1) Technical Setups, Markets and Sectors, p. 3-9
a. U.S.—All major indices and most sectors at 52-week and/or all-time highs. Best setups include Technology, Health Care, Consumer
Cyclical, Cap Equip, Retail, and Transportation.
b. Currently favored international markets include Japan, Germany, Hong Kong, India, South Korea, and Taiwan.
2) Growth for Countries and Sectors, p. 10-11
a. GDP Growth—Less than 3% estimates for key developed markets in 2017 and 2018. India, Taiwan, Thailand, South Korea, the
Philippines among emerging markets with 3%+ growth expected in 2017 and 2018.
b. Median sales/EPS growth (>$1B companies)—U.S., Hong Kong, India, Brazil, Taiwan have most favorable EPS growth expectations.
c. P/E valuations—Hong Kong is the only developed market in which stocks are trading at a median of <1x PEG. In four emerging
markets—India, Brazil, Taiwan, and South Korea—stocks are trading at a median of <1x PEG.
3) Actionable Focus List Names – Favored Areas, p.11-14
a. U.S. – Technology, Health Care, Cyclicals, Cap Equip, Retail, Transportation
i. Actionable names include Salesforce.com, United health and Home Depot
b. Developed – Consumer Cyclical, Capital Equipment, Technology, and Health Care stocks from Japan, Hong Kong, and Germany
i. Actionable names include Tokyo Electron (RG@N.JP; 8035:JP), CSPC Pharmaceutical (CPHA.HK; 1093:HK), and Nemetschek
(NEMX.DE; NEM:GR)
c. Emerging – Consumer Cyclical, Capital Equipment, Technology, and Financial stocks from India, Taiwan, and South Korea
i. Actionable names include Vakrangee (VKS.IN; VKI:IN), Indiabulls Housing (IEZ.IN; IHFL:IN), and Koh Young Technology
(KYX.KR; 098460:KS)
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
All-time performance records are in sight, but some caution is warranted.
1) DJIA Record in Sight
a. Second longest rally without a 5% correction, will become the longest if DJIA hits new highs next week, p.3–7
b. Current longest stretch, November 1994–March 1996, ended with a 6% correction, p.3–4
2) S&P 500 Records
a. October would be the 12th consecutive monthly gain for the total return index (assuming reinvested dividends). For the total return index,
this would match the two longest stretches which occurred in 1935–1936 and 1949–1950.
b. However, in the two prior 12 month periods, the S&P 500 sold off 5% and 7% respectively, in the 13th month.
Strategy View
Q3 2017 Earnings Preview
a. Slight sales/EPS growth deceleration expected in Q3 for the S&P 500 and most sectors. But, consistent upside EPS surprises over six
years likely to continue. Assuming normal beats, about 9% EPS growth expected versus 11% in Q2, p.3–5
b. Excluding Energy (many coming from negative EPS in Q3 2017), Technology is expected to have the best EPS growth for a second
quarter. Energy and Technology have had the biggest EPS beats over the past two quarters, p.3–5
c. Q4 guidance will be key, as the expectation is for reacceleration of EPS growth in Q4, p.3–5
d. S&P 500 valuation full relative to history, so expect growth to be EPS driven instead of multiple expansion, p.6
Strategy View Report
Due to low inflation and yields, stocks still remain the best game in town. This was reflected in the first half of 2017 by strong performance in domestic and international equities. In the U.S., equity performance was stronger than normal for the first year of a presidency. The U.S. DJIA, S&P 500, and Nasdaq rose, 12%, 19%, and 11%, respectively, to recent peaks. Likewise, Asia enjoyed strong gains with the AAXJ rising over 30% to last week’s highs. In Europe, the Stoxx 600 was up about 10% through May before tapering off over the past three months. This raises three questions. First, what does typical seasonality look for the last quarter of the year? Second, when there are exceptions to these patterns, what do they normally look like? Third, given historical patterns and the current quantitative and technical patterns seen through the O’Neil Methodology lens, how should U.S. portfolios be positioned for Q4?
Strategy View Report
Offers the world’s leading institutional investment managers a distinct blend of quantitative, fundamental, and technical expertise in global stock buy-and-sell recommendations. Its core method profiles stocks displaying the characteristics of outperformance proven persistent over market history—drawn from the firm’s industryleading database.
William O’Neil + Co., Incorporated is a Registered Investment Advisor with the State of California and certain other states. The firm and its affiliates may now or in the future have positions in the securities mentioned in this or other publications. Charts are intended to be used as tools to assist institutional investors in identifying equity ideas worthy for further review. Charts provide certain current and historical information, but are not a substitute for comprehensive analysis of the individual stocks. For further information about our business and legal policies, please see williamoneil.com/legal.
Strategy View Report
U.S. equities markets have continued to be strong as we move through the third quarter. All major indices are up year-to-date. Distribution days, as calculated under the O’Neil Methodology, continue to be low across most indices. Large capitalization stocks continue to lead with growth stocks being favored. The top two sectors remain Technology (+16.34% YTD) and Health Care (+15.44% YTD). Small capitalization stocks continue to lag as evidenced by the Russell 2000’s performance. Generally, U.S. small capitalization stocks have higher exposure to the domestic economy than their large capitalization counterparts. Continuing lackluster U.S. economic growth may be the source of small capitalization stock underperformance.
Strategy View Report
Included in the report is a study on historical seasonal patterns in relation to Q2 earnings season and sector performance. Some highlights from the report: From S&P 500 companies, analysts expect some deceleration in Q2 2017 revenue and EPS growth compared to Q1 2017. Average gains during Q2 earnings seasons have been fairly muted since 2000. The market has had a very long rally already (including fresh new highs this week) without a 5%+ correction. Leading long-term sectors, Technology and Health Care, expect better growth than the S&P 500, and we expect these two to continue to perform, which should help the market. Also, two other key sectors, Financials and Energy, expect among the best EPS growth.
Macro View
We are cautiously optimistic on the U.S. stock market. Year-to-date, stocks have performed well, with the S&P 500 (+8.9% intraday 6/23/17) the Nasdaq (+16.1% intraday 6/23/17) outperforming the Russell 2000 (+3.5% intraday 6/23/17).
