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Earnings update for January 2014

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The reported earnings in the third quarter again set records for quarterly and trailing twelve month’s earnings based on the un-weighted operating earnings of the current constituents. The third quarter earnings increased 5.47% over the previous quarterly earnings record reported in the second quarter. The third quarter’s trailing twelve month earnings record saw an increase of 2.85% over the previous record, also reported in the second quarter.

Third quarter earnings were 9.22% higher than those reported by the current constituents a year ago. The trailing twelve month’s earnings in the third quarter were 35.43% higher than the then record trailing twelve month’s earnings in the third quarter of 2012.

The earnings reported in the third quarter were at a pace to increase trailing twelve month earnings by 52.27% over the then record trailing twelve month earnings of the third quarter of 2007 during the next three quarters. On Jan 10, 2014, the date data was collected for this earnings update, the price on the S&P 500 was only 17.71% higher than the Oct 10, 2007 high.

Although over 41% of the 29 S&P 500 constituents that had reported earnings had missed the earnings estimate for the fourth quarter at the time of this update; half of those that missed reported earnings greater than they did the same quarter a year ago. At the time of the update 52% had beat projections and 7% were inline with expectations.

Earnings projections for the fourth quarter were down 4.29% from the projections made a quarter ago, but are less than $2 lower than the third quarter’s projections were at about the same time in the reporting season. Earnings for the third quarter beat those estimates by 4.19%.

The fourth quarter’s current earnings estimates are 6.47% higher than the reported earnings of the same quarter a year ago and 33.65% higher than the trailing twelve months earnings reported in the fourth quarter of 2012.

Based on changes from the last fully completed update on Nov 11, 2012 and the current update completed on Jan 10, 2013, earnings projections for the next full year forward saw 236 (47.20%) constituents with earnings projections decreases, 37 (7.40%) that remain the same and 227 (45.40%) that had increases in earnings projections. Despite fewer increases than decreases, the overall earnings expected increased by 1.00% over the three month timespan.

Due to time spent on other projects over the past several months, complete updates were not made in a timely manner during several of the past months, and therefore full comparison data normally used in this report is not available. As a result this month’s report is contained in this article only.

Constituent Changes

Following is a list of constituent changes since the last earnings update was published in May, they included:

Former S&P 500 constituent Dean Foods Co. (DF) completed its spinoff of WhiteWave Foods (WWAV) and was replaced by former S&P Midcap 400 constituent Kansas City Southern (KSU) in the S&P 500 due to a reduced market capitalization after the spin-off. Dean Foods was moved to the S&P Midcap 400 and WhiteWave Foods (WWAV) was also added to the S&P Midcap 400. Kansas City Southern was added to Industrials Sector.

S&P 500 constituent Berkshire Hathaway Inc. (BRK-B) and an investment fund affiliated with 3G Capital acquired former S&P 500 constituent H. J. Heinz Co. (HNZ) and Heinz was replaced by Detroit Michigan based General Motors Co. (GM) in the S&P 500. GM returns to the S&P 500 after completing its bankruptcy proceedings and also returns to the Consumer Discretionary Sector.

S&P 500 constituent Pfizer Inc. (PFE) split off Zoetis Inc. (ZTS) in an exchange offer allowing stockholders to exchange all, part or none of their shares in Pfizer for shares in Zoetis. As a result Zoetis replaced First Horizon National Corp. (FHN) in the S&P 500 due to First Horizon’s low market capitalization. First Horizon was added to the S&P Midcap 400. Zoetis was added to the Health Care Sector.

S&P 500 constituent News Corp. (NWSA) changed its name to 21st Century Fox (FOX) and at the same time spun off a new company with the old News Corp. name and ticker symbol. As a result the new News Corp. replaced former S&P 500 constituent Apollo Group Inc. (APOL) in the S&P 500. Apollo was removed due to its low market capitalization and added to the S&P 400 Midcap index. Both News Corp. (NWSA) and 21st Century Fox (FOX) remained in the Consumer Discretionary Sector.

After SoftBank Corp. (SFTBY) acquired a substantial stake in former S&P 500 constituent Sprint Nextel Corp. (S) and reduced Sprint’s public float below the 50% level required to be included in the S&P 500 it was replaced by Nielsen Holdings N.V. (NLSN) which is headquartered in Diemen, The Netherlands, making them a United States tax evader. Its website, like many of the other tax evaders leaves the impression that it is a US company; however as is stated on its Edgar filings, “State or other jurisdiction of incorporation or organization” is the Netherlands. It was added to Industrials Sector. Sprint’s departure leaves only six companies in the Telecommunications Services Sector.

Bain Capital, LLC acquired former S&P 500 constituent BMC Software (BMC) and as a result Delta Air Lines (DAL) returned to the S&P 500 after completing its bankruptcy reorganization to replace BMC Software. Delta was added to the Industrial Sector.

Former S&P 500 constituent Advanced Micro Devices Inc. (AMD) switched places former S&P MidCap 400 Vertex Pharmaceuticals (VRTX) to better align the two company’s market capitalization. Vertex Pharmaceuticals was added to the Health Care Sector.

Former S&P 500 constituent SAIC Inc. (SAI) split into two companies and immediately prior to the split had a 1-4 reverse stock split. SAIC then changed its name and ticker symbol to Leidos Holdings Inc. (LDOS) and the spinoff company was named Science Applications International Corporation (SAIC). Due to this planned reorganization and the fact the resulting companies’ market capitalization was more representative of the S&P MidCap 400, Ametek Inc. (AME) replaced SAIC in the S&P 500, and SAIC was moved to the S&P MidCap 400. Leidos Holdings and Science Applications were both later added to the MidCap 400. Ametek was added to the Industrial Sector.

Former S&P 500 constituent Dell Inc. (DELL) was acquired by founder Michael Dell and Silver Lake Partners. As a result former S&P 500 constituent Transocean Ltd. (RIG), who was kicked out earlier for re-domesticating to and is still headquartered in Zug, Switzerland to evade US taxes, was readmitted. It was added to the Energy Sector.

Former S&P 500 constituent NYSE Euronext Inc. (NYX) completed its merger with S&P 500 constituent Intercontinental Exchange Inc. (ICE) and was replaced by Michael Kors Holdings Limited (KORS). Michael Kors is another US tax evader, headquartered in Hong Kong. It was added to the Consumer Discretionary Sector.

Former S&P 500 constituent J. C. Penney Company Inc. (JCP) was replaced by Allegion plc (ALLE) the spinoff company of S&P 500 constituent and US tax evader Ingersoll-Rand plc (IR). Allegion like the parent company is headquartered in Dublin, Ireland and therefore a US tax evader. It was added to the Industrial Sector. J. C. Penney was moved to the S&P MidCap 400 due to low market capitalization.

Former S&P 500 constituent Molex Inc. (MOLX) was acquired by privately held Koch Industries Inc. and as a result former S&P 500 constituent General Growth Properties Inc. (GGP) was readmitted to the S&P 500 after reemerging from bankruptcy. General Growth Properties was added to the Financial Sector.

Former S&P 500 constituent Teradyne Inc. (TER) was replaced by Facebook Inc. (FB) in the S&P 500. Teradyne was moved to the S&P MidCap 400 due to low market capitalization. Facebook was added to the Information Technologies Sector.

Former S&P 500 constituent Abercrombie & Fitch Co. (ANF) swapped places with former S&P MidCap 400 constituent Alliance Data Systems Corp. (ADS). Abercrombie & Fitch was moved to the S&P MidCap 400 due to low market capitalization. Alliance Data was added to the Information Technologies Sector.

Former S&P 500 constituent JDS Uniphase Corp. (JDSU) swapped places with former S&P MidCap 400 constituent Mohawk Industries Inc. (MHK) due to JDS Uniphase’s low market cap. Mohawk Industries was added to the Consumer Discretionary Sector.

Additional Notes:

The S&P Dow Jones Indices recently updated market cap guidelines for the S&P 500 increasing the range for inclusion in the index to a market cap of $4.6 billion or greater up from the $ 4.0 billion or greater previously required. The S&P MidCap 400 ($1.2 billion to $5.1 billion up from $1.0 billion to $4.4 billion) and S&P SmallCap 600 ($350 million to $1.6 billion up from $300 million to $1.4 billion) ranges were also increased.

As can be seen in the constituent changes above the increase in market cap has had an effect on some constituent’s ability to maintain inclusion in the index. Although an increase in market capitalization generally shows a company is increasing stock value, it is not always the best means of determining the value of a stock. The increase is often temporary, and many of the stocks added to the index are eventually dropped later.

One of the companies recently added appears to be a possible candidate for an early exit. Vertex Pharmaceuticals might have a large market capitalization, but it appears to be a money losing machine. In 2007 they had losses of $3.03 a share; in 2008 they had losses of $3.27 a share; in 2009 they had losses of $3.71 a share; in 2010 they had losses of $3.77 a share; in 2011 they had their only yearly gain of $0.14 a share; and in 2012 they had losses of $0.50 a share.

The past two years made it appear the company might be on its way to becoming profitable; however the first three quarters of 2013 makes this illusion seem unrealistic as they have racked up Q1 losses of $1.43 a share, Q2 losses of $0.26 a share, Q3 losses of $0.54 a share and they are expected to lose $0.49 in the fourth quarter. Based on past performance the chances are pretty good that fourth projections are too high, as they have missed expectations in each of the past seven quarters. It looks possible they could be back to losing over $3 per year. To make matters worse, they aren’t expected to turn a profit for the foreseeable future. Given the history of earnings projections that have been high, it seems likely they won’t be back in the black for a while.

In all the years of tracking the S&P 500 there is not an addition to the index with a poorer earnings record or with poorer expectations of future earnings. There may be a good reason to invest in this company. Other than glancing at several earnings reports to compile data little further research was made into them, but since earnings generally drive stock prices higher, and large losses like they have endured for many years generally eventually causes a company to perish, their past earnings performance and future earnings expectations puts them very low on the list of companies to investigate into further, at least not until a light is visible at the end of the tunnel.

The recent additions to the index also brings the total of the inclusions in the S&P 500 that have domesticated abroad to evade US taxes to over 5%. More than one in 20 of the 500 largest publicly traded companies in the US, has re-domesticated to evade taxes. Some investors see this run to foreign sovereignty as reason to invest in these companies. Shareholders often vote for this flight. The increase in the numbers fleeing will probably eventually promote repercussions, just as loopholes were closed in Bermuda and The Camion Islands that caused many to flee to other destinations. Over the years many companies have been banned from trading in the US markets.

Some of the other developments affecting the constituent’s since the last report include:

The Washington Post Company (WPO) was sold to Amazon founder Jeffrey Bezos for $250 million in August. The name and symbol were changed to Graham Holdings Co (GHC) and the Post remained in the S&P 500.

Limited Brands Inc. (LTB) changed its name to L Brands Inc. (LB) in March as a condition of its final split from Limited Stores LLC in 2010, then in December changed its symbol to LB.

The S&P 500 has seen an increased in the pace of splits. This increased split activity is a bullish indicator. The following companies have had stock splits since the last earnings report was published:

Colgate-Palmolive Co (CL) stock split 2-1.

Noble Energy Inc. (NBL) stock split 2-1.

Whole Foods Market, Inc. (WFM) stock split 2-1.

Flowserve Corp. (FLS) stock split 3-1.

Cerner Corp. (CERN) stock split 2-1.

Franklin Resources, Inc. (BEN) stock split 3-1.

Cabot Oil & Gas Corporation (COG) stock split 2-1.

DAVITA INC. (DVA) stock split 2-1.

FISERV, INC. (FISV) stock split 2-1.

BORGWARNER INC. (BWA) stock split 2-1.

V. F. CORPORATION (VFC) stock split 4-1.

In addition, Master Card (MA) stock will split 10-1 on Jan 22.

Although some stocks experience a decrease in value for a short time after splitting, most rebound and add value faster than before splitting. Splits also tend to increase volume. Research shows that stocks that split generally increase dividend payments faster than those that don’t.

Many of these sources were used in this article.

Have a great day trading,

Disclosure: Ron has investments in DF, PFE and JCP. Ron divested in WWAV, AMD, SAI, DELL and NYX prior to planned reorganization or fairly recently. Ron currently has no investments (or had no investments prior to mergers or acquisitions of nonexistent companies) in BRK-B, HNZ, GM, ZTS, FHN, NWSA, FOX, APOL, SFTY, S, NLSN, BMC, DAL, VRTX, LDOS, SAIC, AME, RIG, ICE, KORS, ALLE, IR, MOLX, GGP, TER, FB, ANF, ADS, JDSU or MHK although he has invested in several in the past and is currently interested in some of these stocks. Ron is currently about 85% invested long in stocks in his trading accounts.

Disclaimer: This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.