Public-Private Disconnect

I love puzzles… crosswords, sudoku, solitaire. Theyʼre fun, challenging and sometimes you even find the solution. If only we could say the same of economics.

Today the U.S. Bureau of Economic Analysis released preliminary data indicating the economy grew 2.3 percent in the first quarter, well ahead of the sluggish 0.6 gain in the first quarter. This is clearly welcome news, yet completely opposite the negative aggregate 2Q sales reported thus far by 324 companies in the S&P 500.


Wells Fargo Chief Economist John Silvia explains the divergence as a split level economy. Whereas “Consumer spending led the second quarter… and residential investment also came in strong… structures and equipment spending remain a drag.” In other words, people are spending but businesses arenʼt.

Thereʼs a secondary explanation as well. Total consumer spending (ex-health care) accounts for 56 percent of U.S. GDP, but consumer sector stocks only make up 23 percent of the S&P 500 Index. So the robust buying cited by Dr. Silvia has a lesser weighting in overall corporate earnings data than in the governmentʼs GDP figures. Puzzle solved!

We see two messages here:

  • For CEOs, celebrate your sales growth and boldface the figures across the top of your earnings release. Your growth distinguishes you.
  • For investors, focus only on those companies demonstrating top line success, and since the market has run over three years without a 10 percent correction, avoid high P/E stocks.

Applying this logic to the S&P 500 Index, we identify ten companies growing sales at least 20 percent, and trading with a Price to Earnings ratio under 17x (the current market average). We would also note the group is up 17 percent YTD, well ahead of the broader index. Apple Inc. (AAPL), Avago Technologies Limited (AVGO), D.R. Horton Inc. (DHI), Gilead Sciences Inc. (GILD), Laboratory Corp. of America Holdings (LH), Mallinckrodt (MNK), Mylan N.V. (MYL), Signet Jewelers Limited (SIG), Skyworks Solutions Inc. (SWKS), Zimmer Biomet Holdings, Inc. (ZBH).