February 2, 2017

U.S. Post-election Update: Which Industries May Prosper – or Not?

by Tim Gaumer

One month after the U.S. presidential election, we examined sell-side analyst activity across industry groups as one measure of which industries may face better or worse conditions under the new administration. http://tmsnrt.rs/2hb5R5l

It’s now been 12 weeks since the Nov. 8 election and we’re updating our results. In an attempt to partially answer the question in our headline, we again turned to a collection of experts who know their companies well – sell-side analysts.

Next, we’ll gauge investor sentiment by looking at stock price changes, by industry, since the week prior to the election. Finally, now that we’re into the first earnings reporting season since the election, we’ll also see how companies have been faring.

Analysts have been busily revising their earnings models since the election. Using the Eikon Aggregates App (to access, type AGGR), we aggregated their collective views by industry to see which have experienced the most upward revisions in their financial projections and which have seen the most downgrades.

As a comprehensive measure of the change in analyst sentiment, we’re using the Thomson Reuters StarMine Analyst Revisions Model (ARM) which incorporates revisions in EPS, EBITDA and revenue for multiple fiscal periods and looking back as far as 90 days. The numbers associated with each of the Thomson Reuters Business Classification (TRBC) Industry Groups below are aggregated from security-level 1-100 relative percentile ranks across all U.S. active equities with sufficient analyst coverage – representing over 3,000 companies.

Possible winners

High scores represent upward revisions and are considered a bullish signal. Low scores represent the opposite. Here are the industry groups with the most positive revisions. Like our analysis done one month after the election, coal and transport infrastructure remain in positions one and two, respectively.

Exhibit 1. Industry Groups with StarMine Analyst Positive Revisions

elec1

Source: Thomson Reuters Eikon/StarMine

Left behind?

Now for the list of those who may lose out under the new administration. Textiles and apparel, uranium and renewable energy top the list of strongest downward revisions, similar to the results from a couple of months ago.. We noted the contrast between coal benefiting and renewable energy losing out at the time of our first analysis. That pattern persists.

New to this list’s top five are personal and household products and services and telecommunications services. Three industry groups fell from the list with the strongest upward financial revisions to the bottom group below: healthcare equipment and supplies, computers, phones and household electronics and aerospace and defense.

Exhibit 2. StarMine Downward Revisions

elec2

Source: Thomson Reuters Eikon/StarMine

Price changes

Of course, there are probably many reasons beyond just the election causing analysts to revise their outlooks. And, be careful with those industries that have very few companies in the aggregate (e.g. uranium and office equipment in the list above). Still, it’s interesting to note some of the contrasts here that may indeed be tied to the election outcome.

Now, turning from analyst reactions to the market response, the following two figures show industry groups sorted by their 13-week percentage price change. Among the notable winners are metals and mining companies, banks and investment companies.

Exhibit 3. 13-Week Price Change Upward

elec3

Source: Thomson Reuters Eikon

Exhibit 4. 13-Week Price Change Downward

elec4

Checking in on earnings season

Forty-four percent of all constituents of the S&P 500 have reported quarterly earnings results. Of those, 65% reported earnings above analyst consensus expectations, in line with the long-term average of 64% but below the average of 71% observed over the last four quarters.

To capture an expanded view of the economy, we now look at all U.S. equities with analyst coverage, by TRBC Business Sector. The image below comes from the Eikon Earnings Season Report App (to access, type EARN). Use this app to track for yourself the current earnings season as it unfolds.

Although it is still relatively early days during earnings season, here are the sectors with the highest percentage of constituents beating expectations, topped by software and IT services. This list includes just those sectors doing better than the long-term average.

Exhibit 5. Sectors Beating Expectations

elec5

Thomson Reuters Eikon/I/B/E/S

And now, for the sectors where at least half their members have come up short of expectations:

Exhibit 6. Sectors Missing Expectations

elec6

Thomson Reuters Eikon/I/B/E/S

There will be blood

We assume most would agree that the new administration bears little resemblance to the prior one. As with any change of environment, there will be winners and there will be losers.

Oil and gas and banking appear on the top-ranked lists for both positive price change and analyst revisions. In contrast, the textiles and apparel industry tops the list of those with the most negative analyst revisions. While some of this may be driven by company-specific factors, the incoming administration’s call for imposing taxes on imports would, if enacted, hit this industry especially hard. Few of their materials are still made in the U.S.

Textile and apparel has, as a percentage of sales, the highest net import content of any U.S. industry. As reported in the Dec. 12 issue of the U.S. edition of the Financial Times newspaper, “the National Retail Federation said the import tax could inflate the tax bill of some fashion chains to three to five times their pretax profits, jeopardizing their solvency.”

As many policy, regulatory, and tax changes are potentially enacted over the following months and years, investors may benefit by keeping a close watch on industry-level analyst revisions activity, price reactions, and earnings impacts. Valuations and company-level fundamental analysis may no longer be enough to outperform in an ever-changing environment.

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