These Charts Could Make You Money by Andrew Snyder, Editorial Director, The Oxford Club Investment Wisdom
A Note From the Managing Editor: Today’s essay originally ran in The Oxford Insight, a premium e-letter that goes out to Oxford Club Members. (To learn more about the benefits of Club Membership, click here.)
In it, Andy highlights some of the market’s fastest-growing opportunities... prospects that have gone virtually unnoticed thanks to our gloom-and-doom media cycle.
If you’ve been sitting on the sidelines while stocks blast off, hopefully the information below will spur you into action. Carpe diem.
The Zero Economy trudges on. Nearly every place we stick our ear, we hear of low growth, no growth or, dare we say it, negative growth.
Listen to the media... read nothing but the headlines... or track the candidates... and you’d be convinced the financial world is at a standstill.
When it feels like there’s no hope, what’s an investor to do?
Alas, the answer is simple. With a simple tweak to the typical follow-the-crowd investing approach, profits can still be had.
To see what we mean, first you need some facts.
Here’s a table that shows the GDP growth of the world’s top 10 economies according to Bloomberg.
There’s growth, but not much. Outside of high-risk economies like China’s and India’s, only the U.K.’s has eclipsed 2% - and thanks to Brexit, that’s certainly about to change. The rest of the developed world is stuck growing at about a 1% annual pace.
If you’ve tracked the headlines, you know the latest figure from the U.S. was a disappointment. Most folks who track such things expected an annual growth rate of 2.6%. But headlines tell a different story... the number was a paltry 1.2%.
Despite (or is it thanks to?) central banks gone wild, the world’s economy refuses to budge.
Again, it’s easy for an investor to shrug their shoulders and blow their money on a new boat.
But as any good investigator tends to find... there’s more to the story.
We’re in the midst of earnings season. And as a bit of light on any subject tends to do, each new report grants us a better view of the truth. As companies report their second quarter profits, we’re seeing clear trends.
Another chart to ponder:
This table tells an interesting tale. On the left, we’ve included a list of the economy’s 10 most influential sectors. Moving toward the right, we show the number of companies that have reported their latest earnings. In most sectors, we’re well over halfway through the earnings reports.
On the right is the column to pay close attention to.
It depicts overall earnings growth within each sector. The green portion of the bar represents the percentage of companies with earnings growth, while the red depicts the firms that went backward.
The energy sector was hammered. It’s almost all red. Overall earnings fell by 82%. Even so, there’s a sliver of green in there. At least a few companies - and their investors - made progress.
Further down the table, we see much better news. The consumer discretionary sector did quite well. Not only did the majority of companies show growth, but they grew their profits by an average of more than 11%.
But take a close look at the top line. It shows something peculiar.
At the top, the green bar stretches well past the halfway mark. That’s good news. And yet the average company reversed its profits by 4%. In other words, while the majority of companies saw their earnings grow, the decline from those that didn’t was large enough to pull down the average.
It’s a trend our Matthew Carr has referenced often in this column. Despite the attention it gets from the press, the average simply isn’t a good indicator of the truth.
Put another way, the benchmark is worthless.
If all we measured was the average, we’d never see the majority of companies that are growing. If all we looked at was some far-fetched composite - like GDP growth for an entire country - we’d never see the opportunity.
To hammer home the idea, we’ll conclude with another compelling chart. It’s quite similar to the image above. But this time, instead of measuring earnings growth, it shows the number of companies that surprised analysts and their earnings expectations.
We think you, too, will be surprised:
There is a lot of green. The vast majority of companies beat the Street’s estimates. Even the energy sector shows more green than red.
But you probably haven’t heard the news.
Across the board, firms beat estimates by more than 4%... and yet the average investor has no idea. If it’s not in the headlines, the average investor doesn’t know it.
It leads us to something our beloved Alex Green said earlier this year.
This is not the time for a shotgun approach to investing. Instead, it’s time to get out the rifle.
Instead of taking aim at a broad sector of the market, we are compelled by the evidence to single out the best companies in the best sectors. When we do, the verdict is clear. There are plenty of profits to be found in an economy that refuses to budge.
You simply need to look past the headlines.
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