Author: Raj Gupta

Raj Gupta is Director, Research Analyst. After joining the firm in 2002 as a research analyst, Raj was appointed senior equity analyst in 2006, and lead senior equity analyst in 2014—largely because of his ability to select outperforming stocks. He acts as an expert in the O’Neil Methodology and contributes to the direction of product and service line development. He recommends securities for addition to or removal from the U.S. Focus List, or USFL, and the associated alerts to clients. During his tenure, he was part of the leadership that developed the Global Focus List, which marked the firm’s successful expansion into international equity recommendations. He is also a lead on the IPO Rewind report and contributes to weekly summaries on the performance of the U.S. market. Much of his expertise is delivered as highly customized service to clients. RAj earned his Bachelor’s degree in Economics from the University of California, Santa Barbara. He began working at the firm directly out of college, driven by his passion for investing and stocks. An avid soccer player, he built and managed an adult league in the Los Angeles area, in which he still plays. He also enjoys international travel; he and his wife commit to at least one major adventure a year.

Market View

Posted on by Raj Gupta

Strategy View

Index strength remains intact a third of the way through earnings season. Normal (~78% of S&P 500
companies) beats have occurred so far.

Style-wise, large growth continues to be the standout, up 20% year-to-date and 17% over one year.
Small growth is up 20% year-to-date, but only 5% over one year.

Notably, the top 10 stocks make up 35% of the large-growth (0IKT) index: AAPL, MSFT, AMZN,
FB, GOOG, GOOGL, V, HD, MA, and UNH. The top 10 stocks in the small-growth index only
make up 6%.

Technology, the leading sector over one year, is also more represented in large growth than any
other index, giving it another advantage.

Materials and Cyclicals look cheap on a forward multiple basis in both the S&P 500 and S&P 600
indices and could play catch-up if overall strength continues, but only Cyclicals is showing relative
improvement currently. Materials and Energy continue to lag far behind.

Health Care is sharply decelerating but is not yet at a historically extreme level of underperformance to
make for a successful reversion trade.

Market View

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Strategy View

According to Bloomberg, from 2008 to Q3 2018, S&P 500 companies have spent $4.9T on buybacks versus
only $3.4T on dividends.

Last year, partially fueled by lower corporate tax rates, S&P 500 constituents spent $770B purchasing
their stock; this year it’s estimated they will spend close to $1T. This means the S&P 500 will buy back
more than 3% of its outstanding market capitalization in 2019. Given that S&P 500 earnings are only
projected to grow +7% in 2019, shrinking the share base by 3% is significant.

Looking at a buyback proxy ETF (Invesco Buyback Achievers ETF-PKW, companies with at least 5% of
shares bought back in trailing 12 months), we note that buybacks as a group outperformed the S&P 500
from March 2008 to March 2015. But, over the past four years, that trend reversed.

Lower interest rates likely played a large role in this difference. The outperformance period began
as rates were lowered and ended when the Fed raised rates in 2015.

With the Fed currently on pause and talks of interest rate cuts picking up, the buyback group has
begun to outperform again.

When looking at individual names that buy back shares, not all are equal. The table below shows that
the best performers also have stronger growth (at the median level).

Interesting names that have both growth and 5%+ buybacks that performed well in the past year include
NTAP, CHDN, UNP, AWI, CRMT, UBNT, ORLY, GLW, SBUX, CSCO, and ATKR.

Managed Care

Posted on by Raj Gupta

We continue to recommend avoiding the Medical-Managed Care Industry Group, which is now ranked 193 of 197 groups (1=best, 197=worst). The Industry Group chart broke long-term support along its 200-DMA in December and has not fully re-
covered. It is now once again testing support at December/January lows and though we may see a near-term rebound post-UnitedHealth Group (

) earnings, individual charts are broken and need time to recover.

Market View

Posted on by Raj Gupta

Strategy View
The negative trend in earnings revisions for the current quarter and year has continued for both the S&P 500

and S&P 600. This trend of downward revisions began at the end of September 2018 and has continued non-
stop. Given how far estimates have fallen, we are hopeful the hurdle is now low enough that estimates can be

revised upward for Q2 2019 and beyond, when companies give forward guidance during this season’s earnings
calls. If this does not occur, it would increase our nervousness about a potential pullback from the current rally.
The key companies reporting this week, including JPM and WFC, both posted better-than-expected top- and
bottom-line results. However, only JPM gained (+5%), while WFC fell due to weak guidance overshadowing the
earnings beat.

April 11, 2019 – Key Insights on Recent IPOs with Raj Gupta

Posted on by Raj Gupta

In this week’s webinar, Executive Director, Research Analyst Raj Gupta reveals the fundamental and technical characteristics our analysts believe are necessary for successful new issues. He will be joined by other O’Neil analysts, who will provide exclusive insight on select IPOs and other ideas they are watching.
Please note that this webinar will only be accessible through Research View in PANARAY or in the Research Library.

IPO Rewind

Posted on by Raj Gupta
This report identifies a select group of IPOs or spin-offs that have priced in the last two years, giving them time to digest any initial volatility and release a few quarters of earnings. Our selected ideas display positive fundamental trends with strong top- and bottom-line consensus estimates, and IPO Rewind provides an efficient way to review these ideas that we believe warrant attention.

Market View

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Strategy View

Q1 earnings season is expected to be a significant deceleration from Q4. Median S&P 500 sales and EPS growth of 3% and 4%, respectively, would be the lowest since 2016. We do expect normal beats of 1% for sales and ~3% for EPS. Any lower-than-normal sales and EPS beats, or poor guidance, will put significant pressure on the ongoing rally.

Bull investment advisor sentiment reading of 53% and a VIX of 13.5, are bullish but not extreme, similarly making the results of this earnings season a large variable.

Index and sector setups are broadly positive ahead of earnings, with all now supported by upward-trending 50-DMA.

Best sector setups into earnings are Technology, Health Care, Capital Equipment, and Staples.

While the number of actionable U.S. Focus List stocks is smaller than over the previous two months, a few strong setups include AMZN, PAGS, CCMP, ISRG, LULU, GLOB, and FOXF.

Market View

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An inverted three-month (13-week) to 10-year yield curve has been a good predictor of recessions (about
12 months out).
Inversion does not always lead to weak market performance but does so on average.
o In all cases where the curve inverted on a weekly basis since 1962, average 4/8/13/26/52-week
forward performance for the S&P 500 is negative.

Cyclicals and Utility tend to be weak, while Material has performed the best.
Interestingly, Utility is currently the best performer over one year, while Material is the worst. A
mean reversion could be approaching.

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq held their respective 21-DMA this
week, consolidating gains. The 50-DMA is now moving above the 200-DMA and will act as another layer of
support should the market pull back. There are currently six distribution days on each index, though four will
expire within six sessions beginning next Wednesday.
Leading ideas are consolidating constructively, with few major technical breakdowns. We will look for secondary
entry points in leading ideas over the next several weeks. Generally, bases take five to seven weeks to complete
and should occur above near-term support levels, including the 50-DMA, the 100-DMA, or prior pivot points.
We recommend a selective and patient approach as the market consolidates. We would like to see distribution
subside and the right-hand side of bases begin to form over the next few weeks before recommending any
meaningful increase in risk.
Sectors: Over the last five sessions, Transportation, Capital Equipment, Consumer Cyclical, and Retail are
leading, while Technology and Utility are lagging. Technology remains a long-term leading sector despite the
recent pullback, and is still trading above 21-DMA support.

Carl Zeiss Meditec

Posted on by Raj Gupta

Key points from the report:

 

  • The stock is actionable as it forms the right side of a flat base. Support is along the 50-DMA.
  • Fundamental ratings: EPS Rank of 69, Composite Rating of 89, SMR Rating of B.
  • Technical ratings: RS line trending upward, RS Rating of 87, A/D Rating of B.

Market View

Posted on by Raj Gupta

Strategy View
Presently, U.S. equity markets remain in a Confirmed Uptrend. The indices’ progress since the December 24,
2018 low is nothing short of amazing, with all major indices up at least 18% as of March 21. All but the Russell
2000 are above both their 50- and 200-DMA.
One of the more remarkable aspects of the current rally is that most asset classes have made positive moves in
unison; U.S. bonds, U.S. stocks, oil, and metals have all risen. Every single one of our 11 sectors has posted
strong returns as well.
In addition, the spread between the best-performing sector, Technology (+20.7%), and the worst, Consumer
Staple (+9.6%), is 1,010bps. Technology’s gain is only 6% greater than the average, while Staples lags the
average by approximately 4%.
On a relative basis, Utility is still the best performer over the trailing one-year, and recently reached a historical
extreme of +20% versus the S&P 500. In fact, it may be near a relative peak, especially if the worst of the 10-
year yield slide is over. Materials are by far the worst over the trailing one-year, lagging Utility by nearly 30%.
This could be at a trough, but this sector likely needs improvement in the economy to revert.
Elsewhere, Technology is slightly outperforming the S&P 500 over the trailing one-year but is trending positively
(particularly in semis and software), while Retail still holds a large lead, but continues its relative deceleration.
Lastly, Energy’s relative trend is improving, but it still has some distance to make up before it becomes a leader.
So far, this rally has rewarded investors regardless of the sectors in which they are invested. Going forward, we
expect performance to be much more dispersive, and the importance of selecting the correct sectors to invest in
will be much higher.
As mentioned in our Global Sector Commentary on February 22, once breadth (as measured by the percentage
of NYSE stocks above their 30-week average) moves higher than 75%, further market gains tend to be met with
a narrowing of breadth. As a result, we expect larger divergences for the remainder of the year.