Author: Randy Watts

Randy Watts is Chief Investment Strategist for William O’Neil + Company. Mr. Watts manages William O’Neil + Company’s research department and guides the development of the company’s suite of services. He oversees the strategic direction and focus of the company’s research content, and his buy-side experience provides additional insight that allows the company to leverage its experience and expertise to help clients generate alpha. Mr. Watts has more than 25 years of equity asset management experience with specific focus on large- and small-cap growth stocks. He started his professional career as an Equity Analyst at Freedom Capital Management in Boston, MA. He spent nine years at Westfield Capital Management as an Equity Analyst then as a Partner and Portfolio Manager overseeing a $500+ million growth stock portfolio. Mr. Watts served as a Senior Managing Director for small- and mid-cap growth investments at The Boston Company, where he managed $4 billion in both long and long/short equity portfolios. During his tenure at the Boston Company, he hired, trained, and managed a team of investment professionals. Most recently, he ran a long/short equity hedge fund for Folger Hill Asset Management in New York, NY. Mr. Watts graduated from the University of Virginia with a degree in American Studies and is a Chartered Financial Analyst.

Strategy View

Posted on by Randy Watts
Key Points:
In Q2 2018, 75% of S&P 500 companies beat earnings expectations. The median beat was around 4%, which was slightly lower than Q1, but at the upper end of a six-year range. There has since been no real upward revision to Q3 or full-year EPS estimates.
From 60 days ago, the median EPS revision for next quarter is actually -0.4% lower. The median full-year revision from 60 days ago is up just 0.4%
For S&P 600 companies it is similar. Median beat in Q2 was 6%, but from 60 days ago the median EPS revision for Q3 is 0.9% lower and for the full-year there has been no median revision.
 Since earnings estimates have not substantially risen to reflect the upside surprise, by implication even without lowering estimates, Wall Street analysts are expecting lower for earnings growth for the rest of the year than they had entering the quarter.  As a result, William O’Neil + Co. believes that Wall Street is still underestimating the earnings the S&P 500 will report for 2018. 

Strategy View

Posted on by Randy Watts

Key Points:

  • U.S. dollar breakout is sending EM currencies lower. Most at risk are the Turkish lira and Argentinian peso. Also extremely weak are the Russian ruble, Brazilian real, South Africa rand, and Indian rupee.
  • Past EM currency crises in the late 1990s were mixed in their effect on U.S. equities.
    • Asian crisis in 1997: not much of an effect on U.S. market throughout.
    • Ruble collapse in mid-1998: immediate negative effect sending U.S. market into sharp correction, but no end to bull market and recovery within a couple of months.
    • Brazilian real devaluation in early 1999: not much of an effect on U.S. market.

Strategy View

Posted on by Randy Watts

Key Points:

  • Second earnings season with 8%+ sales and 20%+ median EPS growth for S&P 500 companies—both at highest level since 2010–2011. Median EPS beat of 4%.
  • Small caps even better with 10% sales and 23% median EPS growth for S&P 600 companies. Also better median EPS beat of 6%.
  • Strong industrial production, GDP growth, earnings results, small-cap outperformance, and recent rotation to cyclical sectors (except for Consumer Cyclicals) are all bullish highlights.
  • See attachment for actionable Focus List names ( WP, BL, MPWR, ASGN, etc.), other leading mid/large-cap industrial names ( CF, IR, XYL, UAL, etc.), and leading small caps ( EYE, SKYW, SAIL, GOLF, CBPX, etc.)

Strategy View

Posted on by Randy Watts

Key Points:

FB’s $125B market cap loss is the largest ever daily cap loss for a stock.

Of four largest prior: INTC (2000), MSFT (2000), AAPL (2013), XOM (2008), three were well into a developing bear market. In the one (AAPL 2013) where the market was near highs, it had no effect on the uptrend.

FB is large but still under 2% of the S&P 500. Despite today’s drop costing the S&P 500 50bps, the index is down just 30bps. Average stock is up 0.5% today.

Indicators to closely watch:

Market conditions: all indices in a Confirmed Uptrend. Low distribution day counts except for NDQC (5).

Sectors: All but Staple above 200-DMA. All but Cyclicals/Materials above 50-DMA.

Stocks:

Favored group of leadership stocks intact, 69 Focus List stocks which is above the long-term average. 20% are actionable. Earnings reactions have been slightly positive.

Good S&P 500 earnings result, beating EPS by 4.2% at median. 70%+ of S&P 500 above 200-DMA, 64% above 50-DMA.

Coming earnings from S&P 500 heavyweights, Amazon, Apple, and Exxon Mobil, and many of our favored Focus List names, like SQ, ILMN, ATVI, ANET, EW, FLT, and GPN, could be key in further affirming our bullish stance. However, broadly negative reactions could be even more important that FB’s huge decline today.

Strategy View

Posted on by Randy Watts
Key Points:

Earnings

Sales and EPS growth are expected to decelerate in Q2 from Q1, but if normal beat occurs, it will be just a minor drop.

Resource and industrial sectors have best estimates in both the S&P 500 and S&P 600. Technology and Health Care more moderate in both; Retail strong in large but weak in small.

Market Setup

Indices are back at highs, led by the Nasdaq, but sector rotation has favored defense over eight weeks (has backed off this week some).

While somewhat counterintuitive, this is partially because, despite defensive outperformance, mega-cap growth continues its dominance.

The 15 USFL names on the S&P 500 with greater than $45B market cap make up two-thirds of year-to-date gains for the S&P 500.

Focus List

A healthy number of stocks, at 68, although off January highs of 80, is above the long-term average. Would like to see more actionable names, but of extended names all should be held, not trimmed. This is clearly a positive sign.

Actionable Ideas ( buy ): Activision ( ATVI ), Alphabet ( GOOGL ), Arista Networks ( ANET ), Calavo Growers ( CVGW ), Diamondback Energy ( FANG ), Edwards Lifesciences ( EW ), Fleetcor Technologies ( FLT ), Global Payments ( GPN ), Home Depot ( HD ), Nextera Energy ( NEP ), Paypal ( PYPL ), PRA Health Sciences ( PRAH ), Ring Central ( RNG ), SS&C Technologies ( SSNC ), Unitedhealth ( UNH ), Vertex Pharmaceuticals ( VRTX ), and Worldpay ( WP ).

Extended Ideas ( hold ): Amazon.com ( AMZN ), Five Below ( FIVE ), Idexx Laboratories ( IDXX ), Ilumina ( ILMN ), Lululemon ( LULU ), Mastercard ( MA ), Monolithic Power ( MPWR ), Netflix ( NFLX ), Ollie’s Bargain Outlet ( OLLI ), Planet Fitness ( PLNT ), Q2 Holdings ( QTWO ), Salesforce.com ( CRM ), Servicenow ( NOW ), Square ( SQ ), and Visa ( V ).

Strategy View

Posted on by Randy Watts
Key Points:

10 year–2 year yield curve down to 35bps, lowest in more than a decade.

Curve has been positive 87% of all weeks since 1976.

But when 10 year–2 year yield curve has inverted, forward average gains for the S&P 500 since 1976 have been clearly lower.

Strategy View

Posted on by Randy Watts

Key Points:

 

  • William O’Neil + Co. has U.S. equity markets categorized in a Confirmed Uptrend. While the number of distribution days of six and five on the S&P 500 and Nasdaq, respectively, are higher than we would prefer, our leading ideas continue to trade constructively with multiple names across various sectors and market caps breaking out and making higher highs. There remain some market risks in the form of a tightening Fed, slowing U.S. earnings growth, and a potential trade war with China. However, until we see further distribution and/or a violation of the 50-DMA by the major indices, we remain positive on U.S. stocks.
  • Within this broader market, we continue to see industry-specific themes for investors. In this report, we highlight three themes from our research analysts that are both investable and multi-year in nature: U.S. Medical Devices, Enabling Software for the Financial Industry, and CAD Software.
  • Top picks within these three themes include ABMD, ALGN, EW, FIS, QTWO, SSNC, TEMN.CH, SIM.DK, DSY.FR, NEMX.DE, and ADSK.

Strategy View

Posted on by Randy Watts

Q3 2018 U.S. Market Preview:

After some rocky moments this winter, U.S. equity markets are now performing positively. Year-to-date, the Nasdaq (+11.6%), small-cap S&P 600 (+11.0%), and Russell 2000 (+9.6%) indices have been the clear leaders. But the DJIA (+2.5%) and S&P 500 (+4.3%) indices are now positive for the year as well after solid quarter-to-date gains. The broadening of the market to include small-cap stocks and other sectors besides Technology and Retail, including Consumer Cyclicals and Transportation, is a bullish sign for investors. Still, U.S. equity markets have uncertainties to deal with. The first, detailed in our Strategy View dated June 6, is the likely slowing of U.S. corporate earnings growth over the next year as quarterly comparisons toughen given this year’s new tax bill and lower corporate tax rates. Second, the Federal Reserve continues to tighten financial conditions
and is now expected to raise the Federal Funds rate four times in 2018. Finally, as shown in the bar chart below, U.S. markets are entering the historically weakest quarter of the year. From 1970 to present, Q3 U.S. equity returns have been, on average, the weakest of the year, with the S&P 500, DJIA, Nasdaq, and S&P 600 posting negligible positive returns and the Russell 2000 posting losses.

Strategy View

Posted on by Randy Watts
Key Points:

Q1 2018 Earnings Review

  • S&P 500 companies: Median +9% sales and +22% EPS growth. Second-best revenue surprise (+1.7%) in eight quarters and best EPS surprise (+4.9%) in six years.
    • Best growth in Energy, Cap, Tech, Retail sectors.
  • S&P 600 companies: Median +9% sales and +17% EPS growth.
    • Best growth in Energy, Cap, HC, Transports.
  • USFL earnings: 27 of 72 with sales/EPS growth acceleration. All but nine beat on revenues and all but six beat on EPS.
    • 20 stocks with sales/EPS acceleration, sales/EPS beat, and positive reaction to earnings. Of these, BABA, CRM, SCHW, TCBI, UNH, VEEV are actionable now.

2019 Earnings Deceleration

  • With big 2018 jump, 2019 S&P earnings to decelerate (~+18% to ~+10%), a risk to be aware of next year.
  • Since 1960, 14 instances of similar deceleration (see below).
    • Average 7% annual gain in decelerating year, versus 14% year before.
    • Four years of negative returns in 14 periods (1974, 1977, 1994, 2000).