It’s been a rough time of late -- questions are being raised about growth prospects, both for the global economy and the stock market. We’ve had more companies issue negative outlooks than we have had in some time, while the latest round of economic data has been weaker than expected. It boils down to people being once again worried about growth.
All of this has taken a toll on the major stock market indices, leaving the Dow Jones Industrial Average down more than 550 points from where it was just two weeks ago. Also down big are both the S&P 500 and the Nasdaq Composite Index. That drop has investors frustrated, worried and, in some cases, according to a new poll by CNNMoney, filled with “extreme fear.”
When I look at these earnings reports roll in and even economic forecasts like the one from the International Monetary Fund, the question I ponder is how aggressive full-year expectations had been ahead of 2014. Per data from FactSet, the Street's average full-year earnings target sits at $120.09 per share, up 9.9% from $109.30 per share in 2013. In 2012, the consensus was $103.80 per share.
Is that 9.9% growth forecast likely to hold? That's one of the questions the stock market and investors will grapple with this week. If expectations are revised down, it could mean that the index will have been trading around 15-15.5x those earnings estimates, as compared with the recent 14.6x earlier this week. For those wondering, the price/earnings (P/E) ratio has averaged 13.1x earnings during the past five years and 13.9x earnings during the past decade, according to FactSet.
There are a number of trite sayings on Wall Street that I am sure you have heard at one time or another. They include: “Buy when there is blood in the streets.” “There is always a bull market out there.” “Bulls make money, bears make money, but pigs get slaughtered.” Those sayings are often fun to repeat, but at times like these, they are not going to help you see through the market commotion and make a sound stock pick for the long term.
Now, you are probably asking yourself, “What are some of those strategies?”
One is to invest in pain points. During the last few weeks, I’ve shared much on that. For those that missed it, some examples include cybersecurity, alternatives to rising beef and pork prices and, of course, solutions to the current drought situation. Another strategy that is as potent as investing in pain point solutions is buying shares of what I call dividend dynamo companies.
Chris Versace is the editor of PowerTrend Brief — a FREE, weekly electronic newsletter. He also writes PowerTrend Profits, a paid monthly newsletter that helps individual investors profit through buying shares of companies poised to win big in the 8 PowerTrends, as well as writes the PowerTrader trading service that seeks to deliver short-term gains using stocks, ETFs and options. Chris has been ranked an All Star Analyst by Zacks Investment Research.