The Wall Street Journal published an interesting article For Small Cap Stocks, Look Past The Trump Trade. It is worth sharing the article’s premise and the potential pitfalls in the analysis as quite a few articles seem to be popping up recently touting small-cap stocks. Let’s start with the scatter plot below, courtesy of Fuery Research Partners and the Wall Street Journal. Data from 1968 shows that the lower the ratio of the P/E of small-cap stocks versus the P/E of large-cap stocks, the better the forward small-cap relative returns versus large-cap stocks. Moreover, when the ratio is 80% or less, as today (64%), small caps beat large caps every time. Per the article:
According to monthly data by Furey Research Partners going back to 1968, which includes only profitable companies, a valuation gap as large as the one at the end of November has historically led small-caps to outperform over the following five years 96% of the time, and 51% of the time by more than 10 percentage points.
The risk of blindly following the analysis is that it does not account for potential growth. The large-cap indexes have a more significant concentration of technology companies growing faster than the economy than small-cap indexes. Conversely, the small-cap index has greater contributions from companies growing at or less than the economy’s growth rate. The takeaway for investors is to do their homework. If you prefer small caps, find the profitable ones with robust expected growth rates. For those leaning toward small-cap stocks, the profitable with growth subset will offer the best rewards versus large-cap stocks.
What To Watch Today
Earnings
Economy
Market Trading Update – Is AMD A Buy?
Yesterday, we discussed that the market continues to hold key support, keeping the bullish “buy signal” and trend intact. Today, I wanted to look at Advanced Micro Devices (AMD) from a technical perspective as it may be setting up for a bullish move.
The stock has been under significant selling pressure for the last few months, which worked off much of the previous overbought condition. Furthermore, the sentiment on AMD has turned deeply negative, given its recent underperformance. The stock was pushed lower on Wednesday following its recent earnings announcement. Overall, the company continues to post strong earnings and revenue growth, but concerns over data center growth led to investors selling the stock.
However, this is where it is potentially very interesting. Over the last few months, money flows into AMD were deeply negative, corresponding with the relentless selling pressure in the stock. However, on Wednesday, while the stock was being sold off into the market, buyers were stepping with money flows turning positive for the first time since November. As shown, there is a high correlation between money flows and the stock price. Secondly, the MACD (momentum) and RSI (relative strength) have continued improving even as the stock price declined. Historically, positive divergences are a good early warning indicator of a bullish turn.
We currently hold a position in AMD, which we have increased and reduced over our holding period. The technical improvement may provide a near-term opportunity to bring the position back to target portfolio weights. We would like to see some follow-through, and a break above the 20-DMA will likely be a good “buy trigger” to make that addition. We remain patient for now, but the technical improvement is encouraging.
Ford Flounders Despite Good Earnings
Ford shares fell 5% on the open. Its stock is down by 50% from the early 2022 highs and at levels also seen in 1994. Needless to say, the company is struggling. However, on Thursday, Ford had a decent earnings report. It reported earnings per share of $0.39, beating the estimate of $0.34, and revenue of $48.2 billion, beating the forecast of $47.4 billion. But, the market was spooked with its forward guidance, which the CEO reiterated on CNBC. To wit:
There’s no question that tariffs at 25% level from Canada, Mexico, if they’re protracted, would have a huge impact on our industry, with billions of dollars of industry profits wiped out and adverse effect on the US jobs as well as the entire value system in our industry. Tariffs would also mean higher prices for customers
Ford is losing market share and taking significant losses in its EV division. The last thing the company needs is tariffs that will further weigh on its income statement. Ford now pays a 7.5% dividend. Be careful; the dividend will likely be reduced or cut if its struggles continue. Walgreens has been paying a dividend since 1933. They just eliminated the dividend to try and preserve its viability.
The Role Of Annuities In A Retirement Income Plan
Planning for retirement involves building a diverse and stable income strategy that ensures financial security throughout your golden years. Among the tools available, annuities in retirement planning offer a unique advantage: the ability to create a reliable, guaranteed income stream. However, understanding their types, benefits, and potential drawbacks is essential to determining whether they fit into your retirement plan.
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