Transcript Slide 1

Strategy Tear Sheet
Most Recent Strategy Calls…
Brian G. Belski
612.303.1503 / [email protected]
Adam J. Freeman
612.303.1509 / [email protected]
Chad E. Klatt, CFA
612.303.1506 / [email protected]
Cash Is King ~ February 14, 2005
Market Pulse
We Believe Investors are “Overlooking” Balance Sheet
Strength Of Corporate America
Small vs. Large
Monthly Model Review ~ February 7, 2005
Q4 Earnings Scorecard ~ January 31, 2005
Consensus Negativity ~ January 24, 2005
Financial Sector Differentiation ~ January 18, 2005
Identifying Growth vs. Value Groups ~ January 10, 2005
January 3, 2005 ~ 2005 Stock Lists
Earnings
Contrarian, Growth At A Reasonable Price (GARP), Yield Prospects
2005 Outlook ~ December 10, 2004
Growth vs. Value
See “Market Pulse” Slide for details
January Effect ~ November 22, 2004
Outside The Box ~ November 1, 2004
Technology Overweight ~ September 22, 2004
Health Care Overweight ~ September 20, 2004
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Valuation
Weightings
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Disclaimer
Updated as of: 2/14/2005
Market Pulse
2005 Outlook
We believe the stock market (as defined by the S&P 500 Index) will see a peak price level of at least 1350 during the year.
> As a result, stocks will likely post surprisingly positive returns for a third consecutive year.
> Leadership will likely be defined by companies exhibiting quantifiable fundamental growth characteristics and results.
> We believe investors should focus on growth companies relative to the value leadership of the past several years.
> Differentiated fundamental trends will lead to increased micro strategies and decreased “blanket” conclusions.
What CLIENTS want to talk about….
S&P 500 EPS Growth Model
• Energy: Will leadership extend into 2005?
• Tech: Does the “recovery” have staying power?
25.00
20.00
• Cash levels remain HIGH
15.00
•Dividend investing and “trading range” talk are
dominating forward market trend opinions
10.00
In addition, momentum remains a longer-term positive for a majority of sectors
and indices.
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Sep-06
Dec-05
Mar-05
6/2004
9/2003
12/2002
3/2002
6/2001
9/2000
12/1999
3/1999
6/1998
9/1997
3/1996
-10.00
12/1996
However, is not positive growth still positive growth?
-5.00
6/1995
Yes, the rate of growth will most likely decelerate in 2005 (high single-digit versus
low double-digit percentage growth in 2004).
0.00
9/1994
Earnings Analysis
Earnings are still growing…
5.00
12/1993
• Health Care: Drug hangover “skewing”
performance
Earnings Analysis
1.00
Growth
0.90
Consensus projections of 10-12% growth over the next 3-4 quarters
are likely too low.
0.80
1.00
0.70
0.60
0.00
0.50
0.40
Near-term momentum models solidifying; longer-term net positive
trends intact.
0.20
0.10
2005 Price Target = 1350
Fiscal Year 2
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Fiscal Year 1
December
November
October
September
August
July
June
May
April
believe forward assumptions are too conservative, with further upward revision
strength likely.
March
EPS Momentum + Growth - Long-term positive trends remain intact; we
February
Conclusions
S&P 500 Earnings Seasonality
0.200
0.150
0.100
0.050
0.000
(0.050)
(0.100)
(0.150)
January
1/31/2005
6/2004
11/2003
4/2003
9/2002
2/2002
7/2001
5/2000
12/2000
3/1999
10/1999
8/1998
1/1998
6/1997
11/1996
4/1996
9/1995
0.00
2/1995
-2.00
Momentum
PJC S&P 500 Projections
EPS: $70.88 – 2005
EPS: $77.27 – 2006
0.30
-1.00
Revision Ratio
% Change in EPS Revision
2.00
Small vs. Large
Relative Valuation - Russell 1000 vs. Russell 2000
Relative Perform ance - RUT vs. RUI (Monthly)
0.50
1.20
0.40
1.10
0.30
0.20
1.00
0.10
0.90
0.00
0.80
-0.10
1/2005
5/2003
9/2001
1/2000
5/1998
9/1996
1/1995
5/1993
9/1991
1/1990
5/1988
0.60
P/FE Rel. Val.
P/CF Rel. Val.
2/01/2005
3/2004
4/2003
5/2002
6/2001
7/2000
8/1999
9/1998
10/1997
11/1996
1/1995
12/1995
-0.20
0.70
P/S Rel. Val.
Re lative Pe rform ance - RUT vs . RUI (Daily)
1.20
Fundamentals…
1.10
Performance…
1.00
Large-cap valuation discounts proceed
Longer-term: Potential Peak
Shorter-term: Decelerating
0.90
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2/09/2005
10/13/2004
6/17/2004
2/19/2004
10/21/2003
6/25/2003
2/27/2003
10/29/2002
0.80
7/03/2002
Conclusion
Large-cap poised for fundamentally driven “run;” Small-caps losing steam and
increasing “expensive”
Growth vs. Value
Russell 1000 Grow th vs. Russell 1000 Value
Take-Away
1.06
1.05
1.03
1.02
1.00
0.99
0.97
0.96
0.94
Russell 1000 Indices - Value outperformance likely extended; we expect
growth to close the relative gap over the next 2-3 quarters
Russell 2000 Indices - Despite longer-term relative discount, value becoming
Grow th
Value
2/04/2005
12/17/2004
10/29/2004
9/10/2004
7/23/2004
6/04/2004
4/16/2004
2/27/2004
1/09/2004
11/21/2003
10/03/2003
progressively more expensive
Relative Valuation - Russell 2000 Value vs. Russell 2000 Growth
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
Fundamentals…
-0.30
Growth = Deep relative valuation discounts to market and value persist; growth
expectations likely too conservative
Performance…
-0.35
-0.40
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P/FE Rel. Val.
P/CF Rel. Val.
P/S Rel. Val.
3/2004
2/01/2005
Conclusion
Long-term focus = High-quality growth companies
4/2003
5/2002
6/2001
7/2000
8/1999
9/1998
10/1997
11/1996
12/1995
1/1995
-0.45
Value trends are testimony to defensive investing posture
Valuation Analysis
Indices
Overall contraction intact; small- and mid-cap still trading at premium to large-cap
market
Valuation - Price / Forw ard EPS
30
25
Differentiation
Growth sector contraction creates opportunity
20
Conclusion
15
Market NOT as expensive as consensus believes
10
Russell 2000
S&P 500
Conclusions
S&P 500
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Average
Upper (+1 SD)
1/31/2005
2/2004
3/2003
4/2002
S&P 500 Valuation - According to our PPV model (which takes into account
5/2001
6/2000
7/1999
8/1998
9/1997
10/1996
11/1995
12/1994
S&P 500 Valuation Model
Lower (-1 SD)
P/FE, P/S, P/CF, & P/B) the S&P 500 is trading below its average 10 year multiple.
Cheap or Expensive?? - On a relative and absolute basis, small-cap
multiples are trading at a premium to large-cap.
2/09/2005
6/24/2004
11/04/2003
3/20/2003
8/01/2002
12/12/2001
4/23/2001
9/01/2000
1/18/2000
6/02/1999
10/13/1998
2/26/1998
5
Sector Weightings
S&P 500 Index
6-12 Month Weighting
Russell Mid-Cap Index
6-12 Month Weighting
Russell Small-Cap Index
6-12 Month Weighting
Consumer Discretionary
Market Weight
Autos & Transportation
Market Weight
Autos & Transportation
Market Weight
Consumer Staples
Market Weight
Consumer Discretionary
Market Weight
Consumer Discretionary
Market Weight
Consumer Staples
Market Weight
Consumer Staples
Market Weight
Energy
Underweight
Financials
Market Weight
Energy
Underweight
Energy
Underweight
Health Care
Overweight
Financials
Underweight
Financials
Underweight
Industrials
Overweight
Health Care
Overweight
Health Care
Overweight
Information Technology
Overweight
Materials & Processing
Market Weight
Materials & Processing
Market Weight
Materials
Market Weight
Producer Durables
Overweight
Producer Durables
Overweight
Telecommunication Services
Market Weight
Technology
Overweight
Technology
Overweight
Utilities
Underweight
Utilities
Underweight
Utilities
Underweight
The Positives ~ Sectors to Overweight
Overweight Health Care: Earnings Consistency + Contracting
Aggregate Multiples = Long-Term Key
Overweight SPX Industrials and RMC/Rut Producer Durables:
Earnings Growth Recovery + Long-Term Revision Strength + Peak
P/E Valuation = Traditional Upward/Positive Change In Cycle
Overweight Technology: Tech earnings are NOT as bad as
consensus believes + Fundamental SEASONALITY is turning positive
+ Valuation contraction is attractive = Appetite for growth investing vs.
current “defensive posture.”
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The Negatives ~ Sectors to Underweight
Small- & Mid-Cap Financials:
Earnings: We believe momentum has peaked.
Macro Pulse: Treasury yield spread contraction is potentially
negative to forward earnings.
Valuation: Small- and Mid-Cap Financials are among the most
expensive areas in the market.
Energy:
Earnings: We believe momentum has peaked and is decelerating.
Macro Pulse: The sector is very over-owned by institutions.
Valuation: Multiples are volatile and not necessarily “cheap.”
Utilities:
Earnings: We believe momentum is reversing (negatively).
Macro Pulse: High yielding stocks have actually underperformed.
Valuation: Multiples are very expensive – near historical highs.
Analyst Certification—Brian G. Belski
The views expressed in this report, including the Key Points and Risk sections in particular, accurately reflect my personal views about the subject Company and the subject security. In
addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.
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