by Bryan Perry

December 8, 2020

Once the market is past the highly charged Georgia runoff election on January 5, investors and fund managers will likely focus on forward earnings growth relative to where the market currently trades.

By historical standards, the S&P 500 is fully valued up here around 3,700. If the S&P earns $140 for 2020, then it trades at a current P/E of 26.4, which is clearly rich.

According to FactSet, the bottoms-up EPS estimate for 2021 (which reflects an aggregation of the median EPS estimates for CY 2021 for all of the companies in the index) is $169.20. If $169.20 is the final number for the year, it will also mark a record-high forward EPS for the index.

Standard and Poor's 500 Bottom-up Earnings per Share Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Even if we assume the S&P hits its 2021 earnings forecast of around $170, as modeled by FactSet, that would imply a forward P/E of nearly 22, which is also at the high end of the range going back to when this metric for measuring the market’s undervaluation, fair valuation, or overvaluation was created.

This topic gets a lot of commentary by the talking heads in the financial media, but it doesn’t seem to set off any alarm bells at the largest trading desks around the globe, which raises the question of … Why?

I think most would agree that the explanation that most easily satisfies this question is the cost of money. While Treasury yields have moved up in the past month from the 5-year to 30-year maturities, short-term rates from 1-month to 3-years have remained steady at extremely low levels, as targeted by the Fed.

Treasury Yields Table

Since most of the Fed’s debt and investment-grade debt is conducted in maturities of under five years, the cost to finance the Fed’s growing balance sheet, now at $7.2 trillion, is considered manageable.

Federal Reserve Total Assets Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The same thinking holds true for S&P 500 companies that can issue A-rated or higher debt at 1.5% for bonds that mature in 2030. This is almost “free money” that can fuel expansion or organic operations, or spur accretive acquisitions or expand stock buy-backs. Even junk bonds with maturities averaging about four years are paying below 5% yields in today’s market.

High Yield Corporate Bond Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Shares of iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the largest junk bond ETF traded, with over $27.5 billion in assets, has some amazing data that provides a big-picture view of just how bullish the debt markets are in light of how huge they have grown. As the 12-month price chart (above) shows, HYG is almost back to trading at its pre-pandemic high, while paying 4.86% yield.

Junk Bond Breakdowns Table

Be aware that we’re talking junk ratings paying under 5% in a rising-rate market where income received is taxed at one’s ordinary income tax rate. This is not a great investment proposition vs. other alternatives.

When looking for income assets to own when inflation and bond yields are rising, we want to steer our focus toward equities in companies that can raise prices for their goods and services. As money comes out of low-yielding fixed income, it will rotate into inflation- and rate-sensitive equities.

As such, ETFs like the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) would be a solid example of both attractive yield and capital appreciation potential. With assets of $2.2 billion, this broadly diversified ETF is made up of the S&P 500 best blue-chip stocks that throw off hefty dividend payouts.

The fund has 49 total holdings, including utilities, real estate, information technology, materials, communications services, consumer staples, energy, financials, healthcare, and consumer discretionary. It’s a real “who’s who” of big dividend-paying companies.

This is a made-for-income-investor ETF that is seeking blue-chip income and growth, trading at a 17% discount to its February high. There is no leverage, short-term gains, long-term gains, or return of capital contributing to the monthly dividend payments – just dividends from the assets themselves. The current annual dividend yield is 4.80%. Shares of SPHD traded as high as $44.42 prior to the March sell-off. Today, they trade at $37.50. Finding a blue-chip, investment-grade asset trading at an 18% discount to its prior high and paying out nearly a 5% yield on a monthly basis is a fortunate situation for income investors seeking to add capital to an elevated market.

This is just one example of how to deploy capital dedicated to income moving out of bonds and into more economically sensitive assets. In such cases, capital usually ends up flowing to blue-chip equities, most of which have qualified dividends. When comparing HYG and other conventional income vehicles, the case for blue-chip dividend stocks with investment grade balance sheets is pretty solid.

Highest Published Fixed Rates Table

The SPDR S&P 500 ETF (SPY) sports a current 1.57% yield, which has come down as the SPY has risen, but it still exceeds that of the benchmark 10-year Treasury. As long as this 60-basis point premium continues, so will the rally in dividend and dividend growth stocks. The best days for bonds are probably over until the next Great Recession, but some of the best days for dividend stocks are likely just ahead.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Industrial Metals Predict a Stronger Global Economy

Sector Spotlight by Jason Bodner
Solving the Rubik’s Cube of Stock Market Logic

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

Important Disclosures:

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.

ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:

  • ETF shares may trade above or below their net asset value;
  • An active trading market for an ETF’s shares may not develop or be maintained;
  • The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
  • The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
  • Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.

Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.

Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.

This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE:The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.

FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.