U.S. Stocks Cheapest Since 1990 on Analyst Estimates

U.S. Stocks Cheapest Since 1990 on Analyst Estimates (Update2)

 

By Lynn Thomasson, Whitney Kisling and Rita Nazareth

April 26 (Bloomberg) -- Even after the biggest rally sincethe 1930s, U.S. stocks remain the cheapest in two decades as theeconomy improves.

Profit estimates for Standard & Poor’s 500 Index companiesfrom Apple Inc. to Intel Corp. and CSX Corp. climbed 9.1 percenton average in April through the end of last week, twice the gainin their prices and the largest monthly increase since at least2006, data compiled by Bloomberg show. The benchmark gauge forAmerican equities is trading at 14.2 times forecasts for itscompanies’ earnings, lower than any time since 1990, except forthe months after Lehman Brothers Holdings Inc. collapsed.

Income is beating analysts’ estimates by 22 percent in thefirst quarter, making investors even more bullish that the rallywill continue after the index climbed 80 percent since March2009. While bears say the economy’s recovery is too weak forearnings to keep up the momentum, Fisher Investments andBlackRock Inc. are snapping up companies whose results are mosttied to economic expansion.

“The stock market is incredibly inexpensive,” said KevinRendino, who manages $11 billion in Plainsboro, New Jersey, forBlackRock, the world’s largest asset manager. “I don’t know howthe bears can argue against how well corporations are doing.”

S&P 500 companies may earn $85.96 a share in the next year,according to data from equity analysts compiled by Bloomberg.That compares with the index’s record combined profits of $89.93a share from the prior 12 months in September 2007, when the S&P500 was 19 percent higher than today.

Record Pace

The earnings upgrades come as income beats Wall Streetestimates at the fastest rate ever for the third time in fourquarters. More than 80 percent of the 173 companies in the S&P500 that reported results have topped estimates, compared with79.5 percent in the third quarter and 72.3 percent in the three-month period before that, Bloomberg data show.

The S&P 500 rose less than 0.1 percent to 1,217.53 at 10:05a.m. in New York. The gauge increased 2.1 percent last week asnew-home sales surged the most since 1963, recovering from theApril 16 rout when the Securities and Exchange Commission saidit was suing New York-based Goldman Sachs Group Inc. for fraud.The index is up 9.2 percent for 2010, the largest gain in theworld’s 15 biggest equity markets, Bloomberg data show.

While analysts are raising estimates, they’re not boostinginvestment ratings. Companies ranked “buy” make up 30 percentof all U.S. equities, the data show. That compares with 45percent in September 2007, a month before the S&P 500 reachedits record high of 1,565.15 and began a 17-month plunge thaterased $11 trillion from the value U.S. shares.

Easier to Adjust

“It’s been easier for analysts to adjust their earningsestimates than to aggressively put forth strong ‘buy’recommendations,” said Keith Wirtz, who oversees $18 billion aschief investment officer at Fifth Third Asset Management Inc. inCincinnati. “It may be a reflection of concern about theresilience of earnings in 2011 and beyond.”

Companies are losing the benefit of a weaker dollar afterthe currency appreciated 9.5 percent since November against abasket of six trading partners, according to the Dollar Indexfrom Atlanta-based IntercontinentalExchange Inc. A risingcurrency cuts demand for American exports and reduces overseasrevenue when converted back to dollars.

Abercrombie & Fitch Co., the New Albany, Ohio-based teenretailer, warned the rally may weaken its profitability,according to a March 10 conference call. Westport, Connecticut-based Terex Corp., the world’s third-biggest maker ofconstruction equipment, said in an April 21 earnings releasethat currency swings may reduce revenue. Terex got 75 percent of2009 sales outside the U.S., Bloomberg data show.

Alternate Valuation

David Rosenberg, chief economist of Gluskin Sheff &Associates Inc., says U.S. stocks are poised for losses becausethey’ve become too expensive. The S&P 500 is valued at 22.1times annual earnings from the past 10 years, according toinflation-adjusted data since 1871 tracked by Yale UniversityProfessor Robert Shiller.

Economic growth will slow and stocks retreat as governmentsaround the world reduce spending after supporting theireconomies through the worst recession since the 1930s, saidKomal Sri-Kumar, who helps manage more than $100 billion aschief global strategist at TCW Group Inc. The U.S. budgetshortfall may reach $1.6 trillion in the fiscal year endingSept. 30, according to figures from the Washington-basedTreasury Department.

“The correction is going to come,” Sri-Kumar said in aninterview with Bloomberg Television in New York on April 21.“You now have a debt bubble growing in the sovereign side, andwe’re slow to recognize how negative that could be.”

Deficit Spending

The European Union deficit tripled to 6.3 percent of grossdomestic product last year, from 2 percent in 2008, the EU’sLuxembourg-based statistics office said on April 22. Moody’sInvestors Service cut Greece’s credit rating the same day onconcern its debt load will be higher and more costly thanpreviously estimated, spurring a drop of 1.1 percent in theStoxx Europe 600 Index.

The S&P 500 posted a 0.2 percent gain that day afterinitially falling 1.3 percent, helped by an advance in PNCFinancial Services Group Inc. The fifth-largest U.S. bank bydeposits said profit rose 28 percent on higher net interestincome and less reserves for bad loans.

PNC, based in Pittsburgh, is one of 38 financial servicescompanies in the S&P 500 reporting an average first-quarterearnings increase of 175 percent after banks and brokeragesracked up $1.78 trillion of losses and writedowns linked to thecollapse of the U.S. subprime mortgage market.

Mobile Devices

Intel, the world’s biggest semiconductor maker, spurred theS&P 500’s biggest rally in a month after reporting earnings onApril 13 that topped Wall Street estimates and predicted datacenters and the shift to mobile devices will drive growth. Theresults prompted at least 20 of the 31 firms covering the SantaClara, California-based company to raise their 2010 forecasts.

Analysts lifted the average 2010 prediction by 10 percentto $1.88 a share, Bloomberg data show. Intel trades at 12.8times projected annual income, about half the average usingtrailing profits since 1991. The shares are up 18 percent in2010, the Dow Jones Industrial Average’s eighth-biggest gain.

Information-technology spending will climb 1.7 percent in2010, after dropping 3.1 percent last year, according to MorganStanley. Personal-computer shipments rose 27 percent lastquarter, according to Gartner Inc. The PC market bounced backfrom a year earlier, when the recession dragged down shipmentsalmost 7 percent -- the worst performance since 2001, accordingto market research firm IDC.

Concerns Are Past

“We’re in a time period where the concerns we had in 2007and 2008 have been taken care of or are past,” Kenneth Fisher,who oversees about $40 billion as chairman of Fisher Investmentsin Woodside, California, said in a April 20 Bloomberg Televisioninterview. “If you’re waiting for a market pullback orindividual stock pullbacks, you could be waiting a long time.”

CSX, the third-largest U.S. railroad, rallied the most intwo months on April 14 after saying it hauled more goods andcharged more for each carload. Analysts say the Jacksonville,Florida-based company will earn $3.48 a share in 2010, a 6.2percent increase since the firm released quarterly results.

Profit estimates for energy producers and industrialcompanies have climbed more than 10 percent in the past month,the most among the 10 largest groups in the S&P 500, datacompiled by Bloomberg show. Gross domestic product in the U.S.is forecast to increase 3 percent this year and 2.95 percent in2011 after contracting 2.4 percent last year, according to themedian estimates of 64 economists surveyed by Bloomberg.

Apple Earnings

Apple’s profit almost doubled last quarter as consumerssnapped up iPhones and Macintosh personal computers, theCupertino, California-based company said on April 20. Theresults sent its stock up 9.5 percent to an all-time high of$270.83 last week and boosted projections for annual income by7.7 percent to $13 a share.

Apple, the third-biggest company in the U.S., with a marketvalue of $246.4 billion, is 30 percent cheaper than the averageof the past five years with a multiple of 20.8 times estimated2010 profit, Bloomberg data show.

U.S. retail sales increased 1.6 percent in March, more thananticipated and the biggest gain in four months, according tofigures from the Commerce Department issued April 14 inWashington. Consumer spending and manufacturing helped theeconomy expand across most of the U.S. in March, according tothe Federal Reserve’s Beige Book of regional economic activityissued April 14.

Biggest Rally

The S&P 500 rallied 92 percent in the five years afterreaching a valuation in November 1990 of 14.1 times profit,about the multiple indicated by earnings forecasts for nextyear, according to Bloomberg data. The index last traded thatcheaply in June 2009, near the start of the biggest rally inseven decades and nine months after New York-based Lehman filedthe world’s biggest bankruptcy.

“The earnings story is very supportive of the market evenafter the rally over the last year,” said Liz Ann Sonders,chief investment strategist at Charles Schwab Corp., whichoversees $1.4 trillion in client assets from San Francisco.“The recovery is real, it’s V-shaped and it’s got legs.”

To contact the reporters on this story:Lynn Thomasson in New York at [e-mail];Whitney Kisling in New York at [e-mail];Rita Nazareth in New York at [e-mail].