Singular Research Director’s Letter: March performance 2020
Singular Research’s March 2020 Director’s Letter
In March, the Corona virus continued to spread throughout the world, making the U.S. the world leader in confirmed cases. The summer Olympics were postponed until 2021 and countries began closing their boarders with mandatory lockdowns in an attempt to curtail the spread of the Corona virus and its damage to human life and the economy. Domestically, the March Purchasing Managers Index (PMI®) fell into contraction territory, registering 49.1 percent, a decrease of 1.0 percentage points from the February reading of 50.1 percent. Similarly, the Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.1 percent in February to 112.1 (2016 = 100), following a 0.7 percent increase in January and a 0.3 percent decline in December. The Conference Board has flatly stated that the Leading Economic Index® will not show improvement in March. The unemployment rate rose to 4.4% (3.5% in February), as workers were laid off due to the negative effects of the Corona virus.
For the month of March, the Singular coverage list outperformed the Russell 2000 by 149 basis points and underperformed the S&P 500 by 768 basis points, respectively. Year-to-date, the Singular coverage list has outperformed the Russell 2000 by 337 basis points and underperformed the S&P 500 by 733 basis points, respectively. As the Corona virus continues to spread domestically and globally, small businesses are the most affected because of their lack of resources to weather such volatile times. Investors continue to look favorably to companies that may not be negatively affected as others, such as precious metals and healthcare.
FND was our top performer in March mainly because it is a short position. As fears of the Corona virus exacerbate, investors have and will continue to look to safe haven plays such as AMRK and EHTH, both of which should benefit in times of pandemonium. Interestingly, AMRK and EHTH were on our top performers list for the month of February.
CMTL was our worst performer for the month after delivering a slightly weaker second quarter than expected and lower guidance for the remainder of the year; however, in January, the company just acquired Gilat Satellite Networks, Ltd., and we believe this acquisition will position the company well for 2021 and beyond. RUBI was our second worst performer for the month even after reporting strong fourth quarter results in late February. Given the national quarantine and shut down of the U.S. economy, investors may believe that companies will not be spending as much on advertising, thus hurting RUBI’s top line. NMIH, a private mortgage insurance company, also had dismal results as investors worried over the company’s future success if many Americans may lose their jobs and their ability to stay current on their loans. GEOS also had a poor month as the price of oil collapsed, worrying investors about demand for GEOS’ products. Finally, BLX had a dismal month as the Latin American economy also has fallen on tough times due to the Corona virus; many investors fear of an increased delinquency rate on BLX’s loans.
For March, we initiated coverage on the LGL Group, Inc. (LGL). The LGL Group manufactures custom-designed highly engineered electronic components and instruments. The company’s products are primarily used in defense, aerospace, and Internet Communications Technology (ICT) industries.
We wish to thank our clients for their support and belief in our process. To learn more about Singular Research and register for a 14-day trial offer, please follow the link below.
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Robert Maltbie, CFA
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Top Deep Value Plays
Our Top Deep Value Plays for Investors with a 1 to 2 Year Time Horizon
At Singular Research, we focus on small and micro-cap stocks that are undercovered on Wall Street. These stocks have a niche business model and have yet to be widely discovered. As a result of the recent market decline from the Corona virus pandemic, several of the companies under our coverage now pose great buying opportunities for the investor with a longer-term time horizon. To start our discussion, we will first show a market comparison of where the market is today versus the market conditions in 2008/09. We will then describe five of our top, most undervalued coverage, why we believe so, and where we see these companies headed in 2021 and beyond.
A Comparison of the S&P 500, Now vs. 2008
By comparing current conditions of the S&P 500 to what they were in 2008, we want to show investors that the stock market is not valued much differently than what it was twelve years ago. There are, however, arguments for and against whether we are at a current market bottom. The point of this research article is to help one understand current company valuations and realize that there are attractive buying opportunities to the patient investor with a long-term time horizon.
First, before discussing our top undervalued ideas, we will help you understand the value metrics that lead us to believe these companies are truly undervalued. Value ratios such as debt-to-equity help us understand if the company’s balance sheet is strong and likely to withstand recessionary times by not having excess interest payments. A company’s book value (assets minus liabilities) per share helps us understand what the true value of the company is regardless of where the stock price is currently trading. Furthermore, once we have a good understanding of the true value of the company, we look at its relative valuation, or how the company is trading relative to its peers. In this article, we will look at the price-to-earnings, price-to-book, price-to-sales, and enterprise value-to-ebitda ratios.
Olympic Steel, Inc. (ZEUS)
$14.75 Price Target, Buy, Current Price: $8.83 (4/7/20)
Olympic Steel is a leading U.S. metals service center focused on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin, pipe, and tubular products.
For Olympic Steel, we want to emphasize the firm is largely undervalued from a book value per share perspective. The firm trades $18 below what it is currently valued for its equipment and machinery. Similarly, the industry average price-to-book ratio for iron and steel producers is 1.01. ZEUS’s price-to-book ratio is 0.71 below the industry average. If ZEUS were to trade at the industry average price-to-book ratio, the share price would be $27.18, over three times where it currently trades.
Banco Latinoamericano (BLX)
$24.00 Price Target, Buy, Current Price: $9.85 (4/7/20)
Banco Latinoamericano, a multinational bank, primarily engages in the financing of foreign trade in Latin America and the Caribbean. The company operates through two segments, Commercial and Treasury.
Bladex earned $86 million in 2019 and has a dividend yield of 15.6%. The company has paid a dividend of $0.385 per share since 2014. The company, too, is undervalued on a book value per share basis as BLX trades $15.63 below its book value per share. On a relative valuation basis, the average price-to-book ratio for regional banks is 0.82; therefore, if BLX were to trade with its peer average, BLX should be valued at $20.89. Furthermore, BLX’s P/E ratio is 2.85 below its peer group average. On a P/E basis, BLX should be trading at $16.17 if it were to trade in-line with its peers.
Comtech Telecommunications Corp. (CMTL)
$30.25 Price Target, Buy, Current Price: $14.76 (4/7/20)
Comtech Telecommunications Corp. designs, develops, produces, and markets products, systems, and services for communications solutions in the United States and internationally. The company operates through Commercial Solutions and Government Solutions segments. Comtech Telecommunications Corp. was founded in 1967 and is headquartered in Melville, New York.
Although not trading near its 52-week low, CMTL, like the aforementioned, is trading below its book value per share. The industry average for communications equipment companies’ P/E, P/B, and P/S ratios is 20.0, 1.83, and 2.64, respectively. On those three ratios, CMTL is trading vastly below their peers. If we were to equally average those three ratios and use CMTL’s trailing twelve month earnings and sales per share, we would come up with a fair value price target of $46.87. CMTL’s EV/EBITDA ratio of 5.90 is also well below its peer group average of 18.69.
L.B. Foster Co. (FSTR)
$18.75 Price Target, Buy, Current Price: $13.40 (4/7/20)
L.B. Foster Co. engages in the manufacture, fabrication, and distribution of products and services for the transportation and energy infrastructure. The company operates through the following segments: Rail Products and Services; Construction Products; and Tubular and Energy Services.
As investors feared the worst regarding the Corona virus and its negative effects on the U.S. economy, L.B. Foster has had a wild ride. The company is trading below its book value per share, although not as badly as some already mentioned. For a company that is still earning money, we believe FSTR has and will weather this storm nicely. At P/E, P/B, and P/S ratios well below the industry peer averages of 9.04, 1.06, and 0.59, we believe FSTR has more room to the upside. The firm’s EV/EBITDA ratio is also below its peer average of 7.93.
REX American Resources Corp. (REX)
$90.00 Price Target, Buy, Current Price: $47.54 (4/7/20)
REX American Resources Corporation, together with its subsidiaries, produces and sells ethanol. It operates through two segments, Ethanol and By-Products and Refined Coal. The company also offers dried distillers grains, modified distillers grains, and non-food grade corn oil.
Lastly, we believe REX is undervalued and has a much higher potential. As fears of the Corona virus ease and China starts to demand ethanol, we believe that REX’s valuation metrics will increase from current levels. Specifically, REX’s price-to-book and price-to-sales ratios are below their peer group average of 0.80 and 1.34. If REX begins to trade in-line with its peers, we believe its share price could almost double from where it currently trades.
One common theme in these stocks is that they are all trading below their book value per share, P/E, P/B, P/S, and EV/EBITDA ratios. We believe, with time, that these stocks will not only realize their true valuation but exceed their potential. If one has a long-term time horizon, any one of these stocks would be a good buy and hold candidate.
Thank you for reading our article and if you are interested in learning more about us and a subscription offer to our services, please go to www.SingularResearch.com. For a complimentary research report on any of these companies mentioned, please e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. or call 818-222-6234.
Sports Gambling Outlook
THE LONG TIME OUT IN SPORTS GAMING:
Winners & Losers
(Visitors are turned away from the entrance to the MGM Grand in Las Vegas, which was closed by Gov. Steve Sisolak’s orders on March 17.)
The coronavirus pandemic has thrown the country into a personal and financial abyss like none other witnessed by generations of Americans, from the bombing of Pearl Harbor to the terrorist attacks on New York City and Washington, D.C., from cliff-diving days on Wall Street to periodic years of recession.
COVID-19 has virtually shut down businesses across the globe. It’s an unparalleled situation and we must help each other as much as possible to prevail over these unforeseen challenges.
How the United States and other countries rebound from this crisis is as good of a guess as the final death tally resulting from the virus.
Few industries have been hit harder than gaming, which took a two-fisted slam from closures of casinos and suspended sports seasons and cancelled sporting events.
Despair begets hope, and with it comes opportunity. In states that have seen tax revenue plummet as millions of Americans self-quarantine at home, spending only on necessities, legislators may be open to fast-track approval of legalized sports gambling.
Howard Jay Klein, gaming analyst and publisher of The House Edge casino investment site, sees a burst of sports betting legalization across the United States in the aftermath of the virus.
“It will be driven by officials desperate to replenish the disastrous depletion of state coffers by the virus pandemic,” Klein said on Seeking Alpha. “It will benefit from the starvation diet sports bettors are now subsisting on until play resumes. Once the spigots are open, we see sports betting moving to 24 states from its current 14 within the next year and a half.”
Interest in legalized sports betting began ramping up following the U.S. Supreme Court’s 2018 landmark decision in Christie v. NCAA, which struck down the Professional and Amateur Sports Protection Act.
Michigan and Illinois launched regulated sports betting in early March, then had to suspend operations due to the virus, losing out on the NCAA tournament, the Masters and NBA playoffs.
Klein believes Caesars Entertainment (CZR) and Eldorado Resorts (ERI), which had agreed to a merger prior to the virus outbreak, are poised to benefit from legalized sports betting. They had good positioning with sports betting partners before the virus hit, and the new company will become a national player in the space, he said.
However, the $17.3 billion merger could be jeopardized by the coronavirus fallout. Caesars stock has dropped 52 percent from a year ago to $6.46 as of April 2, while Eldorado is down 82 percent to $10.67 over the same period.
Caesars furloughed 90 percent of its domestic workers in the wake of Nevada Gov. Steve Sisolak shutting down the Strip on March 17. For the first time in Nevada history, casinos went dark.
U.S. unemployment claims skyrocketed to 10 million in March, and many people and small businesses are relying on the government’s $2.2 trillion coronavirus relief package to get through the coming months.
With all casinos and hotels in Las Vegas and many other regions on lockdown at least through April 30, industry stocks have been slammed, down 50 percent to 80 percent. Many of the players are resorts or hotels that are highly leveraged, although many have slashed variable costs.
Following conversations with casino industry executives, we estimate that total operating expenses are down to 25 percent to 30 percent of pre-corona levels.
The operators with the highest leverage have suffered the most and many may be part of the list of beneficiaries of the $21 billion relief package requested by the industry. Meanwhile, they are on the hook for massive debt payments.
While sports gamblers desperate for action occupy themselves with nontraditional activity – betting on Turkish soccer, virtual horse racing, table tennis, esports and even weather conditions – the estimated $150 billion global market opportunity awaits the “green light” and could be a major rebound play for investors to benefit from pent-up demand.
South Point hotel and casino owner Michael Gaughan isn’t so sure about the impetus of the economic downturn on legalized sports betting.
“Only God knows what other states will do,” he said. “I don’t think this will speed sports gaming up.”
South Point was handicapping sports for six Indian casinos for a fee, and the sports book has implemented betting from mobile devices and in-game wagering, Gaughan noted.
The longtime Las Vegas casino owner is not bullish on the gaming industry, which has seen stocks drop across the board.
“But there are some gaming stocks that are undervalued at this moment that might be worth buying,” he added. “Sands? Boyd? Nobody really knows where we are going.”
Next report: Early risers: top picks for 2020-21
Sports Gaming Alpha Portfolio (12/31/2019 - 4/6/2020)
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Singular Research Director’s Letter: February performance 2020
Singular Research’s February 2020 Director’s Letter
In February, the Corona virus spread throughout the world and dramatically affected stock markets both domestically and worldwide as fear of the unknown rattled investors. Iran, Italy, and China became global focal points of the Corona virus; the U.S. reported its first Corona virus related death on February 28 in Seattle, Washington. Domestically, the February Purchasing Managers Index (PMI®) registered 50.1 percent, a decrease of 0.8 percentage points from the February reading of 50.9 percent. Although the PMI® is technically in expansion territory, the data is lagging and there is strong reason to believe the statistic is currently below 50.0. Similarly, the Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.1 percent in February to 112.1 (2016 = 100), following a 0.7 percent increase in January and a 0.3 percent decline in December. The Conference Board has flatly stated that the Leading Economic Index® will not show improvement in March. The unemployment rate remained unchanged at 3.5% (3.6% in January), one of the lowest rates since December 1969.
For the month of February, the Singular coverage list outperformed the S&P 500 and Russell 2000 by 198 and 210 basis points, respectively. Year-to-date, the Singular coverage list has underperformed the S&P 500 and outperformed the Russell 2000 by 38 and 257 basis points, respectively. As the Corona virus continues to spread globally, investors are looking favorably to companies that may not be negatively affected as others, such as technology, precious metals, and healthcare.
RUBI was our top performer in February after the company released better than expected quarter results and favorable news of their pending merger with Telaria which would make the combined companies the largest independent sell-side advertising platform. As fears of the Corona virus exacerbate, investors have and will continue to look to safe haven plays such as AMRK, EHTH, and HBIO, all of which should benefit in times of pandemonium.
Contrary to the positive results of AMRK, SA had a poor month as SA represents a future possibility of gold mined, not an actual store of value. NMIH, a private mortgage insurance company, also had dismal results as investors worried over the company’s future success if many Americans may lose their jobs. HSC reported fourth quarter results that were not impressive as the company is undergoing a tumultuous change to Clean Earth and away from its Industrial segment. BYND, although reporting a strong quarter, had lighter than expected guidance and is also facing many headwinds from the Corona virus’ detraction of consumer demand of the plant-based burger in both restaurants and grocery stores. LUNA also reported a strong quarter with strong 2020 guidance; however, management did not consider any negative affects of the Corona virus on their 2020 guidance.
For February, there were no new initiations as we have been sheltering in place. We wish to thank our clients for their support and belief in our process. To learn more about Singular Research and register for a 14-day trial offer, please follow the link below.
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Robert Maltbie, CFA
Singular Research, President
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Comparison to 2008
A Comparison of the S&P 500 Currently vs. 2008/09
Many wonder how much further the market can fall. Below, we compare the S&P 500 on key metrics in today’s market versus what they were in 2008. There are many arguments for and against being at or near a market bottom. We will briefly discuss both sides based on this data so that you may have an informed opinion as to where the markets may be headed.
At or Near a Bottom: The ValueLine estimated P/E of equal weighted stocks is very close to 2008 levels. Since the ValueLine index is equally weighted, we are led to believe mainly large cap stocks have more room to the downside as the S&P’s P/E ratio over the last twelve months is higher than what it was in 2008. Furthermore, 10-year Treasury yields are currently well below 2008 levels, leading one to believe that bonds are overbought in today’s market.
More Room to the Downside: Although not mentioned below, the unemployment rate as of March 2009 was 8.5%. Currently, unemployment is expected to soar as high as 30+%. The majority of businesses in shopping centers and retail outlets are closed, something we did not see in 2008/09. Furthermore, from a lack of revenue due to the quarantine situation, businesses will be more likely to increase layoffs of workers who are stuck at home. An argument can be made that what we are heading into is a situation that could possibly be worse than what U.S. citizens faced during the Great Recession. From a valuation standpoint, there is much more room to the downside as the S&P 500’s P/BV, P/S, and P/E ratios are all still above what they were in 2008.
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Major Market Indicators (MMI) Report March 2020
Embracing the Corona Bear
The mighty 12-year bull run has come to an end from recessionary fears due to the global Corona virus epidemic. We face a market that is seemingly bottomless as there is increasing uncertainty to the economic damage the Corona virus will ultimately have on the world before a vaccine is created.
Exhibit 1: MMI Market Indicators Assessment
The good news is the fed has sprung into action, fighting with both fiscal and monetary stimulus. The fed’s $2 trillion booster shot with a velocity factor of 1.5 will add roughly $3 trillion to fill the gap from the Q2 drop. With attractive valuations for the long-term, combined with off the charts negativity in our sentiment readings, the aforementioned policy moves should get this roller coaster back on track to recovery.
Sentiment: Bullish
Mind numbing volatility has blown out the VIX and VXN to 20-year record highs, exceeding 2008 levels. The bull-to-bear ratio has turned bullish at 0.60 bulls to 1 bear, as the Corona bear has ended the reign of the bulls. The put ratio has skyrocketed to 1.5 to 1. The Arms index also shows an extremely oversold market.
Technical Indicators: Bearish
With major equity indices cascading 20 to 35% in the last several weeks, there is virtually nothing positive to hang a hat on here. I will list the data only because it is so stunningly horrible. Last week, new highs were 53 and new lows were 1,908; weekly advance/decline on the NYSE was 521 to 1163; weekly advance/decline on the NASDAQ was 148 to 2544. In March, the S&P 500, the Dow Jones, the Russell 2000, and the Russell Micro-cap indices were 21.0%, 26.5%, 35.6%, and 37.6% below their 200-day moving averages, respectively.
Exhibit 2: IWC Russell Microcap ETF 1-Year Performance
Liquidity Indicators: Bearish
To note at press time, we are concerned about restrictions on share buybacks imposed by the federal government as a condition to receive bailout money. These restrictions would mainly impact the hospitality and transportation industries.
Exhibit 3: Delta Airlines (DAL) 1-Year Performance
Margin levels on the NYSE of 33% remain uncomfortably high relative to credit balances. During the March downfall, over $20 billion was taken out of domestic equity funds and ETFs. Meanwhile, over $3.7 trillion dollars sits in money market funds, representing over 14% of the total equity market cap. This money on the sidelines will provide ample fuel to launch the next bull market.
EPS Momentum: Bearish
In the interest of time, it is safe to say that EPS estimates will be receiving a negative readjustment due to the Corona virus epidemic. Although street analysts have yet to lower their 2020 estimates, we anticipate a 10% negative EPS adjustment down to $150 for the S&P 500.
Valuation: Bullish
Valuations are decisively positive on all three of our measures. Our absolute value indicator is now positive for the first time in over five years with the market trading at a mere 7% premium to replacement cost. Total market cap to GDP is now much more reasonable at 107%, which registers bullish. Finally, our relative value indicator shows an earnings yield at a 270 basis point premium to the BBB corporate bond yield.
Monetary Indicators: Bullish
We applaud the fed for its decisive move to flood the market with liquidity and slash interest rates. Our excess liquidity indicator is a positive 177 basis points above GDP. Fed interest rate cuts have repositioned the yield curve to a very positive slope with the one-year bill 100 basis points below the 10-year bond. As a further indicator of extreme fear, the values in our high yield fund indicator are now bullish at a 500 basis point premium to 10-year treasury bonds.
At present, we believe the Fed’s aggressive actions will reinvigorate the economy to post positive growth in Q3 and Q4, thus saving the presidency for Trump.
A Note on the Corona virus:
The end to the Corona virus is the great unknown factor here; however, we believe that, in the shuffling madness, investors are overlooking some important comparables and recent favorable trends. In fact, over the last 100 years, we have had three other pandemic markets. In the Spanish flu of 1918, the Dow Jones was off over 22% and deaths were estimated at 25 to 50 million worldwide. In 1968, the Hong Kong flu slammed the market with an estimated 1 to 4 million deaths while the S&P was up 10.8% for the year. In 2009, we were hit with the swine flu (H1N1) which resulted in an estimated 150 to 570,000 deaths and the S&P 500 was up 26% for the year. The 2009 comparable may not be as strong as the other comparisons as that was the year following Great Recession. No one knows what will happen but based on current daily growth rates of 11% per day, we estimate over 450,000 in mortality due to the Corona virus.
A Further Note on the Presidential Election this Year
In modern times, only one incumbent or incumbent's party has been reelected in a recession year. We believe if Biden were to win presidency, the market multiple would diminish by over 10% due to uncertainties relating to forward tax policies and regulations.
Keep washing those hands and happy investing. We see the S&P fair value of 3,375, +40% at press time.
Robert Maltbie, CFA
President, Singular Research
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Undervalued Microcaps (HNNA, BLX, AMRK)
Undervalued & Undercovered Micro-Caps Provide Compelling Opportunity
At Singular Research, we focus on small and micro-cap stocks that are undercovered on Wall Street. These stocks have a niche business model and have yet to be widely discovered. Many of the global threats in the stock market today do not affect these stocks. Currently, we cover three companies that are both, undercovered and undervalued, providing a great value investment with the right catalyst. Please see below for our review of Hennessy Advisors (HNNA), Banco Latinoamericano (BLX), and A-Mark Precious Metals (AMRK).
Hennessy Advisors, Inc. (HNNA)
$13.25 Price Target, Buy-Long Term, Current Price: $11.04 (2/20/20)
Hennessy Advisors, Inc is an investment management company. The Company's business activity is managing, servicing and marketing open-end mutual funds branded as the Hennessy Funds. The Company provides investment advisory services and shareholder services to the Hennessy Funds. Its investment advisory services include managing the composition of each fund's portfolio, conducting investment research, and monitoring compliance with each fund's investment restrictions and applicable laws.
Summary
- The company has a 5% dividend yield with ample free cash flow and net income to further support and increase dividends as necessary.
- Company is undervalued on P/E, P/B, and P/S valuation metrics as the financial service sector is 24.0, 2.8, and 4.9, for those categories, respectively.
- Catalyst: Stock market continues expansion, M&A activity increases, and global economies recover.
Banco LatinoAmericano (BLX)
$24.00 Price Target, Buy-Long Term, Current Price: $20.03 (2/20/20)
Banco Latinoamericano, a multinational bank, primarily engages in the financing of foreign trade in Latin America and the Caribbean. The company operates through two segments, Commercial and Treasury.
Summary
- The company has a near 8% dividend yield with strong free cash flow. BLX has increased its dividend an average 5.8% per year over the last ten years.
- Company is undervalued on P/E, P/B, and P/S valuation metrics as the regional banks sector is 9.4, 1.2, and 4.8, for those categories, respectively.
- Catalyst: Stock market continues expansion, trade ware disputes ease, and Latin American economies/trade recover.
A-Mark Precious Metals, Inc. (AMRK)
$9.75 Price Target, Buy Long-Term, Current Price: $8.98 (2/20/20)
A-Mark Precious Metals (AMRK) is a full-service precious metals trading company offering a wide array of products and services. Products include gold, silver, platinum, and palladium for storage and delivery in the form of coins, bars, wafers, and grain. Services include financing, leasing, consignment, hedging, and a variety of customized financial programs.
Summary
- The company has a 13% discount to Book Value per Share.
- Management is transforming the company into one with more stable revenues and earnings. The last two quarters have both surprised to the upside as their plan appears to be working.
- Company is a play on turmoil in domestic and global economies and whether the Corona virus can successfully be contained.
- Catalyst: Global economies slow and the Corona virus’ toll on China is worse than predicted, thus increasing volatility in the stock market.
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For a complimentary research report on any of these companies mentioned, please e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. or call 818-222-6234. Thank you.
Major Market Indicators (MMI) Report February 2020
Bulls vs. Bugs
(As of press time markets have strongly rebounded with the S&P 500 +3.0%)
While the Corona virus has provided and an injection of exogenous risk, the market continues to grind higher. Our MMI reading has moderated but is still a bullish +56.7. Liquidity and EPS momentum are still negative. Market sentiment, technical indicators, valuations, and monetary policy are all providing positive readings. We maintain our price target for the S&P 500 at 4,000.
Is fear of missing out rising? Witness Tesla as a precursor.
TSLA 3x in 3 months
Market Sentiment: Positive
The Corona virus sell off pushed the VIX and VXN above 20, a volatility spike that is positive. The bull/bear ratio also turned positive as the bears outweighed the bulls. The ARMS index reading of 1.83 on the NYSE confirmed the oversold nature of the market. Similarly, the put to call ratio spiked to 0.74.
Technical Indicators: Positive
The NASDAQ led the way with an advancing/declining volume indicator of +1.79. To further support a strong technical stance, the weekly advance/decline breadth indicator had a reading of +1.94. All major market indices remain solidly above their 200-day moving averages.
S&P 500 (2/2019-2/2020)
Liquidity Indicators: Negative
The John Q Public investment conundrum continues as individual investors liquidate equity and rotate into bond funds. Over the last four weeks, $18 billion has come out of equity funds and $36 billion has flowed into bond funds. Our NYSE margin indicator is negative at 25% equity. Buybacks and M&A activities are still on a hiatus. While the equity issuance marketplace is starting to grow with over $11 billion slated to hit the market in February.
Valuation Indicators: Positive
Only the Equity to GDP ratio is negative at 1.57 (vs. 2.1 in the year 2000). We believe individual investors have yet to fully participate in this phase of the bull market and are likely to dial up their equity exposure as their bond portfolios lag without further rate cuts to boost returns. Our 4,000 S&P 500 target is predicated on continued multiple expansion, providing 20% upside and EPS growth in 2020 making up the difference at nearly 9%. The earnings yield is still attractive at 5.2% versus 3.7% provided by BBB corporate bonds. Contrast this result with the 2000 dot-com bubble where the earnings yield was 3.4% versus 8% on investment grade corporate bonds.
Earnings Momentum Indicators: Negative
S&P 500 earnings are expected to be down 1.3% for the fourth quarter of 2019. This has been revised upward from a (1.6)% forecast one month ago. Earnings surprises, so far, have come in at 65%, with 45% of the reports in, slightly below the historical average. However, forward estimates for the upcoming quarter and 2020 year-end estimates have been revised slightly lower. The current consensus forecast for the S&P 500 2020 earnings is $178.24. This result would represent an earnings increase of slightly under 10%.
Monetary Policy: Positive
M2 growth last 12 months +5.9%
The fear of the Corona virus has caused the yield curve to flatten. Also, the high yield spread to treasuries is negative at (348) basis points. However, the term spread comes in at 95 basis points and our excess liquidity indicator is +167 basis points. Forward rates hint at a possible rate cut in the next 6 months due likely to the Corona virus fears. These readings still put the Fed solidly in the bulls’ camp.
Asset Class Performance Summary
IVE (value) vs IVW (growth)--1000 bps positive spread to growth
Large cap growth continues to outperform large cap value by 550 basis points this year. Mexico is up 4.09%, followed by Gold up 3.88%. The two laggards are energy (12.36)% and China (7.94)%. 55% of stocks are above their 200-day moving average while 42% are above their 50-day moving average. This economic indicator index was flat last month.
We wish you a great start to the new year and hope for a quick recovery in the stock market.
Robert Maltbie, CFA
President, Singular Research
818-222-6915
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