We are not fond of excuses. A fumble is a fumble, regardless of whether the ball is wet. The bigger question is how to recover and resume the offensive.
If we sound a bit harsh, we promise we’re only preparing ourselves for the inevitable onslaught of CEOs blaming first quarter earnings disappointments on “currency headwinds” and “record snowstorms.” Negativity has hit a five-year high, as 84 of the 101 companies in the S&P 500 Index offering guidance this quarter have lowered estimates. Historically the gloom crew has accounted for 69 percent of pre-announcements, according to data compiled by FactSet.
Recent economic data paints a similar picture. From the lowest rate of job creation in sixteen months, to weaker than expected Durable Goods purchases by consumes and similarly disappointing Capital Goods orders by corporations, the U.S. economy has stumbled upon a slow patch. For the first time since the third quarter of 2012, quarterly earnings are forecast to decline compared to the same year earlier.
Thankfully, global investors have global central banks on their side. Federal Reserve Bank of New York President William C. Dudley offered his own reassurances Monday morning at a speech in Newark NJ. Referring to an eventual normalization of rates above zero, he said “The path will be relatively shallow… as headwinds in the aftermath of the financial crisis are still in evidence.”
His calming remarks lifted equity futures nearly a percent. True, continued Fed “vigilance” argues for maintaining long positions, though we also argue investors should become more selective. Even with central banks at the ready, soft patches can get messy.
So today we set our sights on quality and consistency. First, we selected only the top 20% highest rated companies in the S&P large and mid-cap indices. Second, we screened for reported sales growth in 2014 of at least 15 percent, and estimated sales growth in 2015 of 20 percent (implying fundamental acceleration). Third, we considered just those companies whose consensus estimates have risen during the past four weeks. 18 companies of a possible 900 made the cut and collectively they are up 10.2 percent this year, well ahead of the broad marketʼs 2 percent gain.
Actavis plc (ACT); Alexander & Baldwin, Inc. (ALEX); Avago Technologies Limited (AVGO); Biogen Inc. (BIIB); Celgene Corporation (CELG); Chipotle Mexican Grill, Inc. (CMG); Cognizant Technology Solutions (CTSH); Gilead Sciences Inc. (GILD); Gulfport Energy Corp. (GPOR); The Hain Celestial Group, Inc. (HAIN); Red Hat, Inc. (RHAT); Regeneron Pharmaceuticals, Inc. (REGN); Signature Bank (SBNY); Skyworks Solutions Inc. (SWKS); SolarWinds , inc. (SWI); Solera Holdings Inc. (SLH); The Ultimate Software Group, Inc. (ULTI); United Natural Foods, Inc. (UNFI)