High Number of Quality Stocks Augurs Well for 2011 SPX Price Targets

From the chart below we infer that the the number of “high-quality” stocks in our model portfolio strategies seems to be loosely be correlated with the S&P 500.

The blue line in the chart is the number of model portfolio stocks in our theoretical “Opportunistic Long Only Model” and the red line is the S&P 500 set to 100 as of 12/31/04.

We have not finalized our model portfolio yet for the May 31, 2011 rebalancing but it looks like the number of “high-quality” stocks for the next month will be 34-36 compared to 35 last month and a prior peak of 33 October 2006 and this past March as we previously noted.

We define “high-quality” stocks as those that are ranked highly in four key metrics:  1) Relative Value; 2) Operating Momentum; 3) Analyst Revision Momentum; 4) Fundamental Quality.

Recently analysts in aggregate have been revising estimates down for earnings while increasing them for revenue.  Even while EPS estimates are being revised down relative to a few weeks ago, they are showing growth relative to last year.

As long as gains in ROIC offset and potential decline in earnings, we should still be able to anticipate some degree of market multiple expansion.

Given the increasingly higher levels of business activity which can be measured simply by aggregate revenue growth against the backdrop of a potential peak or plateau in commodity prices, one does not need a high degree of optimism to expect continued gains in ROIC and a reasonable chance for aggregate positive earnings estimates revisions later in the year.

 


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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