MARKET OUTLOOK:

Throughout Goodreid’s history (which dates back to 1986), negative headlines have rattled markets but consistently equity markets have responded to one metric – EARNINGS. There is an old adage which goes, “stock prices are the slaves of earnings”, which speaks to the obvious; if a business produces more profits someone will pay more for it. Admittedly there’s a little more to it, like interest rates and direction, the sustainability of the earnings stream, where we are in an economic cycle, and investor confidence, but over the long-term savvy investors who have kept their eye on earnings have done pretty well.

Earnings coming off the pandemic-inspired recession have been outstanding, picking up the pace from pre-pandemic times. In 2019, the S&P 500 Index earned a weighted US$180/share. In 2021 we expect US$210-220/share. The forward P/E on the S&P is 21 times, not inexpensive but in an environment of rapid growth, high corporate margins and low interest rates, not outlandish. 

The latest quarter demonstrated strong revenue and earnings beats. The percentage of companies beating revenue estimates stands at 85 per cent, while the percentage beating earnings was over 85 per cent. Those guiding earnings prospects higher stood at 20 per cent, while only 4 per cent guided lower. And prices responded; company’s stock prices rose almost 1 per cent on the day a company reported a beat vs a loss of 3 per cent if a company’s financial report disappointed.
What can we expect going forward? Strong earnings are projected for the S&P 500, with earnings for 2021 forecasted to rise 42 per cent from the depressed levels of 2020 and adding another 9.4 per cent in 2022. Margin expansion will aid organic revenue growth, with a record 13 per cent net profit margin expected in 2021.

TOP PICKS:

Lennar (LEN NYSE)

(last bought at $92.00 in June 2021)
Homebuilders have been on a tear and for good reason. A confluence of factors have led to strong performance measurements, including historically low mortgage rates, constrained supply of homes and strong demand from people wanting to move from cities because of the pandemic. In addition, their execution has been outstanding with gross margin improvement of 450 bps vs last year. At 10 times this year’s earnings LEN continues to represent excellent value. 

Lowe's (LOW NYSE)

(last bought at $194.00 in August 2021)
The home improvement space continues to perform very well as the elevated savings rate allows seepage into discretionary home improvement projects. Margins, as we predicted, have steadily risen and we think have some ways to go. At less than 18 times earnings, expect multiple revisions and organic growth to propel LOW’s stock price higher.

Morgan Stanley (MS NYSE)

(last bought at $103.00 in August 2021) 
Morgan Stanley had a tremendous quarter and the stock price is responding.  Wealth management now makes up more than half of their business and the world is flush with liquidity. The latest jewels in their crown are E-Trade and Eaton Vance. They are insulated from loan losses that other financials are exposed to, yet benefit from the spirited trading environment we find ourselves in. 

PAST PICKS: August 27, 2020

Anthem (ANTM NYSE)

• Then: $274.59
• Now: $379.12
• Return: 38%
• Total Return: 40%

Alphabet (GOOGL NASD)

• Then: $1,628.52
• Now: $2,727.01
• Return: 67%
• Total Return: 67%

United Rentals (URI NYSE)

• Then: $179.02
• Now: $341.67
• Return: 91%
• Total Return: 91%

Total Return Average: 66%