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Real Money Post Industrial Average Outperforms

Third-quarter index move outpaced major market measures, Chris Versace notes.

Chris Versace is taking a last look in the rear-view mirror at the third quarter of 2021, with a special focus on his Real Money Post Industrial Average (RMPIA) .

He likes what he sees.

For the third-quarter, the index is 0.2% higher than the majority of major market indexes. How does that stack up? Last week, as the market closed the books on the quarter in full, the major indexes didn't fare too badly:

  • S&P 500: +0.23%
  • Nasdaq Composite Index: -0.4%
  • Dow Jones industrial average: - 1.9%
  • Russell 2000: -4.6%

But those figures also gloss over the damage in September:

  • S&P 500: -4.8%
  • Nasdaq Composite Index: -5.3%
  • Nasdaq 100: -5.7%
  • Dow Jones: - 4.3%
  • Russell 2000: -3.1%

For the quarter, roughly a dozen of RMPIA's constituents moved higher, led by the likes of Accenture  (ACN) - Get Accenture Plc Class A Report, Costco Wholesale  (COST) - Get Costco Wholesale Corporation Report, Salesforce  (CRM) - Get salesforce.com, inc. Report, Alphabet  (GOOGL) - Get Alphabet Inc. Class A Report, and Netflix  (NFLX) - Get Netflix, Inc. (NFLX) Report. Those gains, however, were offset by the share price declines that occurred during the quarter by the likes of PayPal  (PYPL) - Get PayPal Holdings Inc Report, Walgreen Boots Alliance  (WBA) - Get Walgreens Boots Alliance Inc Report, Kraft Heinz  (KHC) - Get Kraft Heinz Company (KHC) Report, and Biogen  (BIIB) - Get Biogen Inc. Report.

“The issues that weighed on the major market indexes during the quarter were several, including supply chain issues, rising input costs, difficulty finding employees, continued pushouts on both the debt ceiling and infrastructure spending,” Versace said recently on Real Money. “Additionally, timing for Fed bond tapering, weaker-than-expected economic data, the continued chip shortage and -- more recently -- manufacturing blackouts in China all impacted performance.”

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Versace also saw renewed restrictions put in place to varying degrees across the globe due to the COVID-19 delta variant. “The fair observation is the vaccination led reopening didn't go as smoothly as planned, but that would be something of an understatement,” he noted.

Recent company commentaries from the likes of Nike NKE, FedEx FDX, Bed Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report, and others confirm the notion the September-quarter earnings season is likely to be something of a bumpy one.

“At risk are earnings expectations for not only the September quarter, but also for the December one, as well,” Versace said. “Currently, EPS for the S&P 500 in the second half of 2021 is expected to reach $99.92, up more than 22% year-over-year, but down about 2% compared to the first half of 2021. Based on what those three companies shared just last week, odds are we will see that $99.92 in EPS gets revised lower in the coming weeks as the September quarter earnings season takes hold.”

Versace is also looking ahead.

“Despite some modest EPS revisions for the basket of companies that make it up, the RMPIA is still poised to deliver substantially faster EPS growth over the 2019-2023 time frame, -- around 73.4% in aggregate versus 44.1% for the S&P 500,” he said. “For those looking for a compound annual growth equivalent, RMPIA stacks up at more than 36%, while the S&P 500 clocks in at 17%.”

If there are EPS revisions for the second half of the year, odds are they would do more damage to the S&P 500 than RMPIA, but Versace is ready to size up revisions for both.

“The concept to focus on is that EPS growth faster than the S&P 500 deserves a premium valuation,” he said. “Based on its September 30 close, RMPIA traded at a price/earnings to growth (PEG) ratio of 0.4-times based on the above EPS growth and its current P/E multiple of 30.5-times for 2021. Based on similar metrics, the PEG ratio for the S&P 500 was 0.49.”

“Consequently, some repricing may be in order.”

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