Leadership Still Lacking; Sustainable Top-Line Growth is Key – YouTube Video & Transcript

In this video, Terry Gardner of C.J. Lawrence reviews this cycle’s three market phases, highlights “Whatever it Takes,” laments the lack of leadership from financial stocks, and shares his analysis of consistent sales growers.

Video Transcript

Terry Gardner:

Hey, good afternoon everyone. It’s Terry Gardner from C.J. Lawrence on May 1st and we thought we’d take it outside today for today’s video. The sun is finally coming out here in New York and this is the new normal. So if you hear dogs barking and lawnmowers going and trucks going by, this is the way we operate and this is the way we’ll be operating I guess for a while. So we want to touch on four topics today. First being, where are we in our three peaks scenario? Second, just touch on the whatever it takes approach that the fiscal and monetary policy makers are embarked on. Third, I want to talk about leadership, which we talked a little bit about last week. And then finally, we want to introduce some work that we did over the week in terms of sales consistency and sales growers.

Terry Gardner:

So first off, we’ve talked about the peak in a panic passing and peak virus here in New York. It looks like we’re past peak and plateauing a bit but most numbers look to be headed in the right direction. And we’ve been digesting all of the bad news that we talked about, that third evolution with regard to downgrade of earnings expectations and GDP forecast. So companies, S&P 500 companies, have been reporting. About half of them have reported their first quarter to date and given us guidance for the rest of the year. And sure enough, earnings are down about 17% to 18% for the quarter, and remember the quarter ended in March so we’re only catching the tail. The tail end of the quarter caught the beginning of the coronavirus. So second quarter would be much more dramatic.

Terry Gardner:

But I think it’s important to note that looking at the numbers as to where estimates have now gone, we were waiting for those changes to happen. Second quarter estimates now show the S&P 500 earnings per share down about 38%, so that’s a pretty dramatic drop from where they were just a couple of weeks ago. So the market is going to have to contend with that and is in fact digesting those numbers. If you believe the bottoms up forecasts, it looks like the third quarter, we’re going to see down 20% in earnings, and fourth quarter down 7% to 8%. That sounds about right given what we know in terms of the trajectory of the virus and the potential reopening of parts of the economy. We’ve expected that the second half we’d start to see some rebound. So those numbers sound about right and I think that’s why the market has reacted somewhat favorably.

Terry Gardner:

The fact that it’s digested these earnings expectations, it kind of is a better feel on where the economy’s headed and now we’re starting to get into this reopening phase. So that leads us to the second point, which is the whatever it takes policy approach by the monetary and fiscal authorities, and we’re getting all of that. So people often ask, “Hey, does that money finally make it to Main Street and does it really actually help the underlying economy?” That’s a tough call and we’ll leave that to the economists to kind of sort that out. But what it does do, it certainly helps the financial markets. So the fact that the U.S. Congress and the U.S. Fed are stepping in so aggressively, I think is providing some comfort to investors, particularly here in the U.S.

Terry Gardner:

Thirdly, we talked a bit about leadership and what we wanted to see in terms of the duration and the strength of this market. We were looking for some leadership from financials. That was kind of a condition we thought was necessary for the rally to be enduring. And we saw that over a couple of days, but financials have lost some steam over the last couple of days. So that’s creating a little bit of worry and something we’re keeping an eye on. The other two things you’d like to see with regards to sustainability of a rally and for a major market move, you’d like to see Treasury Bond yields start to move a little bit higher. That would foretell that the bond market is forecasting that the economy is getting back on solid footing and that really hasn’t happened, if you’re looking at the 10-year Treasury, which is essentially flat for the week and essentially flat over the last couple of weeks.

Terry Gardner:

So the bond market isn’t yet giving us a signal that things are looking a lot better. That’s something to watch. And the third thing is we do like to watch small cap stocks. When small cap stocks do well is typically when the economy is strengthening because they essentially catch the crumbs off the table. The large cap stocks do well, but it’s a rising tide so then the small cap start to do well right behind them. And small caps have lagged for the year. They started to do well in the last a week to two weeks and outperform S&P 500 stocks, so that was encouraging. Again, that lost a little bit of steam today so that’s something we’ll keep an eye on. So we haven’t seen the leadership that we would like to see from the financials supported by a rally, a sustained rally in small caps, and some creeping higher in yields in the mid point of the long end of the U.S. Treasury curve. So we’ll keep an eye on that.

Terry Gardner:

The final thing we want to talk about today is some work that we did. In our investment committee meeting at C.J. Lawrence, we like to talk about what trends and themes we’re seeing in the marketplace. We were reminded by our Chairman, Jim Malts, who’s been watching the market for over 50 years, that it’s really important during these periods to watch which companies are growing their top line despite the downturn in the economy. So we did some work on that and thankfully Jim reminds us of that on a weekly basis. So we followed up on that and did some analysis and actually screened the S&P 500 down for three criteria. One, we were looking for companies that grew their sales in the most recent, there’s the Dog of the Dow right there, that grew their sales in 2019 by more than 7%, so high single digits, are expected to grow their sales more than 7%, high single digits in 2020, and same in 2021. So three years of top line growth in excess of 7%.

Terry Gardner:

And what we found was that there’s only 27 companies in the entire S&P 500 that meet that criteria. And not surprisingly, those companies year to date have appreciated on average, this is not a weighted average, but on average 8.5%. So those 27 companies are up on average for the year 8.5% versus the S&P 500 which is down over 10%. So the point is sales consistency above market sales rates. Companies that are growing the top line even in difficult periods of time and over long periods of time outperform the broader market. That is something that we focus on at C.J. Lawrence and we think that’s a winning strategy going forward, backed up by the analysis that we did today.

So if you’ve got any questions, feel free to give me a ring. (212) 888-6403 or shoot me an email at tgardner@cjlawrence.com. And I look forward to catching up with you next week. Thank you.