Conquer Fear and Focus on the Fundamentals
The media thrives on hysterics. Regardless of which media network or publication that you prefer, fear is often the driving force of news content. This shouldn’t come as a surprise to anyone who follows the stock market. Fear and greed have long been emotional fuel for market moves.
These are easy traps to fall into. They’re human nature, to a certain extent. With this in mind, investors must understand the importance of empirical data rather than emotional sentiment.
For months now, we’ve heard all sorts of negative news about the stock market. Some of it is based in fact. The two largest economies in the world, the U.S. and China, are slowing. This is largely due to the trade war between the two countries and there are fears that the fallout of this conflict will be a global recession.
It’s earnings season and myriad companies have recently cited the trade war as the reason for their growth shortfalls. Yet, while growth is slowing, it’s still far from negative.
Analysts expect to see the U.S. post gross domestic product (GDP) growth of approximately 2.5% in 2019. China just posted its lowest GDP growth figure for 2018. The total was its lowest result since 1990. Yet, Chinese growth still came it at 6.6%. We’d be happy with a figure half that size in America.
Furthermore, several of the other negative headwinds appear to be dying down. The market was worried about the Federal Reserve making a mistake and causing a recession. Well, as of today, it appears that the Fed has turned more dovish and rate hikes are on hold.
The government shutdown certainly isn’t bullish for the economy in the short-term, yet unemployment remains near record lows and recent job reports are still showing strong growth.
And potentially most importantly, the recent market wide sell-off, combined with strong earnings per share growth in 2018, has resulted in an attractively priced market. The S&P 500 is trading for 16x earnings, which isn’t expensive in a low interest rate environment.
In short, things aren’t as bad as they might seem. The market tanked in Q4 of last year, yet it has rebounded throughout January because I think investors realized that there was an overreaction.
These overreactions happen all of the time in the stock market. This is why instead of focusing on the headline news stories and speculation surrounding the macro environment, I think investors are better suited to focus on individual company fundamentals.
Bucking the Trend
In the last 24 hours, we’ve had three major earnings reports that seem to buck the negative news trend. Apple (NSDQ: AAPL), Boeing (NYSE: BA), and Alibaba (NYSE: BABA), all well known, large-cap stocks, posted surprisingly good results that sent the stocks soaring higher.
To me, Apple is one of the largest disconnects between valuation and sentiment in the market. The stock has fallen more than 30% from its 52-week highs, yet the stock posted tremendous growth last year. In 2018, Apple grew sales by 16% and earnings per share by 29%. Sure, in 2019 this growth is expected to slow, yet to me, the current P/E ratio of 13x is simply too low.
Investors are so focused on weaker iPhone demand that they’re missing strong growth in the services and wearable segments. Analysts blame Apple CEO, Tim Cook, for a lack of innovation, yet the Apple Watch and the high-margin app and services revenues continue to grow nicely, reducing the company’s reliance on iPhone sales. Shares are up 5% on the Q1 results. Maybe the market is coming to its senses.
Boeing is a company often tied up in the China trade war. As an industrial name, it is also considered to be highly cyclical and therefore, risky to hold during a recessionary environment. These fears recently drove the stock down below $300/share in late December. Well, flash forward a month and Boeing shares are trading for nearly $390/share after a massive earnings beat and record revenue numbers during 2018.
Boeing has been posting strong growth for years now. The company has half a trillion (yes, trillion, with a “t”) dollars in backlogged sales spanning out years. Global passenger traffic on the airlines continues to be consistently higher than expectations and I don’t see this trend ending anytime soon. Once again, the stock market got too caught up in speculative sentiment, rather than focusing on the numbers.
Source: Boeing Q4 Conference Call Presentation
And lastly, speaking of the Chinese economy and the U.S./China trade war, probably the best known Chinese company, Alibaba, just reported a strong profit beat and 43% revenue growth. The stock is up 6% on this news.
The Chinese economy is slowing, yet Alibaba continues to post amazing growth. This is why investors should view the stock market as a market of individual stocks, rather than a broad basket of holdings. The best in breed companies tend to find a way to succeed throughout a variety of market environments and Alibaba is doing just this.
Source: Alibaba December Quarter Earnings Presentation
This is just one day’s worth of earnings news, yet as you can see, things aren’t as dire as some in the media might lead you to believe. As we continue to move into earnings season, I think it is very important to pay close attention to the results. Sentiment moves the market in the short-term, but fundamentals win out over the long-term. Fear and greed can be hard to overcome, yet knowledge is power and fundamental data can help you avoid irrational mistakes.
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