Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

These past several few weeks has been yet another test of our mettle as investors as it relates to owning stocks. I have been a professional money manager and market and stock analyst for the last 22 years. I have seen numerous pullbacks like this most recent one and I have been through three bear markets.

Each time the market pulls back, I have to ask myself: “Has the next bear market now begun?”

During such pull backs in the market I always hear the pundits say: “This time is different.” Each time I hear them say this, I go back to my guiding light of EARNINGS, EARNINGS, EARNINGS.

Our emotions make several round-trips from fear and greed and back again over the course of several months in the market. It has my observation during my two-decades plus as a professional money manager that far too many individuals and even professionals in the market follow their emotions.

This can be extremely detrimental to your total returns over time. Look at the last ten years. How many times did you panic and sell? How much has this cost you during the ride from 666 to almost 3,000 during that time? Come on, fess up!

You cannot completely take emotion of the equation, but you can greatly mitigate it.

The secret is to focus on earnings and not emotion.

We live in a HEADLINE driven world. All of those headlines out there are beckoning for your attention. Lo here! And lo there! Like Odysseus in Homer’s Odyssey, sometimes you have to tie yourself to the mast so that you do not follow the songs of the beckoning “bear” sirens.

So how does one focus on earnings.

I will begin first with the overall market, and then give an example of an individual stock.

When I am not managing money for folks or do my analysis of the markets and stocks, I love to get out and do some recreational fishing. It is fairly easy to observe that fish follow the baitfish in the water. First, look for the bait and the patterns of the bait and you will almost always find the fish.

Just as fish follow bait, stocks follow earnings. As longs as earnings continue to grow, you will find the individual stocks and the averages following right behind. This is of course, unless the stocks and the averages get too expensive like they did in the year 2000.

Let’s take a look at the role that earnings have played during this current ten-year plus BULL MARKET.

There are several very important takeaways from the chart above.

First and foremost, S&P 500 earnings bottomed out in 2009 at $59.34 per share and have been climbing ever since. When did the market bottom out? What has the market been doing ever since 2009? See the chart below:

Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

That’s right, the S&P 500 has been following rising earnings every year since it’s 2009 day. Do you see how this can help take the emotion out of your overall market analysis and prevent you from hitting the panic sell button.

Furthermore, stocks and indexes follow earnings expectations. That is why the chart above shows the consensus analyst estimates for 2019 and 2020. The market and stocks are always looking ahead to those all-important earnings expectations that are readily available from many sources.

Every time that expectations are raised or lowered, stocks and indexes react immediately. Believe it or now, with all of the scares that have hit the market over the last nine months, not one of them has changed future earnings expectations in the least.

I update my earnings estimates and target price for the S&P 500 each week in my client/live-trading subscriber newsletter. I have been almost dead-on for the last ten years with my macro forecast.

I have also invented an app that tracks the market along with 5,139 stock, ETF’s, and Mutual Funds. Here is what the app is saying about the S&P 500 now.

Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

Data from www.BestStocksNowApp.com

Now when it comes to individual stocks, the same principle applies. Individual stocks also follow earnings. I am going to use Adobe Systems Inc. (ADBE) as an example.

Adobe’s earnings have been growing at an average annual rate of 45% per year over the last five years. How has the stock done in relation to that earnings growth?

Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

Data from www.BestStocksNowApp.com

As you can see from the screenshot from my App above, the stock has indeed followed that sensational earnings growth. Just look at the alpha that the stock has delivered in relation to the S&P 500.

Here is a graphic look at the performance of ADBE vs. the S&P 500

Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

While it is true that Adobe Systems has a five-year average of 45% per year of earnings growth, we also know that stocks and indexes trade on future expectations.

What are those expectations for the next five years, and what kind of target price can we place on that potential future scenario?

Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

Data from www.BestStocksNowApp.com

Adobe is expected to make $9.69 per share in 2020. This is the consensus analyst estimate. The consensus 5-year average annual earnings growth rate is 16.4%. That gets us to a potential of $17.77 per share, five years from now. Adobe has a current PE ratio of 39X and a current forward PE ratio of 28X.

I am using a future multiple of about 29X to calculate a 5-year target price of $518 per share. The stock currently has almost 90% upside potential over the next five years. Is this not an important number to know? Does this not take a lot of the emotion out of the daily decision to buy, sell, or hold this position?

Adobe is a good example of what fits my description of a Best Stock Now.

Adobe is a disruptor and not a disrupted stock.

Remember when Eastman Kodak was a member of the Dow Jones Industrial Average? Today it is a tiny $98 million micro-cap company trading at $2.28 per share. Their business and technology was disrupted by Adobe and others.

Every Pullback In The Market Over The Last Ten Years Has Been A Buying Opportunity

Adobe has been a consistent deliverer of Alpha over the years. It had been a superior performance (momentum) stocks. But momentum alone can get investors into big trouble.

I also require a valuation that gives me 80% or more upside potential over the next five years. I have previously described how I have calculated that number. Adobe currently fits this all-important criteria. Valuation alone yields many troubled, low PE stocks with broken models that are going nowhere. I call them value traps.

A Best Stock Now must possess both performance and value. This really narrows down the universe.

You can follow Bill Gunderson on StocksTwits and Twitter @BillGunderson. You can also find my daily blog Blog | Gunderson Capital Management

Disclosure: I am/we are long ADBE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.