Growth Seeker Portfolio: Earnings Start to Give Clearer Picture

 | Jan 29, 2017 | 12:00 PM EST
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This commentary is an excerpt from the Growth Seeker Weekly Roundup. Click here to learn more about this dynamic portfolio and market information service.

The long-awaited and much prognosticated Dow 20,000 occurred last week, and yes, the party hats were broken out on the floor of the NYSE. As that grouping of 30 stocks moved higher, so, too, did the S&P 500 and Nasdaq Composite Index. With earnings somewhat of a mixed bag, it seems the market has re-embraced the Trump Trade during the first week of the new president's term.

While we like stocks moving higher, we have one eye on valuations and the other sizing up the growing gap between the stock market and near-term tone of the economy. Friday's disappointing 1.9% print for fourth-quarter 2016 GDP served as a solid reminder that despite all the pro-business rhetoric it will take time for that to have an impact on the economy. We are also excited and optimistic, but continue to think the benefits will likely start to be felt in the back half of 2017.

While the major market indices rose between 1%-2% last week, we had a number of positions in the Growth Seeker portfolio, including Amazon (AMZN) , CalAmp (CAMP) , Dycom Industries (DY)  and Universal Display  (OLED) , handily outperform the market. As we get ready to close the book on January in just a few days, six of the 11 Growth Seeker positions are outperforming the S&P 500 as well as the Russell 2000 on a year-to-date basis.

On the downside, our United Natural Foods (UNFI) and AMN Healthcare (AMN) positions moved lower last week. There was no news that drove UNFI lower, but with the stock back at levels last seen in early November and the organic/natural tailwind still blowing we continue to rate the shares a One.

With regard to AMN, we chalk up its move to the renewed uncertainty over how President Trump might repeal and replace the Affordable Care Act. One interesting comment regarding the Affordable Care Act came from Johnson & Johnson (JNJ:NYSE): "We did not see any significant impact uptick in business as a result of the implementation of the Affordable Care Act...So therefore, any change going in the opposite direction, we don't think will be negative." Perhaps this means expectations for pain on the repeal-and-replace process may not be as bad as the market is expecting. Rather than speculate, we'll wait to see details on the proposed plan when they are put forth.Following the decline from AMN this week, there is roughly 18% upside to our $43 price target, so we continue to rate the shares a One.

During the week, no Growth Seeker companies reported earnings, but that will change next week when Amazon, Under Armour (UAA) , and Fortinet  (FTNT) share their December-quarter results.

Taking a larger look, more than 500 companies are set to report results next week, including 103 S&P 500 companies (including five Dow 30 components). By next Friday, we will have heard from roughly 55% of those 500 companies, meaning the picture on 2017 earnings expectations should start to come into sharper focus.

One of the sectors that we'll be focusing on will be energy, not only because it was a huge drag on earnings of late, but also because the group is projected to deliver just under 30% revenue growth in 2017 vs. 2%-7% for the other S&P 500 industries. While this could be a major source of opportunity, it also means any significant shortfall relative to expectations is likely to result in a major revision to current EPS growth forecasts of 11.8% year over year in 2017 for the S&P 500 group of companies.

Turning to economic data, next week brings the usual combination of end-of-month numbers, such as the December personal income and spending report, and the start-of-the-month data, including PMI data from Markit Economics as well as the ISM Manufacturing and Services Indices, auto sales and, of course, a few different looks at job creation during January. Following the disappointing 4Q GDP number this morning, we'll be looking for indications of a pick-up in the economy over the last few weeks. Based on the most recent railcar loading and truck tonnage data, however, we have to say it looks more like the domestic economy has continued to bump along.

That's quite different than the view that we get by looking at the stock market, which, as we mentioned above, set new all-item highs last week. We certainly understand the stock market is a forward-looking beast, but we also know that from time to time expectations get ahead of themselves and can lead to a less-than-pleasant time when slapped by the sobering reality of economic or earnings numbers.

Adding to the potential market headwinds, Greece and its creditors failed to resolve their differences over finding a solution for the country's deadlocked bailout. As a reminder, the Greek government has been caught for months between the IMF's demands for more austerity and Germany's refusal to discuss major debt relief, while the country's debt stands at about 180% of its GDP. The question remains if a workable solution can be reached before Europe's coming election season.

Aside from those uncertainties, we have the brewing brouhaha between President Trump and Mexico, which has Trump considering "a 20% tax on imports from Mexico to pay for a southern border wall." That led to several Republicans expressing concerns over a potential trade war with one of the U.S.'s most significant trading partners -- and could drive up the debt in the process. We have our fingers crossed that we are seeing Trump the deal maker make his initial mark, but as with pending tax and health-care reform, we continue to wait for more specifics before jumping to any conclusions.

Amid the Washington drama, next week is likely to be the high point for earnings reports and offer our first real look at the economy in 2017. So, we'll continue to sharpen our investment mosaic to determine our next moves with the Trifecta portfolio. We've got sufficient cash to make some moves should the opportunity arise, but generally speaking, given the current valuation of the market, we're inclined to be largely patient near term.

We'll be sure to share our latest thoughts on portfolio positions and the overall market with Growth Seeker subscribers during the week ahead.

-- Lenore Hawkins is co-portfolio manager of Growth Seeker

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