An Adjustment Of Valuation Multiples Of Existing Forecasts

0
An Adjustment Of Valuation Multiples Of Existing Forecasts
sergeitokmakov / Pixabay

In his Daily Market Notes report to investors, while commenting on valuation multiples, Louis Navellier wrote:

Play Quizzes 4

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2021 hedge fund letters, conferences and more

Voss Value Sees Plenty Of Opportunities In Cheap Small Caps [Exclusive]

investFor the first quarter of 2022, the Voss Value Fund returned -5.5% net of fees and expenses compared to a -7.5% total return for the Russell 2000 and a -4.6% total return for the S&P 500. According to a copy of the firm’s first-quarter letter to investors, a copy of which ValueWalk has been able Read More

A Different Start

We're having a different start to the year than usual.  Traditionally investors tend to be more aggressive at the beginning of the year, not wanting to fall behind early if the market jumps quickly, and having the whole year to recover from mistakes. 

There are often bargains available from year-end tax loss selling, particularly in more volatile names. So far this year, we're seeing quite a different rotation, more of a flight to quality with more conservative names, those with lower valuation multiples of earnings or sales, outperforming in this first week of the year. 

The NASDAQ in particular, which is heavy with high valuation tech companies, is off to a particularly weak start, while the Dow, with very large companies with solid earnings and mostly down to Earth valuations, is doing much better.  The best explanation for divergence from historical beginning year starts are 1) the high level of uncertainty of the Fed winding down Quantitative Easing and planning to raise Fed Funds rates soon, and 2) whether the huge spike of Covid cases is the beginning of the end of the pandemic and even if it is will it create further supply disruptions on it's way out. 

An Adjustment Of Valuation Multiples

The good news is that we are not seeing any downward revisions of earnings estimates nor GDP forecasts. It's an adjustment of valuation multiples of existing forecasts, which is logical given the higher discount rate of future earnings that higher interest rates should bring.  

But the reality is that bond yields are and will still be offering negative real returns after deducting inflation and cash will still offer sub-one percent rates while stocks will still offer the best investment choices. 

Expect this opening pullback of growth stocks to be seen as yet another buying opportunity as soon as the next wave of earnings reports affirms the strength of earnings growth going forward. 

After Hours Peril

According to our friends at Bespoke SPY appreciated only 9.5% during market hours, and a whopping 16% after market hours.  The moral of the story is that if investors tried to trade the SPY ETF intraday, they most likely dug themselves a “transaction grave” as ETF spreads and after hour performance ate into any potential profits.  SPY’s performance during and after market hours in 2021 is a classic example of why it is important to “wait to trade” stocks, otherwise you could be destroyed by bid/ask spreads.

Further, this “spread risk” is why it is so important to wait for quarterly sales and earnings announcements because they generate significant activity after hours. 

I should add that the weakness in NASDAQ this year caused CNBC’s Jim Cramer on Tuesday to tell investors to sell growth and buy value stocks.  So far this year, energy and financial stocks have been the leaders.  The biggest problem I have with Jim Cramer’s value declaration is that it will soon be “every stock for itself” when the fourth quarter announcement season commences. 

Semiconductor stocks are expected to announce the strongest fourth-quarter results.  I should add that at the Consumer Electronics Show (CES) that will soon be underway, most of the latest and greatest consumer products, like televisions, virtual reality, video games, 5G and electric vehicles, will all be on display and, of course, now require more high-powered semiconductor chips.  If you have can cash to invest, I have BUY recommendations on:  KLA Corporation (NASDAQ:KLAC), Kulicke & Soffa Industries (NASDAQ:KLIC), NVIDIA Corporation (NASDAQ:NVDA) and United Microelectronics Corporation (NYSE:UMC).

Coffee Beans

A rare copy of Marvel Comics' The Incredible Hulk #1 smashed a world record when it was auctioned for $490,000. The sale represents the highest price ever paid for a copy of The Incredible Hulk #1, which is part of a growing trend in vintage comic book sales. In April 2021, a copy of Action Comics #1, which contains the first appearance of Superman, set the world record for a comic book sale when it was auctioned for $3.25 million. Source: UPI. See the full story here

Updated on

One of Wall Street's renowned growth investors, Louis Navellier is the editor of four investing newsletters: Blue Chip Growth, Emerging Growth (formerly known as MPT Review), Quantum Growth and Global Growth. His longest-running publication, Emerging Growth has a track record of beating the market nearly 3-to-1. Navellier is the author of a BusinessWeek best seller, "The Little Book That Makes You Rich", and the Chairman and Founder of Navellier & Associates, Inc.
Previous article Vaccination-To-Fly Rule Is Being Reconsidered
Next article FlexJobs Names 30 Hottest Companies Hiring for Work-From-Anywhere Jobs

No posts to display