Thu, November 7, 2019 | 2:51PM ET

Raising S&P 500 YE Target to 3,185 (+60) due → Santa Claus rally + ISM inflection + positioning... don't sell this rally

Name: FS Insight
Price range: $$$

Equity markets have decisively broken to the upside in the last few days and no doubt, leaves many wonder whether to “fade this” into year-end or view this as a sustained risk-on move. In our view, this advance, is supporting by rising visibility around the upturn in the global industrial cycle, thus, we are buying this rally, not de-risking.

POINT 1: US ISM Exports index moved back above 50 after tanking below 45 for 2 months… implies 18% EPS growth next yearThe ISM exports turned back above 50 in October. This is exports–> it strongly supports our view that the industrial recession is bottoming and now turning up. Since 1990, moves back above 50 lead to average EPS growth of 18%.

– this points to a re-acceleration cycle, not late-cycle move into a recession.

Raising S&P 500 YE Target to 3,185 (+60) due → Santa Claus rally + ISM inflection + positioning... don't sell this rally

POINT 2: Stocks are just catching up to EPS –> 2-yr EPS CAGR is 11% (’17-’19) while S&P 500 CAGR only 7%
EPS growth last 2 years has outpaced market gains. Hence, we would argue that 2019 is merely catching up to the EPS move.

– Moreover, if EPS is accelerating next year to as much as 18% EPS growth, then stocks have similar upside, arguably.

POINT 3: Santa claus rally. 10 of 10 times in last 20 years, if market is up YTD 9% thru 11/5, it has finished positive 11/15 to YE. Implies 3,200.
There is the Santa Claus rally. As shown below, when markets are up >9% thru 11/5, it has seen positive follow thru to YE, 10 of 10 times. Avg gain is 4%

– This means S&P 500 still has 100 points of upside. We would not fade this move.

POINT 4: Raising S&P 500 Target to 3,185 (+60).We are raising YE target to 3,185. We think 2020 EPS can be above consensus ($182 vs $180) and P/E can expand 0.4X to 17.5X. This PE is a ~6% earnings yield and Investment grade bond yields are 3%. Stocks are cheap. And arguably EPS could be $188-$190 if industrial cycle accelerates as we expect.

BOTTOM LINE: WE LIKE THESE STOCKS…We think Cyclicals are the place to be. We have a list of quality cyclicals to own into YE.

– Tickers: TPR, KSS, LEN, PHM, EXPE, LMT, CAT, CMI, EMR, ROK, IBM, INTC, MXIM, QCOM, QRVO, PLD, CBRE, CCI, IRM, SBAC, CTL, DISCK, T, ATVI and VIAB

Disclosures (show)

This research is for the clients of FS Insight only. FSI Subscription entitles the subscriber to 1 user, research cannot be shared or redistributed. For additional information, please contact your sales representative or FS Insight at fsinsight.com.

Analyst Certification (Reg AC)

Tom Lee, CFA, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. There is a possibility that we will from time to time have long or short positions in, and buy or sell, the securities or derivatives, if any, referred to in this research.

Conflicts of Interest

This research contains the views, opinions and recommendations of FS Insight. At the time of publication of this report, FS Insight does not know of, or have reason to know of any material conflicts of interest.

General Disclosures

FS Insight is an independent research company and is not a registered investment advisor and is not acting as a broker dealer under any federal or state securities laws.

FS Insight is a member of IRC Securities’ Research Prime Services Platform. IRC Securities is a FINRA registered broker-dealer that is focused on supporting the independent research industry. Certain personnel of FS Insight (i.e. Research Analysts) are registered representatives of IRC Securities, a FINRA member firm registered as a broker-dealer with the Securities and Exchange Commission and certain state securities regulators. As registered representatives and independent contractors of IRC Securities, such personnel may receive commissions paid to or shared with IRC Securities for transactions placed by FS Insight clients directly with IRC Securities or with securities firms that may share commissions with IRC Securities in accordance with applicable SEC and FINRA requirements. IRC Securities does not distribute the research of FS Insight, which is available to select institutional clients that have engaged FS Insight.

As registered representatives of IRC Securities our analysts must follow IRC Securities’ Written Supervisory Procedures. Notable compliance policies include (1) prohibition of insider trading or the facilitation thereof, (2) maintaining client confidentiality, (3) archival of electronic communications, and (4) appropriate use of electronic communications, amongst other compliance related policies.

FS Insight does not have the same conflicts that traditional sell-side research organizations have because FS Insight (1) does not conduct any investment banking activities, and (2) does not manage any investment funds.

This communication is issued by FS Insight and/or affiliates of FS Insight. This is not a personal recommendation, nor an offer to buy or sell nor a solicitation to buy or sell any securities, investment products or other financial instruments or services. This material is distributed for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice.
The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Intended for recipient only and not for further distribution without the consent of FS Insight.

This research is for the clients of FS Insight only. Additional information is available upon request. Information has been obtained from sources believed to be reliable, but FS Insight does not warrant its completeness or accuracy except with respect to any disclosures relative to FS Insight and the analyst’s involvement (if any) with any of the subject companies of the research. All pricing is as of the market close for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, risk tolerance, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies. The recipient of this report must make its own independent decision regarding any securities or financial instruments mentioned herein. Except in circumstances where FS Insight expressly agrees otherwise in writing, FS Insight is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice, including within the meaning of Section 15B of the Securities Exchange Act of 1934. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client website, fsinsight.com. Not all research content is redistributed to our clients or made available to third-party aggregators or the media. Please contact your sales representative if you would like to receive any of our research publications.