In an environment of rampaging stock prices - and valuations - it can be difficult to keep one's eyes on the prize. The old Wall Street axiom always applies: buy low and sell high. Fortunately, thanks to derivative instruments and the commission-free brokerages that today exist, it is possible to do that process in reverse. Just as you should be buying more of your long-term holds when prices fall for exogenous reasons (we saw an example of this with the COVID selloff in March 2020) you should be adding to short positions/and or buying puts when prices are rising for no reason. This is especially virtuous on the options side, because implied volatilities - as often aggregated by the VIX - tend to fall when prices are rising, so puts get cheaper, at the margin.
OK, how do you do this without, metaphorically, getting your face ripped off? Well, follow the fundamentals. We have entered earnings season, and this is the one chance every three months to actually calibrate an "E'' in the P/E. According to FactSet's John Butters, the S&P 500 is sporting a forward P/E of 22.4x, and hovering at a cycle-high on that metric. So, stocks aren't cheap, in fact they are expensive by any metric.
But which ones are going to fall? Is that even possible in these Fed-addled markets, and in the midst of a bond market rally the yield on the 10-year UST has fallen to 1.58% as of this writing, as bonds have regained some strength lost in the huge January-March selloff? Well, yes, but it's time for stock-picking, not market-timing.
So, as always, I look at earnings, and Butters' work at FactSet gives me some grist for my research mill. With S&P earnings now forecast to grow 24.5% in Q12021- a significant increase over the forecast as of January - earnings momentum has been a powerful force driving higher stock prices. But what companies don't have it? Well, Butters gives a list of companies that are subject to earnings revisions... in both directions. Watch out for the high-flying "momo" names with constantly increasing estimates if you are a bear, but look for the opposite.
Butters' work gives us a "Bottom 10" of companies that have seen the largest negative earnings revisions in Q2 EPS in the past four weeks. Remember that Q1 is actually over as we sit in the middle of April, so always focus on the NEXT PLAY and FactSet's numbers are very helpful there. So, who is likely to drop an earnings surprise on the market as spring turns to summer?
Well, there's a whole bunch of "yuck" in Butters' Bottom 10 - Carnival Cruise (CCL) , United Airlines (UAL) , Las Vegas Sands (LVS) - and I am not betting on a wholesale COVID recovery. I am just working on my own, which is progressing nicely, and thank you for all the kind words.
No, I am looking for a company in a secular downtrend fundamentally, but whose stock has risen with the market in this wild ride over the past 12 months. FactSet's Bottom 10 gives a great play here: General Electric (GE) . General Electric has seen a 19.1% drop in SECOND quarter earnings estimates, just as the company prepares to report (scheduled for May 5th) a first quarter that Wall Street expects to be around break-even.
Yet, GE shares have risen about 30% thus far in 2021. This is in contrast to the earnings estimates, which are weakening, especially in the intermediate term. On consensus EPS estimates of $0.24 and $0.52 for 2021 and 2022, GE is trading at 56x and 26x this year and next year's earnings. Is that cheap to you? It is not to me. GE is NOT a value play and has no earnings momentum. It's the worst of both worlds, so buy some puts on GE here and protect the gains that you have in your other winners.