Adding Fundamentals to the Storyboard

By Don Schreiber, Jr. – WBI Founder and CEO

It seems that investors are starting to pay attention to fundamentals. Fundamentals tend to tell the bigger picture when it comes to the investing storyboard. They are key when it comes to predicting future price movement, analyzing market trends, and determining where to invest. 

Over the last 10 years, the Federal Reserve has controlled the markets, and company earnings weren’t necessarily the driving force behind market moves. During the 2015-2016 recession, I believe the market completely ignored the fundamentals. Fast forward to present day, the Fed is supporting the markets with their recent decisions to cut back on rate hikes and evaluate the balance sheet. For the first time in about 10 years, it seems market participants are finally starting to pay careful attention to the fundamentals: earnings, revenue, and forecasts. This is a step in the right direction when it comes to evaluating which stocks to include in your portfolio. 

Profit margin is also a fundamental growth analytic which investors should be paying attention to. The percentage of profit investors are making for each dollar of revenue is starting to contract. I think there is a potential profit margin problem since the margin of profit is starting to get thinner. For the first time since 2016, profit margins look as if they’re going to turn negative in Q1 2019. Here are a few reasons I believe this to be true:

According to the latest FactSet report:

• As of December 31, 2018, energy earnings were forecast at 75% growth rate. As of February 22, 2019, earnings were reported at 94%, which is a big beat. 
• Communication services nearly doubled; the group of FAANG stocks are still growing fairly strong. Earnings were forecast at 13.3%, they came in at 22.3%.
• Industrials is one of my favorite sectors where I believe you can find good value. Industrials came in at 18% which is fairly strong for this sector.

Though earnings look fairly strong, we have to be careful about our expectations. If you recall, last year’s tax effect on earnings was impacted by the Tax Act. This is a one-year wonder in terms of an earnings benefit. I would imagine earnings will grow this year, but without the big boost from the tax effect, numbers could fall. I think the overall narrative points to higher stock valuations, as long as the numbers don’t further deteriorate. 

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