Research Library
Below is our research library, listed in reverse chronological order. Please use the search box to look for research on a specific company or topic, or use the Calendar, Archives, or Sector links at left to browse for research from a specific time period or sector. If you are a Wolfe Trahan client and can not access any of the links in our library, please contact to request our PDF decryption plug-in.The Sell-Side Sentiment Barometer: An In-Depth Look At Analysts’ Price Targets And Earnings Estimates
One of the most important tools an investor must have in the arsenal is a way to gauge sentiment. Knowledge of whether an investment is consensus or contrarian is essential in this business, as it can make the difference between picking an outperformer or market performer. There are many surveys of market sentiment that do a fairly good job of tracking bullish/bearish conditions for the overall indices, but there are very few tools available that do the same for sectors, industries and stocks. While there is some value in looking at indicators like “short interest ratios” or “implied vols”, they have many shortcomings. One proxy that can be used to gauge sentiment at the sector, industry or even stock level is the price targets of sell-side analysts. The difference between today’s market price and analysts’ price targets can be used as an approximation of sentiment on any segment of the market.
Aggregating mean price targets for all S&P 500 stocks shows that sell-side analysts are looking for the index to rise 11.5% in the next twelve months. While this is above the S&P 500′s long-term growth rate of about 7% it is not extremely elevated in the context of recent memory. At the sector level, the energy sector is the sell-side favorite, with an expected return of 19% in the next 12 months. The Consumer Discretionary and Industrials sectors are the two with the most conservative expectations.
In the following pages, we highlight expectations for industries and stocks for each of the ten GIC sectors. The extremes are sometimes breathtaking as one can find a stock with expectations of 40% upside or with 10% downside in the same sector. We aim to publish an update of the sentiment work on a monthly basis. As always, a full list that details analysts’ expectations for earnings and price targets is available for those interested. Email us at strategy@wolfetrahan.com to sign up.
We Would Be More Inclined To Chase The Market If … (Part Deux)!
It is difficult for us to get excited about equities when leading indicators, arguably the most important set of data points for financial markets, look set to roll over. Across time, this development has usually led to a very different backdrop for stocks. Does this mean that the market cannot go up any further? No, of course not. It does mean, however, that the risk reward for stocks is about to change dramatically. Indeed, stocks have risen every single time since 1950 when leading indicators were rising, while they have only been up about 50% of the time following their peaks. If anything, it is always some sort of inflection point, one that provides investors with an opportunity to review their thesis.
As we see it, the debate for stocks is not about this Friday’s employment report or even next month’s employment report. It is increasingly about 2011 and what the year might bring for the economy in U.S. and abroad. On the international front, the one development that could make us more constructive toward U.S. equities would be to see the Asian equity markets hit new highs. This is critical since we are talking about the economies that have been the incremental growers of world GDP in the past decade. Most of these equity markets have been floundering for the past six months which is never a good sign for growth. The fact that the S&P 500 is outperforming the world equity index is troubling as this last occurred in 2007 and then before that in 2000.
The China market is one whose performance is particularly lackluster. Clearly, equities are paying attention to the re-emergence of inflation in that country. While we do not normally pay much attention to specific technical patterns in the market, technicians refer to what is currently happening to Chinese equities as the “death cross”. The name alone got our attention. Essentially, it is a downside move by the 50-day moving average below the 200-day moving average. Time will only tell if this is anything significant but it is worthwhile tracking since it relates to the largest grower of the world’s economy.
Friday Freight
This weekly report summarizes the most recent views and research of Wolfe Research. Included are (1) three to five snippets or key takeaways from our team’s recent channel checks with traffic managers about their experiences with purchasing, competition, and service from Airfreight and Logistics, Rail, and Truck capacity providers; (2) notices of upcoming industry events; (3) key takeaways from some of our notes from the past week; (4) recent stock performance for our transport universe; (5) updated comparison tables for the airfreight and logistics group, railroads, and trucking; and (6) fuel trends for West Texas Crude Oil, On-highway diesel, Rail diesel, and Jet fuel.
Keeping An Eye On Macro Trends Amidst The Volatility
It’s getting hot in the “market is about to flat-line” seat. It feels like every uptick in equities leads to more pushback. The question we had to answer many times this week is whether we still believe leading indicators are about to peak. Our answer is “of course”. Nothing in our work has changed on that front. The time-tested series we look at argue that LEIs are set to peak (probably in March). This peak will mark a change in appetite for risk on the part of investors, one that sees more difficult gains for the index and possibly downside, a massive change in sector leadership away from hyper-cyclicals toward the so-called defensive sectors, and a re-emergence of valuation and quality factors like free cash flow.
If anything, there are subtle signs that this is already beginning. Firstly, as we highlighted in our quantitative research report this past Monday, dividend yield as a factor is outperforming year-to-date. This is not usually a very bullish sign for the road ahead. Secondly, the chart above shows the S&P 500 is outperforming the rest of the world in recent months. While the rally feels good on many levels, this development has been a “red flag” in past instances, specifically in 2000 and again in 2007. In short, there’s nothing we see that is extremely alarming for U.S. equities at this time, but we are concerned that investors are getting ahead of reality a little. Interesting tid-bit, we have heard the term “goldilocks” many times during the past week!?! Wow.
What would make us more constructive here? Well, a peak in leading indicators is typically a trend-changer for the markets and we feel confident that it will take place. There’s not a whole lot that could alter our conclusion that the market flat-lines post that highest level in LEIs. Clearly, lower inflation is helping for now as the emerging leaders in the last run-up have been stocks that usually fare well in disinflation (regional banks, consumer cyclicals, etc.). This is encouraging but it might not be enough when LEIs change course and begin to head lower. Fingers crossed.
UTIW F4Q Earnings: What’s Ailing UTIW?
UTIW reported an ongoing F4Q (ending Jan.) EPS miss of about 45%—removing restructuring charges and goodwill write downs but including another round of severance charges. UTIW missed our expectations on both weaker top line and margins as Gross and Net Rev. were 2pp and 44p worse than we expected and weaker Net OR was 400bp worse than our expectation.
On Track, Week 11 Ending March 20: Rail Volume Growth Remains Strong
Total Week 11 Rail vols increased 9.3% y/y, modestly decelerated from +11.9% and +13.0% the prior 2 weeks. Vols were down 0.7% sequentially. Vols are now tracking up 6.1% QTD, above our yet unadjusted expectations of +4.2% in 1Q. Vols remain down 9% on a 2-year stacked basis.
If the U.S. Can’t Force the Hand of China… Maybe Inflation Will?
Our work in recent weeks has focused largely on what we feel will be a major change in U.S. markets this year: a peak in leading indicators of the economy. Of course, the U.S. does not live in a vacuum and developments elsewhere are also likely to influence the path of financial markets this year. The most important potential catalyst on the horizon for the U.S. is the emergence of the policy tightening cycle taking place around the world, most notably in China. In our minds, it is not a question of “if” China will tighten further but one of “when”. Thus far, the preferred policy tool of Chinese authorities has been “reserve requirements”, but we believe it is only a question of time until a “revaluation” occurs.
In many ways, China’s setting today is that of a classic boom-bust cycle. Let’s recap. The Chinese economy decelerated sharply in late 2008 in the wake of the credit-induced global slowdown. Chinese authorities responded with cuts in official rates and one of the largest doses of fiscal stimulus ever seen. The domestic economy rebounded rather quickly and now the export side of the equation is also beginning to show signs of life, courtesy of a recovery in the U.S. All of this sounds great so far.
The only issue is that the stimulus has now led to a slight recovery in inflation. If the recovery in CPI stops then everything is hunky-dory. Unfortunately, leading indicators of CPI trends in China argue it is about to rise a lot more, primarily driven by commodities and real estate prices. If history is any guide, China will likely tighten policy until inflation begins to lose steam. As such, we believe many more hikes in official rates and a revaluation of the Yuan are in the cards. In the coming pages, we discuss the potential impact this is likely to have on U.S. financial markets.
TNT: Downgrading to Peer Perform – We See Less Upside Earnings Potential
In C09, TNT shares gained 60%, materially outperforming UPS, FDX, the S&P 500 and the Dutch AEX. With many of the catalysts we favored during C09 behind it, we see less upside to earnings for TNT and expect it to trade in line with the market going forward.
KSU: Equity Redemption Analysis Interactive doh! Model
Plug in your estimates for the amount of debt repurchase (up to 35% of each tranche), and the model will project the potential EPS accretion.
UTIW: F4Q Preview – Can UTIW Beat Expectations Enough for the Stock?
UTIW is scheduled to report its F4Q (ending Jan.) on Thurs. morning. While the stock has rallied 17% YTD following generally upside reports from forwarding comps EXPD, KNIN and PWTN, F4Q Cons. remains at $0.16. We are leaving our EPS estimate unchanged at $0.17 ($0.01 above Cons.) as we except strong Gross Rev. growth (particularly Airfreight) will more than offset contracting gross yields. We estimate Net Rev., EBIT and EPS y/y growth of +10%, +16% and +2% y/y vs. -11%, -42% and -50% y/y in F3Q.
