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

William O’Neil + Co. has the U.S. equity market in a Downtrend. The S&P 500 and Nasdaq Composite undercut their May 13 lows and pierced through their respective 200-DMA. We are now looking for the market to establish a bottom and hold for three trading days to shift the U.S. to a Rally Attempt. After that, a follow-through day, where the market rises +1.7% or more on higher volume than the previous day, is required for us to upgrade the U.S. to an Uptrend.

However, the U.S. market is not giving encouraging technical signals. After a ~26% move up from the December 24, 2018 low, the S&P 500 has only corrected ~6% from its May 1 peak. As noted in our previous Strategy View on May 9, 2019, an average down leg in a bull market is 8% and occurs over 23 trading days. Therefore, the current down leg has not yet reached a typical percentage decline despite coming off a much better-than-normal up move. As a result, we believe this present down leg has further to go before the next upward leg.

This belief is strengthened by examining the percentage of NYSE stocks trading above their 30-WMA. This measure peaked at roughly 79% in April which is in line with a typical historical peak of 75–90%. It has been falling since and currently stands at 43%. While this is a major decline, we do not believe it is at a low enough level to represent a bottoming process in the market. Over the last 20 years, this metric has tended to reach 13–30% before rebounding.

 

Market View

Posted on by Raj Gupta

Strategy View

The U.S. equity market was under pressure this week due to an increase in rhetoric from the U.S. and China regarding trade discussions. Importantly, the current U.S. administration singled out Chinese technology company Huawei for inclusion on the U.S. government’s Entities List. This list comprises foreign companies that U.S. firms are forbidden to do business with unless they have received approval by the U.S. government. In response to this, China threatened to completely halt further trade negotiations. As a result, the stocks of many U.S. technology companies, particularly semiconductor and semiconductor equipment suppliers, fell sharply.

This negative stock action was further exacerbated by two negative economic readings in the U.S. First, the U.S. Composite PMI fell from 53 last month to 50.9 this month, the worst reading in 36 months. In addition, U.S. durable goods orders for April fell 2.1% versus a gain of 1.7% in March. When combined with the previously mentioned trade issues, this caused investors to reconsider forward GDP estimates and corporate profit growth for U.S. public companies.

Grupo NotreDame Intermedica Update

Posted on by Raj Gupta

Key points from the report:

The stock is breaking out of a 16-week consolidation, turning actionable. The stock becomes extended above BRL 38. Support is at the 50-DMA.

Fundamental ratings: EPS Rank 97, SMR Rating B, Composite Rating 99.

Technical ratings: RS line at all-time highs, RS Rating 85, A/D Rating B-.

Market View

Posted on by Raj Gupta

Strategy View

U.S. indices have corrected ~5% to this week’s lows. Median corrections for the past 120 years are 7–8%.

Revisiting style performance, small has begun to catchup a bit to large, and value has done similarly versus growth.

The relative comparison nearest a historical extreme is small growth versus large growth—which reached -13%
over a trailing one-year period recently.

Interestingly, even with this week’s volatility, small growth has improved slightly versus large growth since last week.

Market View

Posted on by Raj Gupta

Strategy View

As U.S. indices continue to trade near all-time highs, we will take a look at some of the similarities and differences of stocks
that are near highs versus those further off highs.

We looked at 13 metrics within our data library and found medians of those metrics and looked at ranges of % off 52-week highs for each. In each column, green is the highest value while red is the lowest (except for EPS Stability Factor, where low-er is more favorable). The results are quite clear in that stocks nearer to highs are larger and have better EPS Ranks, EPS growth in the current quarter and estimates for 2019, better EPS stability, higher P/T margins and ROE, higher P/E ratios, and lower dividend payout ratios. Sales growth does not seem to be as big of a differentiating factor, nor does 2020 EPS growth estimates.

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

Posted on by Raj Gupta

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.