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No Earnings, No Problem

by WBI Insights

By Don Schreiber, Jr. – WBI Founder and CEO

Does the market want to party like it’s 1999? 2019 is looking eerily similar to the market in 1999 and investors are having déjà vu all over again. First quarter returns in 2019 are reminiscent to the returns captured 20 years ago. Let’s start with the Big Growers’ Composite, which consists of the top 75 stocks with the best growth credentials. According to Empirical Research Partners, the top 75 stocks in the composite have an 85% Price-to-Earnings (P/E) Premium compared to the rest of the large-cap composite. In fact, they are almost two-to-one. The price for the top 20% large-capitalization stocks based on their factors, meaning these are the companies that have the highest quality trends right now, is turning negative. The worst quintile stocks, or lowest 20%, are experiencing price appreciation. To put this in simpler terms, the stocks that have good cash flow are the ones that have negative returns from a price standpoint. The stocks within the worst quintile of the same select factors are up about 30%. This looks identical to what happened in 1998 through March of 2000.

If we look at forward PE ratios by sector, we can see that the most overvalued stock sectors at the moment are Software & Services and Retail, Media & Consumer Services. When comparing these sectors to the most overvalued sectors in 1999 we can see that the same sectors were overvalued with a P/E multiple average of about 40 times that of earnings. In this case, having no earnings appears to be no problem for investors. The stock of the companies that are making the money is dropping, and the stock of the companies making no money are soaring through the roof. If the market continues partying like it is 1999, could we see a resurgence of the New Economic Era? We’re not counting the market out yet, but we will have to stay tuned to see if investors will stay at the party or turn the lights out early.

Important Information

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

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