Everything is going well in the market, but now it’s time to start planning for when things go wrong. One way is to buy stocks based on “earnings momentum.”
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S&P500
It has risen about 22% since the bear market in early October. Investors are betting the Fed is all but ready to halt rate hikes as inflation steadily eases, although much of the recent rally has come from big tech benefiting from artificial intelligence. As a result, the rate of increase has increased recently. A pause means the economy and earnings could stabilize soon.
The problem now is finding stocks that still have room to invest. The average S&P 500 stock is up 5.8% so far in June, and the index is trading at 18.8 times expected 12-month earnings, especially high compared to current interest rates. “With the S&P 500 forward multiple now at 19x, the equity risk premium has fallen to a new cycle low and the lowest in almost 20 years,” said Michael Dalda, market strategist at Ross MKM. It has said.
What would be the best way to pick stocks in that environment? Evercore ISI strategist Julien Emmanuel writes that you should buy “what the last buyer hasn’t bought yet.” He screened stocks for which earnings forecasts for 2023 are revised upwards this year and earnings per share are expected to grow year-over-year. Emmanuel also wanted stocks with high short interest rates. In other words, if the stock starts to rise, investors who were betting on the stock will have to buy. The screen includes United Airlines Holdings (ticker: UAL), Royal Caribbean Cruises (RCL), cybersecurity firm Fortinet (FTNT) and Zscaler (ZS).
The stock also includes Alphabet (GOOGL), even though its stock is up 39% so far this year. The company’s stock has benefited from strong earnings growth in the most recent quarter and the launch of ChatGPT competitor Bard. He also said he plans to incorporate artificial intelligence into advertising and cloud services to make them more appealing to customers. As a result, earnings should continue to grow, with analysts projecting 18% annual growth over the next two years.
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Meanwhile, the fund has shorted the 66th percentile over the past year and may continue to buy Alphabet stock. Consistent with this, the stock is trading at about 21 times 12-month earnings forecasts, a reasonable price for 10x EPS growth.
Eli Lilly (LLY) also made the list. Analysts have raised their 2023 earnings forecast by 13% this year, but the company’s Alzheimer’s drug donanemab, which may be approved for use in Medicare, should keep growing earnings. The company’s type 2 diabetes drug, Mounjaro, has sales of just over $3 billion this year and is expected to exceed $20 billion in the next few years.
Overall, analysts now expect earnings to grow by about 30% annually over the three years from 2024. More buyers are likely, and short-selling rates have reached the 66th percentile over the past year. Even if Lily’s price/earnings ratio is 43 times his, it might be worth it.
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write destination Jacob Sonenshine jacob.sonenshine@barrons.com
