Once again during 2013, the S&P posted a 5% or greater total return in a month. Following a 5.2% return in January and a 5.1% return in July, October was another rockin’ month for the S&P 500 at 5.0%.
It marks the eighth month of these ten that have produced positive returns. It is the 7th best October in the last 28 years, and the second best October return in the last ten years, trailing only 2011’s +10.9%. Aside from 2011, the remaining five returns greater than 5% saw further increases in the months of November ranging from +0.7% in 2003 to +5.9% in 1997. 2011 was marred by a 0.2% decline in November. All this from a month that has some tricks mixed in with its treats. Historically, October has ownership of the two worst performing single months in the last 28 years, -21.8% and -16.8% in 1987 and 2008, respectively.
For those that follow the Bloodhound Exchange Blog regularly know, we track the largest capitalization stocks among six major sectors to gauge the breadth of returns. October was a standout month with positive returns across the board, but is most cases bigger was better.
In each sector’s case, the portfolio of the largest 10 capitalized stocks outperformed the portfolio of the largest 50 capitalized stocks. Some were more dramatic than others.
The technology sector was the most dramatic. The largest ten names saw significant gains from Google (+16%), Amazon (+13%), and Intel and Apple (both +7%), whereas nine of the last 12 in the top 50 experienced losses in the month. Among the losers in the sector were Nuance (-18%), Akamai (-15%), Equinix (-11%) and #24 ranked Citrix Systems (-20%).
Despite an Upgrade with a price target of $78 by Barclays on October 7th based on the opportunity presented by the “recent pullback,” Citrix (CTXS) dropped into the 50s upon a pre-announcement of disappointing 3Q13 revenue and EPS figures. Fortunately a number of analysts downgraded the name following the pre-announcement.
The healthcare sector was probably the most even balanced among the groupings. Out of the largest ten, only Merck (-7.5%) showed declines in the month. On the flip side, 11 of those ranked 29-50 lost ground. However, the decliners were modest equalizing the returns across capitalizations.
Merck’s drift occurred ahead of its third quarter results released on October 28, before the opening bell. Although they beat on the second quarter results, the reaction was mostly disappointing. Heading into the third quarter, they faced a number headwinds including unfavorable currency movement and pipeline setbacks. The month started with the announcement of an increase in their intended downsizing by as many as 1,000 employees. The company once again beat expectations, and the stock reacted, but nowhere near enough to compensate for the month-long decline.
The financial group also so positive performance among nine of the ten largest capitalized names, but gains remained balanced across the board. Only eight of the sectors largest 50 names saw declines in the month, and only two of those were of any significance (WU and PGR). Western Union (WU) turned a gain into a loss at the end of the month when they issued an update on its FY13 earnings guidance. The company provided EPS guidance of $1.38-1.43 compared to consensus estimate of $1.44. A number of analysts had reiterated Buys in September leading to the earlier gains.
In energy, 19 of the largest 20 capitalized names gained in the month led by international conglomerates Petrobras (PBR) and BP. There were only a few losses of any significant size among the 20-50 group, but they include FMC Technologies (FTI, -10%) and Cameron Int’l (CAM). FTI is a manufacturer and supplier of technology solutions and is well positioned in the subsea systems market. The company clinched several contracts in the last quartter from big names including the above mentioned Petrobras. However, along with CAM, another subsea provider, each released disappointing earnings reports. Both Cameron and FTI appear to be struggling with execution problems in the face of big demand, and high analyst expectations.
Consumer cyclicals had steady performance as well. All of the ten largest capitalizations generated gains ranging from CVS at +8% to Cannon ADR which rounded down to 0%. Third Point target Sony (SNE) was the only major downward mover losing 19% in the month. Much like many of the other notations above, it made much of its move on one day.
Sony lost 11% of its value on the 31st as the Japanese entertainment giant reported a net loss for the quarter and reduced its full-year earnings guidance. Results from the company’s television and entertainment units were both particularly disappointing. The TV division deviated from its positive June quarter and posted losses of almost $100 million. Dan Loeb 1, George Clooney 0 – sort of. But don’t worry, Jefferies downgraded the name on November 1st.
Consumer Staples led the pack in October. Thirty of the largest 30 capitalizations generated gains in October, including big gains among the top 10. Only Estee Lauder was held back with a +0.2 gain. There were only five losses among the top 50, and three of those were activist related names – Green Mountain (-18%), Avon (-16%) and always-fun Herbalife (-11%).
We end with a review of Avon, which reported third quarter results before markets opened on Thursday the 31st. Like Western Union, the results at the end of the month turned a winner into a loser. Avon’s net sales for the quarter were down 8% from the same period a year ago. Sales in North America fell 19% and Asia-Pacific sales were down 22%. None of the company’s regions showed a year-over-year gain. Operating profit was even worse than sales, down 38%, falling 10% in North America and nearly 24% in Asia. CEO Sheri McCoy blamed “economic headwinds” and “weakness in some parts of our business.” Apparently. In the aftermath, a number of analysts reaffirmed their Buy ratings, but some with lower price targets. See a trend here?