U.S. bluechips to outperform on strong profits, low valuations

Posted on: November 21, 2011 in: Uncategorized, US Equities with 0 comments

ISHARES S&P 500 INDEX FUND C$ Hedged Ticker: XSP / TSX


Early this year, we defied the doom-and-gloomers and declared ourselves bulls on large-cap U.S. blue-chips. We said they would outperform smaller U.S. companies and their global peers, including Canadian stocks. We also said the U.S. dollar would strengthen. Right on all counts, we remain bullish on the United States as we head into 2012.

Given the mayhem in Europe and the roller-coaster markets, you could be forgiven for thinking that all stocks have performed terribly this year. In most cases you would be correct. U.S. mid-caps are down 1.0% and small-caps are down 4.3%. Europe, Japan, and Emerging Market indices are all down about 14% year-to-date. Our own S&P TSX 60 is down 7.6%.

The one exception though has been the bluest of the U.S. large-cap firms. The Dow Jones Industrial Average exchange-traded fund, the SPDR DJIA Trust (DIA/NYSE), is up a respectable 6.6% in the year-to-date. The Powershares Nasdaq 100 ETF (QQQ/NYSE) is up even more at 7.3%. A stronger U.S. dollar adds another 2% to those returns for Canadian investors.

Not bad for a country where GDP is growing at less than 2%, unemployment is rioting at over 9% and government debt is piling up faster than the heap of failed Republican presidential candidates.

Which brings us to politics. In the face of an obstructionist opposition, the Obama administration is practically emasculated until at least the election next November. The Federal Reserve has limited options, other than to keep interest rates low and money supply plentiful.

But the view is much brighter on Wall Street. Chevron, Du Pont, Caterpillar, Kraft and Boeing are just some of the mega-cap names reporting double-digit growth in profits.

The one thing these firms all have in common is their global reach. Though apple-pie-American, each of these firms earns most of its revenue and nearly all its growth from overseas markets, especially in Asia. Their success is a testament to the strength, ingenuity and resilience of American enterprise and one good reason not to underestimate the United States.

Corporate profits are higher now than they were before the 2008 crisis. Earnings per share on the S&P 500 Index are at 95.16, 5.7% higher than their 2007 high and 57% higher than 2008.

The strong earnings are not reflected in the price. The main S&P 500 ETF, SPY/NYSE, trades at a price-to-trailing-earnings ratio of 14 times. The DIA/NYSE trades at 13 times. Those levels are on par with the lows of March 2009, just when the post-2008 rally began. The levels are also well below the average P/E of about 17 times.

Earnings across the Dow Jones companies are expected to grow about 10% next year. Even if the price-to-earnings ratio doesn’t shift, the Index should still see a healthy return for 2012 on earnings growth alone. There will likely be some big bumps on the road, given the European debt  problem is far from over. But for U.S. equities, the outlook is positive.

The case for the U.S. dollar is not as clear. On the one hand, the Federal Reserve’s easy money policy will cap U.S. dollar gains through this year. Eventually though, as U.S. exporters continue to benefit from the weak dollar, the trend should reverse and the dollar will strengthen.

Canadian investors can avoid the currency uncertainty by opting for a hedged investment. That way, they will get approximately the same return as a U.S. investor would get.

There are several good currency-hedged ETFs available to invest in U.S. equities. The oldest and biggest by assets is iShares S&P 500 Index C$ Hedged ETF (XSP/TSX).

Another is Horizons’ HXS/TSX, also on the S&P 500. It has two benefits. First, its fee, 0.15%, is half of XSP/TSX. Second, it is more tax-efficient since it converts dividends into capital gains. It does this by using a derivative called a “swap” to earn the return of the index rather than buying the stocks directly. (For the complete list of the others, including one on the Dow, subscribe to archerETF’s free newsletter.)

As for the doom-and-gloomers, we will let them hide in their caves for another year.



Chart courtesy of Bloomberg L.P.     Click on Chart for Larger Image

archerETF Metrix XSP / TSX
Categories Equity / U.S. / Large-cap
Total Holdings 500 firms, via an ETF
52 Week High 15.77
Recent Price 14.18
52 Week Low 12.31
Avg Daily Volume 796,565 shares
Avg Daily Volume ($) $ 11.3 Million
Total ETF Assets $ 1.5 Billion
Allocation to 10 Largest Holdings 19.48%
ETF Annual Fee .25%
ETF Trading Currency CAD
ETF FX Exposure CAD
Annual Volatility 21.53%
Correlation to S&P TSX Comp. 77.95%
Return to Risk Ratio 0.41
Beta to S&P TSX Comp. 0.94
Price-to-Earnings Ratio 14.14
Use of Leverage No
Use of Futures No
6 month Return -6.61%
1 Year Return 6.15%
3 Year Return 12.49%
Dividend Yield (TTM) 1.30%

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© 2011 archerETF Portfolio Management is a division of Bellwether Investment Management, a discretionary portfolio manager registered with the Ontario Securities Commission. This report is provided for information only and does not constitute investment advice. While we believe the information to be accurate and timely, we make no claim or warranty to that effect. Please seek professional advice before making any investment decision. We may hold positions in any or all securities discussed in this report.

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