Author: Bob Gay, GEARS
Covestor model: Luxury Liner
The first quarter corporate wealth numbers give us a good measure of the top of the advance of the past two years. With financial statement data for 97% of the index now collected, we see a high sales growth rate at 14.7% but lower than the prior period. Since the average sales growth rate reached a post crisis low of -10% in the annual period ended with the last quarter of 2009, the average sales growth rate of American companies has staged the largest advance in the shortest period on record. Where from here is the critical question.
For this data, the long term history of corporate wealth and our assessment of its predictive value, see GEARS asset allocation analysis.
The proportion of the GEARS total market index capital weight accounted for by rising sales growth companies fell in the recent annual period – it’s now lower than last quarter and down from the peak in the annual period ending with the third quarter of 2010. The consistency of the advance has been lost. That means that the broad and stable share price advance of the past two years will likely become more stock specific and more volatile. Recent market weakness has increased the population of depressed shares and is providing more buying opportunities. Over the next few weeks, as the correction runs its course, I will lower the cash position, reduce the hedge, and aim to buy depressed shares of accelerating companies as they appear.
This is not a long term market top, but rather a leadership transition. The history of business cycles shows that the early stage of the recovery is driven by demand for consumer durables. After about two years, the consumers stop advancing and capital expenditures begin, propelling corporate profits higher for the next and last two years of the business cycle. We are at that transition now.
GEARS Consumer Cyclical sector index shows the peak, with sales growth and gross profit margins lower and inventories up. The late cycle groups are Basic Industry and Technology. Both are showing strong numbers in the recent reports.
Over the past month I have raised cash with the sale of Eli Lilly and Company (NYSE: LLY), Integra Life sciences (NASDAQ: IART), Pulte Home (NYSE: PLT), Stericyle (NADSAQ: SRCL), Intevac Corp (NASDAQ: IVAC), Faro Technologies (NADSAQ: FARO), National Semiconductor (NYSE: NSM), Lattice Semiconductor (NASDAQ: LSCC), Anadigics (NADSAQ: ANAD), OSI Systems (NASDAQ: OSIS) and Fairchild Semiconductor (NYSE: FCS). I have also increased the size of the hedge position from 9% to 20% of the portfolio.
Shares are now lower and I believe it’s time to buy.
To create a successful stock portfolio requires attention, consistency and discipline. Most of all, it requires an information edge. Years of research have shown that shares of companies that are profitable with rising shareholder wealth perform better.
"GEARS Total Market" GEARS. 6/6. http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=ddow
"GEARS Consumer Cyclicals" GEARS. 6/6. http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=sccz
"GEARS Basic Industry" GEARS. 6/6. http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=sbiz
"GEARS Technology" GEARS. 6/6. http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=stkz