It is so cheap there isn’t a lot more downside anyway so just leave it sitting in your portfolio until the market reprices electric vehicles again.
It was 2.5 times higher in price just 2 years ago when profits were 85% lower.
If it gets back to a PE of 25 which is where growth stocks live, that makes the share price 5 times higher than today with no growth in earnings. If it continues to grow profits then you can make that 10 times.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.