A theme so far this earnings season is U.S. companies warning of an economic slowdown. With about half of the S&P 500 companies having reported already, many are citing protracted declines in production, sales, and employment that will track into 2016.
The press is treating this as a surprise, yet I'm hard-pressed to understand how...
We've been talking about the decline in revenue and earnings for more than a year and prepared accordingly. I've shown readers how to move your money into the best quality companies and simultaneously tighten up your risk management controls - often at a profit. But what's becoming more clear from this earnings trend is just how much the Federal Reserve's misguided policies have hurt the U.S. consumer - and how that will affect company revenue and share prices.
Just take a look at these numbers - plus I'll give you two stocks that will help your portfolio thrive in a slowing earnings environment...
So far this quarter just 41.5% of companies reporting have beaten quarterly revenue estimates. That's down from more than 70% in late 2009.
Earnings is the much more common stat to focus on for the simple reason that talking about the 77% of companies that have beaten earnings estimates so far this season is more palatable.
The problem - and what everybody is missing - is that you can fudge earnings. Any decent CFO can swing them by a few percent by drawing on reserves or using special accounting tricks or simple hedges.
But you cannot fudge top line numbers. Either you've got the sales or you don't.
The average S&P 500 company expects a profit drop of nearly 6% alongside a revenue drop of 3.3% in Q3. This revenue dip follows a 3.3% revenue decline in Q2 and a 2% fall in Q1, according to FactSet.
The last time we saw four consecutive negative quarters of revenue was 2008-2009. Falling revenue tells me one thing: Consumers cannot afford to pay up for the inflation the Fed thinks is so important.
New data from the Social Security Administration shows that 51% of working Americans - 1 in 2 - make less than $30,000 a year. The poverty line for a family of four is $24,250.
This is a scathing indictment of the Fed's policy; the middle class is being eviscerated. You have Middle America household wealth going down, people making less money, and people with less savings to begin with...
So companies are turning to serious discounting as a means of moving merchandise. That, in turn, causes profits to fall.
Look at Wal-Mart Stores Inc. (NYSE: WMT). The retail giant forecast a profit drop in 2016 of 6% to 12% when it reported Q3 earnings Oct. 14.
More than 100 million Americans shop at Wal-Mart weekly, so that dramatic drop in earnings projections tells me that the middle class is in more trouble than previously acknowledged. The recovery Washington thinks is moving along is actually shifting into reverse.
The troubled consumer/retail discounts/lower profits chain is a vicious cycle. For investors, it speaks to why we will continue to avoid consumer discretionary stocks for the foreseeable future.
This may take the press by surprise, but you can be prepared for slow earnings over the next few quarters. Continue to build defensive positions in companies selling "must have" products the world cannot live without.
Here's a couple we like now...
Raytheon Co. (NYSE: RTN) is a $32.6 billion defense contractor that provides governments around the world with state-of-the-art electronics, mission systems integration, and other weapons capabilities.
RTN has been one of the best performers for my Money Map Report subscribers. It has nearly tripled since I first recommended it to them in August 2011.
Raytheon is also a dividend star, with yield of 2.25%. The company has raised payouts seven times in the last seven years, and its payout has grown at a 141% growth rate. With a payout ratio of 36%, this dividend has room to climb.
The Boeing Co. (NYSE: BA) is a $93.8 billion defense company - and the world's largest aerospace company. In its Q3 earnings report out on Oct. 21, Boeing raised its 2015 profit and revenue guidance. Its earnings success is unsurprising considering a continued demand for aircraft in a global rearmament trend led by the United States, Russia, China, and Saudi Arabia.
I particularly like the company's proven ability (and desire) to raise dividend payouts aggressively over time. The company has hiked its dividend five times in the last seven years, going from a $0.40/share payout to $0.90/share - a 127% increase that's all the more impressive considering it took place during some of the worst financial conditions the world has ever seen. The just-announced budget deal reached in Congress will have the effect of boosting defense spending by $40 billion through fiscal 2017 - while adding tens of billions of dollars to the Pentagon's budget for experimental military technologies. That's a major potential catalyst for these defense contractors, who have already won more than $1.2 billion worth of contracts after a burst of deals announced this week alone.
As defense contractors everywhere continue to shrug off the shackles of Washington's sequestration, I expect the incredible run of "must have" companies like RTN and others to continue into fiscal 2017 and beyond - no matter what's in store for retailers and their "nice to have" cousins. Stay up to date on investing analysis with our Twitter alerts @moneymorning.
A version of this analysis was first sent to subscribers of Keith’s Money Map Report, a monthly publication where Keith tracks the world’s high-profit trends and profiles new investment opportunities. Subscribers also get weekly portfolio updates and access to special research reports, like “How to Build Lifelong Wealth in a World of Runaway Debt.” Find out how to join here.
