Every month, The Prudent Speculator produces a newsletter that includes a market summary, helpful charts and graphs, recent equity market news, economic outlook and specific stock investment strategies focused on value stock investing. This month, we add stocks to three of our newsletter portfolios, while our Editor’s Note looks at the aftermath of Election Day 2024 and our Graphic Detail offers our quarterly Earnings Scorecard. Note that the entire list is available to our community of subscribers only.
Editor’s Note: 2025 Market Outlook, Earnings Scorecard, Election Aftermath
In large part due to Donald J. Trump’s convincing victory in the race for the White House and a Republican sweep of Congress, the U.S. equity markets turned in a November to remember. Indeed, though the history books dating back more than nine decades and covering 24 presidential terms show that stocks have favored a “D” vs. an “R” in the Oval Office (the results are far less heavily skewed in favor of the Democrats if the scoreboard starts after Herbert Hoover and the Great Depression), the major market averages just posted their best month of the year.
We might argue that many traders were braced for a contested election with the possibility of civil unrest, so a clear winner for Commander in Chief spurred an unwind of defensive positions. In addition, many were likely enthused about potentially lower or at least not higher tax rates, while reduced regulation could boost corporate profits. And a resurgence of animal spirits should bolster deal-making activity, which has helped propel Financials to the top of the sector performance table since Election Day.
Of course, we can’t overlook the fact that Q3 results from Corporate America continued to be healthy (see this month’s Graphic Detail), while the U.S. economy remains on solid footing. The latest estimate for Q4 real (inflation-adjusted) GDP growth from the Atlanta Fed stood at a robust 3.2%, initial jobless claims continue to reside near multi-generational lows and even the relatively weak factory sector just showed signs of improvement with a better-than-expected reading on the ISM Manufacturing Index.
What’s more, inflation is trending in the right direction, with the most recent projection from the Federal Reserve of a further easing of interest rates next year appearing intact. New York Fed President John Williams said on Dec. 2 that while the Personal Consumption Expenditure (PCE) gauges are still above the Fed’s 2.0% target, there are reasons to be confident that they will reach that level, thanks to a slowdown in inflation rates for goods and services excluding food, energy and housing.
No doubt, there are plenty of reasons to be optimistic about the prospects for equities going forward, while the historical evidence shows that Dividend Payers and Value Stocks have enjoyed average annualized returns of 12.6% and 13.9%, respectively, since the launch of The Prudent Speculator in March 1977.
However, we are braced for downside volatility, as selloffs, downturns, pullbacks, corrections and even Bear Markets are events that equity investors always have had to endure on their way to achieving terrific long-term returns.
And, given the experience of Trump 45, we have to expect plenty of twists and turns in policy from a Trump 47 White House. After all, the President Elect said on his Truth Social platform last week, “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”
Tariffs could lead to higher inflation in the U.S. and hurt profits of more than a few American manufacturing companies, but many believe the threat is likely a strong negotiating tactic a la The Art of the Deal. Certainly, it would not be a surprise to see some tariffs implemented, but Mr. Trump arguably threw fans of free trade a bone by naming Scott Bessent as his Treasury secretary. Mr. Bessent could modify his views, but back in January he said, “The tariff gun will always be loaded and on the table but rarely discharged,” while in October he added, “A lot of what he’s doing is to escalate to de-escalate.”
The next four years will be interesting, but we see no reason why they won’t be rewarding for equity investors.
“I never get too attached to one deal or one approach. I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first.” — Donald J. Trump
Graphic Detail: Q3 Season and Earnings Scorecard
Economic data in the period was favorable and real (inflation-adjusted) U.S. GDP grew a healthy 2.8% in Q3, while Corporate America again enjoyed solid revenue and net income tallies, even as management teams engaged in their usual tempering of guidance. Impressively, the number of S&P 500 companies that exceeded bottom-line forecasts was 75.8%, in line with the usual “beat” rate, and 52.6% eclipsed top-line projections. Of The Prudent Speculator’s 95 stocks presented below, 76% topped EPS expectations, and the average one-day price reaction was a gain of 0.2%, while the average two-month gain from 09.30.24 through 11.30.24 was 6.0%.
Standard & Poor’s projects (as of 11.29.24) bottom-up operating EPS for the S&P 500 are to climb to $233.87 in 2024 and $273.25 in 2025. That is up from $196.95 and $213.53 in 2022 and 2023, respectively, and those figures include massive $66.9 billion ($4.74 per share) in Q2 ‘22 and $23.5 billion ($2.82 per share) in Q3 ‘23 “unrealized investment” losses for Berkshire Hathaway. Estimates are subject to change (current forecasts are lower vs. three months ago), but anything close to those EPS levels, we think, should support higher stock prices.
Recommended Stock List
In this space, we list all of the stocks we own across our multi-cap-value managed account strategies and in our four newsletter portfolios. See the last page for pertinent information on our flagship TPS strategy, which has been in existence since the launch of The Prudent Speculator in March 1977.
Readers are likely aware that TPS has long been monitored by The Hulbert Financial Digest (“Hulbert”). As industry watchdog Mark Hulbert states, “Hulbert was founded in 1980 with the goal of tracking investment advisory newsletters. Ever since it has been the premiere source of objective and independent performance ratings for the industry.” For info on the newsletters tracked by Hulbert, visit: http://hulbertratings.com/since-inception/.
Keeping in mind that all stocks are rated as “Buys” until such time as we issue an official Sales Alert, we believe that all of the companies in the tables on these pages trade for significant discounts to our determination of long-term fair value and/or offer favorable risk/reward profiles. Note that, while we always seek substantial capital gains, we require lower appreciation potential for stocks that we deem to have more stable earnings streams, more diversified businesses and stronger balance sheets. The natural corollary is that riskier companies must offer far greater upside to warrant a recommendation. Further, as total return is how performance is ultimately judged, we explicitly factor dividend payments into our analytical work.
While we always like to state that we like all of our children equally, meaning that we would be fine in purchasing any of the 100+ stocks, we remind subscribers that we very much advocate broad portfolio diversification with TPS Portfolio holding more than eighty of these companies. Of course, we respect that some folks may prefer a more concentrated portfolio, however our minimum comfort level in terms of number of overall holdings in a broadly diversified portfolio is at least thirty!
TPS rankings and performance are derived from hypothetical transactions “entered” by Hulbert based on recommendations provided within TPS, and according to Hulbert’s own procedures, irrespective of specific prices shown within TPS, where applicable. Such performance does not reflect the actual experience of any TPS subscriber. Hulbert applies a hypothetical commission to all “transactions” based on an average rate that is charged by the largest discount brokers in the U.S., and which rate is solely determined by Hulbert. Hulbert’s performance calculations do not incorporate the effects of taxes, fees, or other expenses. TPS pays an annual fee to be monitored and ranked by Hulbert. With respect to “since inception” performance, Hulbert has compared TPS to 19 other newsletters across 62 strategies (as of the date of this publication). Past performance is not an indication of future results. For additional information about Hulbert’s methodology, visit: http://hulbertratings.com/methodology/.
Portfolio Builder
Each month in this column, we highlight 10 stocks with which readers might populate their portfolios: American Tower (AMT), Walt Disney (DIS) and Merck & Co (MRK).
Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.