Companies, from PepsiCo (PEP) to Alcoa (AA), are telling us with their earnings and business actions that emerging market countries are slowing.
So are investors reacting appropriately? It doesn't look like it.
According to a recent note out of Wells Fargo, about 70.3% of S&P 500 stocks were down in September, following 88.2% in August. However, despite the broader market sluggishness, there were a few winners in the S&P 500 in September. Approximately 29.4% of the stocks in the S&P 500 recorded a positive return in September; from the May peak to the end of September, 21.4% of stocks were positive from a total return perspective.
By looking at these percentages, it's apparent investors have reacted to the realties that are facing many giant companies in the form of non-existent pricing power abroad and boards scared to do needed transformative deals/restructurings to boost long-term stock prices. But have they reacted enough to the new realties facing corporate America?
The answer to that question may be no. The chart below would suggest investor portfolios continue to be overweight risky consumer discretionary and tech names. Both of these sectors were the choice du jour earlier in the year.
Source: Wells Fargo
For consumer discretionary, a rebounding job market in the U.S. was set to light a fire to online and mall sales. And with that better job market, people would be taking vacations abroad and spending. While companies selling big-ticket home goods, such as Best Buy (BBY) and Home Depot (HD), have fared well this year, the truth is that those selling clothes, like Macy's (M), continue to do battle with margin pressures. So is Coach (COH), which is dealing with slowing sales in China most noticeably.
In other words, the U.S. consumer is not proving out the thesis that money managers pitched to clients on the sector, and investors remain at risk going into year-end as bottom-line results likely stay lackluster.
Now, let's take a gander at tech, always a favorite because in so many instances it's easy to "get" -- Fitbit (FIT) sells plastic health monitors, a simple business model. Judging by the above chart, investors also remain too concentrated in tech. Although they have likely taken some off the table (ditto consumer discretionary) they may not have taken enough.
Old school tech companies such as IBM (IBM) and Action Alerts PLUS holding Cisco Systems (CSCO) may be poised to disappoint investors this quarter and into 2016 as companies curtail capital investments on new hardware and software. If you don't have the employee hiring plans, due to slowing U.S. growth and a strong dollar weighing on international sales, there is no need to add equipment.
In my view, the next shoe to drop is more pronounced selling pressure in tech and consumer dictionary. It has to happen given the macro reads we are seeing at this stage.
One thing the market is not wrong about is the view held on consumer products giant Procter & Gamble (PG). The stock has been hammered this year to the tune of 19% given fumbling performances in most areas of its still vast product portfolio. Although the stock has rebounded about 5% in the past month, that's mostly due to a flight of investors to defensive names with dividends as opposed to a vote of confidence on the direction of future earnings. I think the stock has further room to fall over the next 12-months for the following reasons:
1. Competitors are simply taking market share. Clorox (CLX) is taking share in laundry detergents where P&G sells Tide. P&G's bread and butter razor business is under siege from upstarts selling cheap blades online. Church & Dwight (CHD) is doing quite well in many parts of its portfolio. The direction of P&G's share is becoming worrisome because it will likely have to ramp up trade promotions to win back consumers, which is not great to see considering the company's big investments in advertising and product development. Talk about heading down a road of no return.
2. The executive team has lost credibility. P&G has stayed rather upbeat on its earnings calls and during presentations. It's as if the company doesn't believe the numbers it's putting up, or at least outwardly doesn't want to acknowledge things have degraded. The company's new CEO will have a hard time winning over the investment community, which may make it difficult for investors to warm up to the notion of P&G as a beaten down turnaround play (note the stock is still richly valued given its defensive properties).
3. Investors may wind up being let down by the time it takes for P&G's new CEO to put his stamp on the business. If I have learned anything by studying new CEOs, it's that they were planning years in advance to assume the top role and have detailed plans on fixing things when they grab the brass ring. Once in office, their plans get picked apart by colleagues for months before actions are implemented, even as Wall Street cries out for quick changes. In the case of P&G, investors may be dismayed the new CEO does not move faster to dump lagging businesses and announce more restructuring plans -- these are the things the company needs -- and like, now -- to begin getting investors interested in the story.