Bullish, perhaps a touch over-bullish. That’s what our momentum model registered at the end of last week’s trading. Meanwhile, our leadership and heartbeat models continued to print buy signals.
The three leading indexes took a little off the top on Friday to end the week with the S&P, Dow and NASDAQ treading water a touch below their 52-week highs.
Wall Street pressed sell as the coronavirus scare trade was back in play with understated afflicted counts, quarantined cruise ships, pandemic warnings, and an unfortunate rising death count.
We don’t mean or intend to discount the loss of loved ones due to a new illness. Losing loved ones hurts. We would like to, however, provide some perspective. According to the World Health Organization, seasonal influenza (regular flu, if there is such a thing) is estimated to result in about 3 to 5 million cases of severe illness, and about 290,000 to 650,000 annual deaths globally. (1)
As we type, the death toll for coronavirus is under 2,000 with 99% in China and the fatality rate is dropping, so says the Chinese government. Who knows if they are telling the truth? So far, the Chinese government has been less than forthcoming.
Earnings are likely to be the next victim of the coronavirus. Apple announced they will not live up to their second quarter sales guidance due to disruptions in their supply chain and depressed Chinese demand. (2)
Apple is not alone. According to Factset, 138 of the 364 S&P 500 companies that have reported quarterly results during 2020 mentioned coronavirus. (3) We would not be surprised to see the number of corona cuts climb; however, Factset reports, “For all S&P 500 companies, the average revenue exposure to China is 4.8%.”
Apple and others might not make their current numbers; however, sales won’t just vanish. It’s more likely that demand will just be pushed forward, meaning next quarter’s numbers will probably include what was lost this quarter.
Should Wall Street continue with the corona trade and push stocks lower, it’s our view that investors should see it as an opportunity to buy the dip.
Sticking with the earnings theme, let’s look at how sectors’ bottom lines are performing. Information Technology is tops in the percent of companies reporting bullish earnings surprises, clocking in at nearly 83% (49 of the 58 that have reported).
This one might come as a surprise; Utilities are number two on the leaderboard. It’s early, but nine of the 11 that have released their financial report cards did better than Wall Street’s expectations. Seventeen more to go. If the trend continues, Utility stocks could be high up on the shopping list.
Healthcare gets the bronze and the last of sectors with at least 80% of the reports exceeding forecasts (40 of 50).
On the top line, Financials and Healthcare have posted the strongest year-over-year sales growth. Financials have increased by almost 17% and Healthcare by nearly 13%. No other sector eclipsed the 10% mark, although Communication Services and Information Technology were closest at 9.24% and 8.87%, respectively. (4)
Overall, its been a good quarter for the top line with 277 of the 389 (65.3%) S&P 500 companies reporting top lines exceeding analysts’ predictions, considerably better than last quarter’s 58.8% (378 of 498).
Falling operation margins are the reason sales beats are running well ahead of the third’s quarter pace while bullish earnings surprises are hitting a lower rate than last quarter. Only three of 11 S&P sectors are showing strength compared to Q3, Healthcare (up 6.12%), Consumer Staples (4.16%) and Communication Services (1.45%).
Just four sectors have delivered better operating margins this quarter compared to last year: Financials (a whopping 79.32%), Consumer Staples (8.65%), Healthcare (4.92%) and Information Technology (4.08%).
Healthcare appears to be the healthiest sector as the only one to show up on the plus side for earnings, sales, and margins.
SPDR S&P Health Care Equipment ETF (XHE) was the best performing healthcare related exchange traded fund in the last week, gaining 2.61%. XHE is trading close to its 52-week high of $89.58 and as high as its been since the fall of 2018.
Its monthly chart shows an ascending triangle pattern. If XHE can close above $90, it could be headed for a strong run. The last time XHE followed a similar path at the end of 2012/start of 2013, shares went on a prolonged journey higher.
Haemonetics Corporation (HAE) has the most attractive composite of the more than 60 companies in SPDR S&P Health Care Equipment ETF’s (XHE) portfolio. HAE provides hematology products and solutions around the world.
Haemonetics offers shareholders a high 28% return on equity (ROE). This metric is important because ROE reflects how a company uses its assets to generate earnings growth. The higher the number the better. Return on Equity is reported to be a favorite of world-renowned investor Warren Buffet. Apparently, Buffet seeks a minimum ROE of 14%.
If it works for Warren, it works for us.
Analysts expect HAE to grow its earnings per share (EPS) from $2.39 in fiscal 2020 to $3.37 in 2021. That represents a 41% increase. The stock is valued at 31 times next year’s EPS forecast. Many companies trade with a price to earnings (P/E) ratio that exceeds earnings growth. If HAE traded at a P/E ratio of 41, it would trade at $138.17, about 9% higher than where it is today. Wall Street has a 12-month target price of $145.86, roughly 21% more than $120.50 as we type. (5)
Haemonetics’ weekly stock chart suggests shares could challenge its 52-week high of $140.36. HAE’s price recently busted through the upper end of a six-month downtrend. The last time Haemonetics made a similar move was in May 2019. The breakout occurred at $90ish and then investors bid HAE up to $140 in approximately three-months.
The May 2019 bust out was accompanied by a Bullish MACD crossover, something that could happen this time too if HAE adds another buck or two. Of course, just because it happened before doesn’t mean it will happen this time.
May all of your trades be profitable!