Stocks in U.S. Cheapest Since 1990 as Analysts Boost Estimates

By Lynn Thomasson, Whitney Kisling and Rita Nazareth
April 26 (Bloomberg) -- Even after the biggest rally since the 1930s, U.S. stocks remain the cheapest in two decades as the economy improves.
Earnings estimates for Standard & Poor’s 500 Index companies from Apple Inc. to Intel Corp. and CSX Corp. climbed
9.1 percent on average in April, twice the gain in their prices and the largest monthly increase since at least 2006, data compiled by Bloomberg show. The benchmark gauge for American equities is trading at 14.2 times forecasts for its companies’
profits, lower than any time since 1990, except for the six months after Lehman Brothers Holdings Inc. collapsed.
Income is beating analysts’ estimates by 22 percent in the first quarter, making investors even more bullish that the rally will continue after the index climbed 80 percent since March 2009. While bears say the economy’s recovery is too weak for earnings to keep up the momentum, Fisher Investments and BlackRock Inc. are snapping up companies whose results are most tied to economic expansion.
"The stock market is incredibly inexpensive," said Kevin Rendino, who manages $11 billion in Plainsboro, New Jersey, for BlackRock, the world’s largest asset manager. "I don’t know how the bears can argue against how well corporations are doing."
S&P 500 companies may earn $85.96 a share in the next year, according to data from equity analysts compiled by Bloomberg.
That compares with the index’s record combined profits of $89.93 a share from the prior 12 months in September 2007, when the S&P 500 was 19 percent higher than today.

Record Pace

The earnings upgrades come as income beats Wall Street estimates at the fastest rate ever for the third time in four quarters. More than 80 percent of the 173 companies in the S&P 500 that reported results have topped estimates, compared with
79.5 percent in the third quarter and 72.3 percent in the three- month period before that, Bloomberg data show.
The S&P 500 increased 2.1 percent last week to 1,217.28 as new-home sales surged the most since 1963, recovering from the April 16 rout when the Securities and Exchange Commission said it was suing New York-based Goldman Sachs Group Inc. for fraud.
The index is up 9.2 percent for 2010, the largest gain in the world’s 15 biggest equity markets, Bloomberg data show.
While analysts are raising estimates, they’re not boosting investment ratings. Companies ranked "buy" make up 30 percent of all U.S. equities, the data show. That compares with 45 percent in September 2007, a month before the S&P 500 reached its record high of 1,565.15 and began a 17-month plunge that erased $11 trillion from the value U.S. shares.

Easier to Adjust

"It’s been easier for analysts to adjust their earnings estimates than to aggressively put forth strong ‘buy’
recommendations," said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. "It may be a reflection of concern about the resilience of earnings in 2011 and beyond."
Companies are losing the benefit of a weaker dollar after the currency appreciated 9.5 percent since November against a basket of six trading partners, according to the Dollar Index from Atlanta-based IntercontinentalExchange Inc. A rising currency cuts demand for American exports and reduces overseas revenue when converted back to dollars.
Abercrombie & Fitch Co., the New Albany, Ohio-based teen retailer, warned the rally may weaken its profitability, according to a March 10 conference call. Westport, Connecticut- based Terex Corp., the world’s third-biggest maker of construction equipment, said in an April 21 earnings release that currency swings may reduce revenue. Terex got 75 percent of
2009 sales outside the U.S., Bloomberg data show.

Alternate Valuation

David Rosenberg, chief economist of Gluskin Sheff & Associates Inc., says U.S. stocks are poised for losses because they’ve become too expensive. The S&P 500 is valued at 22.1 times annual earnings from the past 10 years, according to inflation-adjusted data since 1871 tracked by Yale University Professor Robert Shiller.
Economic growth will slow and stocks retreat as governments around the world reduce spending after supporting their economies through the worst recession since the 1930s, said Komal Sri-Kumar, who helps manage more than $100 billion as chief global strategist at TCW Group Inc. The U.S. budget shortfall may reach $1.6 trillion in the fiscal year ending Sept. 30, according to figures from the Washington-based Treasury Department.
"The correction is going to come," Sri-Kumar said in an interview with Bloomberg Television in New York on April 21.
"You now have a debt bubble growing in the sovereign side, and we’re slow to recognize how negative that could be."

Deficit Spending

The European Union deficit tripled to 6.3 percent of gross domestic product last year, from 2 percent in 2008, the EU’s Luxembourg-based statistics office said on April 22. Moody’s Investors Service cut Greece’s credit rating the same day on concern its debt load will be higher and more costly than previously estimated, spurring a drop of 1.1 percent in the Stoxx Europe 600 Index.
The S&P 500 posted a 0.2 percent gain that day after initially falling 1.3 percent, helped by an advance in PNC Financial Services Group Inc. The fifth-largest U.S. bank by deposits said profit rose 28 percent on higher net interest income and less reserves for bad loans.
PNC, based in Pittsburgh, is one of 38 financial services companies in the S&P 500 reporting an average first-quarter earnings increase of 175 percent after banks and brokerages racked up $1.78 trillion of losses and writedowns linked to the collapse of the U.S. subprime mortgage market.

Mobile Devices

Intel, the world’s biggest semiconductor maker, spurred the S&P 500’s biggest rally in a month after reporting earnings on April 13 that topped Wall Street estimates and predicted data centers and the shift to mobile devices will drive growth. The results prompted at least 20 of the 31 firms covering the Santa Clara, California-based company to raise their 2010 forecasts.
Analysts lifted the average 2010 prediction by 10 percent to $1.88 a share, Bloomberg data show. Intel trades at 12.8 times projected annual income, about half the average using trailing profits since 1991. The shares are up 18 percent in 2010, the Dow Jones Industrial Average’s eighth-biggest gain.
Information-technology spending will climb 1.7 percent in 2010, after dropping 3.1 percent last year, according to Morgan Stanley. Personal-computer shipments rose 27 percent last quarter, according to Gartner Inc. The PC market bounced back from a year earlier, when the recession dragged down shipments almost 7 percent -- the worst performance since 2001, according to market research firm IDC.

Concerns Are Past

"We’re in a time period where the concerns we had in 2007 and 2008 have been taken care of or are past," Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California, said in a April 20 Bloomberg Television interview. "If you’re waiting for a market pullback or individual stock pullbacks, you could be waiting a long time."
CSX, the third-largest U.S. railroad, rallied the most in two months on April 14 after saying it hauled more goods and charged more for each carload. Analysts say the Jacksonville, Florida-based company will earn $3.48 a share in 2010, a 6.2 percent increase since the firm released quarterly results.
Profit estimates for energy producers and industrial companies have climbed more than 10 percent in the past month, the most among the 10 largest groups in the S&P 500, data compiled by Bloomberg show. Gross domestic product in the U.S.
is forecast to increase 3 percent this year and 2.95 percent in
2011 after contracting 2.4 percent last year, according to the median estimates of 64 economists surveyed by Bloomberg.

Apple Earnings

Apple’s profit almost doubled last quarter as consumers snapped up iPhones and Macintosh personal computers, the Cupertino, California-based company said on April 20. The results sent its stock up 9.5 percent to an all-time high of
$270.83 last week and boosted projections for annual income by
7.7 percent to $13 a share.
Apple, the third-biggest company in the U.S., with a market value of $246.4 billion, is 30 percent cheaper than the average of the past five years with a multiple of 20.8 times estimated 2010 profit, Bloomberg data show.
U.S. retail sales increased 1.6 percent in March, more than anticipated and the biggest gain in four months, according to figures from the Commerce Department issued April 14 in Washington. Consumer spending and manufacturing helped the economy expand across most of the U.S. in March, according to the Federal Reserve’s Beige Book of regional economic activity issued April 14.
The S&P 500 rallied 92 percent in the five years after reaching a valuation in November 1990 of 14.1 times profit, about the multiple indicated by earnings forecasts for next year, according to Bloomberg data. The index last traded that cheaply in June 2009, near the start of the biggest rally in seven decades and nine months after New York-based Lehman filed the world’s biggest bankruptcy.
"The earnings story is very supportive of the market even after the rally over the last year," said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees
$1.4 trillion in client assets from San Francisco. "The recovery is real, it’s V-shaped and it’s got legs."