Stock Forecast2 old guesses
|------David T. Nicholson
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Investment Strategy - CSFB's Tom Galvin
Last week, the S&P 500 declined -11%. Outperforming sectors included communication services -0.8%, healthcare -6.9% and utilities -7.1% while the three worst areas were transports -21%, capital goods -18% and technology -13%. Though no style was immune, large cap growth shares outperformed small cap and value indices. (Interestingly, CSFB's quantitative analytical work suggests that growth stocks currently provide better opportunity than value). CSFB is now expecting third quarter S&P 500 profits to fall by 27% and fourth quarter earnings to be 23% below last year's level. These new forecasts bring the 2001 estimate to $45 from $51.50 previously. While visibility is extremely poor, the 2002 S&P 500 EPS forecast is $55 (down from $59.00 - consensus now is running about the same level). Price/earnings multiples now for reference are 21.5 and 17.6 times, respectively for this year and next). The CBOE Volatility Index (VIX) hit a record level of 57 on Friday, which exceeds the prior high of 53 hit during the September 1998 Long Term Capital crisis, and well above the 40 level briefly reached a decade ago. Comparing the S&P 500 earnings yield to current T-Bill or Long Bond yields provides buy signals for stocks (although more useful as an indicator of relative value versus bonds than a timing tool, it is the indicator that Mr. Greenspan apparently watches). If risk premiums can hold to levels experienced in past crisis periods, then this market is oversold. According to Mr. Galvin's work, companies with free cash flow have dramatically outperformed cash burners by roughly two to one thus far in 2001 and should continue to win out over capital constrained entities. Tougher economic times will accentuate these trends. Financials, energy, technology and healthcare provide the most attractive free cash flow yields at present. Available cash flow will hold dividends for some more so than others and will also provide the funding for share repurchases. Companies highlighted in his weekly report include Alcoa, Nucor, Placer Dome, Tyco, Wal-Mart, Philip Morris, Kraft Foods, Avon, AIG, Allstate, American Home, Pfizer, Bristol Myers, Amgen and Johnson & Johnson.
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