One More Sign the Bull Is Fading...

We are partway through third-quarter earnings. About a third of S&P 500 companies have reported results already. It is worth discussing this sample, because something has happened that hasn’t happened in a long while.

If you picked up a copy of TheWall Street Journal this Monday, you saw it there in black and white on the front page. “Companies to Post First Decline in Both Earnings and Sales Since the Recession.”

FactSet is even more specific:

For third quarter (Q3) 2015, the blended earnings decline is negative 3.8%. If the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009.

If you want to know why the market peaked in May, this is your answer. The market seemed to figure out around then that earnings were about to shrink. And at the moment, next quarter will also be one of earnings declines. FactSet says earnings growth isn’t expected until the first quarter of 2016.

That’s a problem because growth is what the market is all about. It’s what helps fuel rising price-earnings multiples and stock prices. In this market, growth is getting harder to find.

No wonder, as FactSet reports, investors are “rewarding upside earnings surprises more than average and also punishing downside earnings surprises more than average.”

That’s your overview of the kind of market we’re in.

It has the feel and taste of a late-cycle bull market. Even anecdotally, there have been an awful lot of blowups of late.

There is Glencore, the giant commodity trading firm, whose shares are down nearly 90% since their listing in 2011.

There is Valeant, the giant Canadian pharma stock, down 58% from its highs in July and August.

These are not small firms. And there have been plenty of others. At the end of September, about half of the S&P 500 stocks were down 20% or more from their recent highs. That 20% is the hurdle many typically use to declare a bear market.

It’s been easy to stumble. Valeant’s fall ensnared many great investors, including Bill Ackman, founder and CEO of Pershing Square Capital Management. He also owns Platform Specialty Products, which is down 60% from its high in June.

David Einhorn at Greenlight Capital is another. He’s down 17% this year. Consol Energy and SunEdison were among his biggest positions. Both were cut in half last quarter. If you’re having a bad year with your stocks, you have lots of company.

So there you go.

But heeding Phelps up top, the above earnings discussion is mostly a rationalization of the present. It’s backward-looking. The future could look very different.

Further, if there is good news, it is that not all sectors turn in the same scorecard. Energy has been particularly awful and can’t get out of the bunker. But the telecom group has been in the fairway for both quarters, and earnings are still growing there. There is room for stock picking.

That’s what makes my latest project to find the next 100-baggers — stocks that return $100 for every $1 invested — so exciting. These stocks are out there right now, dozens of them, ripe for the picking. And they can be found under all market conditions, including these. That’s why it’s so important to maintain a long-term view when it comes to investing, as I explain below.

In the spirit of Back to the Future, I take a look back over the past 30 years to record the stocks you could have bought in 1985 that became 100-baggers. You’ll see how they got there… and what we can learn from them in our quest for the next 100-baggers.

Regards,

Chris Mayer
for The Daily Reckoning

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