Stock Investors Focusing More on 2010 Earnings

Tuesday, October 6, 2009

Year 2010Earnings projections for 2010 are rising in importance among stock investors. This return to fundamental-based investing is a good sign of normality coming back. Stock prices remain controlled because outlooks vary widely and analysis vacillates between company performance and economic forces, good and bad. In the latest Barron’s (October 5, 2009), there are three articles highlighting this activity:

“Looking Past the Third Quarter(page 25) focuses on the wide spread of 2010 earnings estimates. Perhaps revealing Barron’s continuing pessimism, after giving the consensus Standard & Poor’s 500 (S&P 500) operating profits of $75.59, they mention two much lower estimates by reputable firms: $60 and $53. (Since a “consensus” is in the middle of all estimates, they have chosen to leave out examples of higher forecasts.)

“Will Corporate America Open Its Wallet?” (page 11) is a more balanced look at 2010 earnings and the effect of the changes in index composition. Like Dow Jones and the DJIA (see my write-up, “Look at Stocks’ Future Prospects, Not Their Past Performance”), Standard & Poor’s has replaced 10% of the S&P 500 companies since early 2008. The 2010 earnings consensus of “more than” $75 is up 21% from 2008’s $62, a seemingly optimistic projection. However, to properly compare, they recalculated 2008 earnings using the current company lineup, and they were $69. Thus, the real estimated growth is a reasonable 9%.

In “Downright Scary” (page 5), Alan Abelson continues his bearish view while referring to “…companies straining to realize those absurdly inflated Street expectations for 2010-11 earnings….” This quote shows that even the bears are looking at future earnings.

There is good news for stock investors in these articles. First is the building focus on future earnings that re-establishes the link between stock price and company performance. Second is the disagreement among the forecasters that keeps uncertainty alive and stock valuations attractive.

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October 2009