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Opus News & Insights

Living in a Material World
Friday, October 14, 2016

So far in 2016, the Materials & Processing sector has been the best performer in the Russell 2000 by a wide margin. The 29.1% total return for the sector comes in almost a full 10% better than the second best performing sector, Technology, which registered a return of 19.2%.  Whenever there is such divergence in the performance of a sector we are intrigued to find out what’s driving that performance.  One useful tool when evaluating sectors is analyzing companies based on their earnings growth estimates for the next twelve months.  This can provide some insight into how the market is pricing a sector based on its growth prospects. The results for the Materials & Processing sector as of 9/30/2016 are listed below. We divided the universe into deciles, with decile 1 possessing the highest earnings growth, and decile 10 the lowest.

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The best performing deciles YTD are those with the largest projected year-over-year earnings declines. Whereas Madonna told us “the boy with the cold hard cash is always Mister Right”, Mr. Market has lately been telling us the companies with the largest projected declines in earnings are Mister Right. We would contend these are more like Mister Right Now, as though things like the diamonds the Material Girl is sporting may be forever, outperformance by companies with the worst earnings growth should not be.

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