How would you react if runaway inflation devalued your dollars by 56%?
That seems a faraway threat, one faced by consumers in today’s Argentina, maybe, or in the post-World War I Weimar Republic of Germany, not in the super-low-inflation United States of today. But if you’re a retiree, or a pre-retiree, at some point, say age 65, you’ll stop adding to your savings and you’ll be in a race against inflation: can your investments outpace the erosion of higher prices and a higher cost of living?
It’s a problem of perception, too, because people are hard wired to think in nominal rather than real terms, a cognitive misfire known as the Money Illusion. But, as you can see, over a non-at-all-rare 30-year retirement, had it begun in 1984, a static pile of money would have lost 56% of its purchasing power, a crippling reduction in living standard.
A YCharts White Paper on Six Behavioral Financial Biases, including the Money Illusion, is available for download at the link directly above. It is written for Financial Advisors but will be helpful to all. Most of us have strongly-held, yet irrational beliefs about finance and investing.
The first signs are in that U.S. based global behemoths such as Apple (AAPL) and General Electric (GE) could be facing a significant headwind in 2015. While the U.S. economy is one of the few bright spots on the global stage, weaker growth abroad and the suddenly rising dollar are beginning to show up as slower earnings and revenue growth for companies with significant foreign operations.
FactSet reports that in the third quarter, S&P 500 companies with at least 50% of revenue coming from outside the U.S. registered earnings growth of 6.5% and revenue growth of 1.6%. For U.S. companies generating the majority of revenue domestically earnings growth was 9% and revenue growth 5.1%.
As seen in this chart, the Fidelity Export and Multinational mutual fund (M:FEXPX) has indeed had a tougher go this year than the benchmark S&P 500.
A few years ago, following the pharmaceutical industry was an exercise in calculating how fast revenues would fall as patents expired on major drugs and lower-priced generic drugs replaced them. Big Pharma’s labs seemed slow-footed, failing to develop new compounds fast enough to replace lost sales, and at times fat dividend yields were the only thing keeping investors focused on the sector.
One can still see the phenomenon here, in a five-year chart of revenue for five well-known pharma stocks, Pfizer (PFE), Merck (MRK), GlaxoSmithKline (GSK), Bristol Myers-Squibb (BMY) and Eli Lilly (LLY).
But the industry is going through a remarkable turnaround. New drugs -- many of them super-high-priced and targeted at limited patient populations – are pushing up sales and profits and some companies. Companies have meanwhile been raising prices on drugs still under patent, fattening the bottom line. And deal activity – most recently the agreement by Actavis (ACT) to buy Allergan (AGN) for $66 billion – is helping to buoy the sector’s stocks as well.
Sticking with emerging markets over the past five years has indeed required a commitment to diversification and patience. The largest emerging markets ETF, the Vanguard FTSE Emerging Markets ETF (VWO) has badly lagged the SPDR S&P 500 (SPY):
And that of course includes the latest round of volatility that arrived a few months ago:
But that long-term drag creates even more opportunity . . . as long as your patience hasn’t worn thin. Research Affiliates has recently begun posting its 10-year Expected Risk and Return. That emerging market equities have the highest expected return (and of course risk) isn’t startling. What stands out is the gap in expected real returns. U.S. large caps have an expected annual real return of less than 1%, compared to more than 6% for emerging markets.
While the market has surged back to avoid a classic correction (loss of 10%-20%), the recent selloff is a good reminder of what sorts of stocks tend to do best when downside volatility strikes.
Established and dominant companies, with one or more definitive competitive edges, often hold up best, as investors who want to maintain equity exposure will often rotate out of riskier fare. Moreover, the big, wide moat stocks tend not to trade at high multiples in the first place, and thus aren’t as exposed to major downside in a down market.
To be clear, the wide moats tend to lag in strong markets. But as we’ve pointed out before, the long-term performance of the underlying index this ETF is based on -- Morningstar’s Wide Moat Focus Index -- has shown net outperformance over periods that include both up and down swings. (Full disclosure: Morningstar is an investor in YCharts.)
The Smartphone Market
Apple AAPL created the category of Internet-enabled portable entertainment device—which I will hereafter abbreviate as "smartphone"—won the first mover advantage and with it, all that a first mover advantage entails (positive brand perception, rapid revenue and profit growth, a core group of fanatical clients, etc.).
However, in the developed world, the smartphone market is no longer free for the taking. Many customers who want a smartphone already have one; numerous competitors are emerging that offer alternative products and may compete on price.
There are two, interrelated battlefields in the smartphone wars: Operating Systems and Handsets.
This is an excerpt from YCharts Research most recent valuation report on Apple.
Click Here to Download the Full Report Now!
While it’s easy to dismiss momentum investing as only for suckers intent on buying high with the prospect of selling lower, S&P Capital IQ’s Sam Stovall is out with an interesting report suggesting just the opposite.
Stovall found that since 1990 the annualized gain for a portfolio made up of the 10 strongest S&P 500 sub industry groups over the trailing 12 months outperformed the overall S&P 500 over the next 12 months. To the tune of 15.2% annualized for the sub-industry momentum portfolio vs. 9.5% for the overall S&P 500. And over that entire stretch both approaches had the same number of up and down calendar years.
Stovall provided a cheat sheet of what sub industries would be in the Big Mo Top 10 if we assumed the year ended last Friday (November 7th ). Herewith the top 10, and their best-fit ETF:
• Airlines. SPDR S&P Transportation (XTN)
• Aluminum. SPDR S&P Metals & Mining (XME)
• Biotechnology. SPDR S&P Biotech (XBI)
YCharts Research released its monthly Valuation Snapshot Report for November 2014 last week. With the drastic drop in spot crude oil prices, the Energy sector has been hit hard, and the market is pricing the group as if YCharts Research preferred profitability metric, "Owners' Cash Profits" or "OCP" will shrink in perpetuity.
In addition to highlighting sectors and industries screening as under- and overvalued using our distinctive relative value heat maps, we display a series of graphs showing market- and sector-level valuation, profitability, and returns metrics (like the sector- and market-level ROE, ROA, and ROIC values below) as well as data tables of individual stocks that are screening as most under- and over-valued.
If you are looking for guidance regarding how to tilt your portfolio or where to look for the best investment ideas, this report may be just the tool for you.
This report was released last week to subscribers to the YCharts Research mailing list.
Sign Up for the YCharts Research Mailing List and Download the November 2014 Report Now!
You’ve heard the one about being greedy when others are fearful? Well, you might want to consider getting your greed on with Qualcomm (QCOM). Yes, it has been absolutely pummeled lately, due to downward guidance as it tussles with China over licensing royalty fees that could result in a significant fine, and the disclosure that the Federal Trade Commission is investigating Qualcomm’s lucrative licensing business.
The recent carnage relative to the general market and the Technology Select SPDR ETF (XLK):
Now to be clear, growth has clearly slowed the past quarter as the licensing clouds aren’t offset by the steadier (less dynamic) growth in the chip business.
Apple AAPL is a failed computer company. If not for an emergency cash injection by Microsoft MSFT in 1997, the name Apple would now be nothing more than a nostalgic entry on a Wikipedia page in the same way that Atari, Commodore, Sinclair, Tandy, and Kaypro are.
This is an excerpt from the most recent YCharts Research Focus Report on Apple.
Click Here to Download the Full Report Now!
But unlike its defunct competitors, Apple sprang out of the ashes of its personal computing defeat as a glorious phoenix. Its present incarnation is that of a purveyor of internet-connected portable entertainment devices—a product category that it has defined as its first mover and shaped as its greatest innovator.
Every success it has had in the last 10 years—every jump in revenues and profitability—has been a result of its status as a market leader in mobile entertainment, and its entire product line-up at present is comprised of products and accessories that support (or are being superseded by) its iPhone franchise.
The problem is that opportunities to define a new product categories happen only rarely. As such, Apple’s future growth depends less on its ability to innovate than on its ability to compete successfully within well-defined market constraints.
Past performance is no guarantee of future results, but Apple’s management is taking steps to keep its momentum in the mobile phone space going.
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