With the SPDR S&P 500 ETF (SPY) and the Vanguard Total Stock Market ETF (VTI) currently trading at forward price earning multiples near 17, investors are regaining their appetite for emerging markets. A year after the taper tantrum smacked emerging markets, flows into the developing countries are picking up, lured in large part by the relative value proposition (and signs of easing in China). In a recent investment note that recommended emerging market stocks, BlackRock’s (BLK) chief global investment strategist cited improving liquidity -- six weeks of positive flows -- as a signal that sentiment is in shift mode.
The two largest emerging market ETFs, the $48 billion Vanguard Emerging Markets Stock Index ETF (VWO) and the $41 billion iShares MSCI Emerging Markets ETF (EEM) both trade at forward multiples below 12. That’s even after a strong rebound during the past six months following the global micro-swoon that started the year:
A sub-12 PE ratio is indeed a nice discount to the 15 average for emerging markets over the past 15 years, but with many emerging markets transitioning from their commodity-based/capital-intensive economic model to consumer-driven, it’s not easy to project what the new norm will be.
It’s still early in second-quarter reporting season, but FactSet (FDS) notes that so far 73% of the 70-odd companies in the S&P 500 that have reported earnings managed to beat on revenue. That’s well above the four-year average of 57.2% reporting revenue performance above expectations.
And that’s where the good news stops. In reality, companies are beating rather dismal revenue projections. Set the bar low and it’s not so hard to step over it. So far, the revenue gain for the S&P 500 companies that have reported is a not-too-inspiring 3%. Though that’s still better than all U.S. business activity.
The lack of organic revenue growth is about the only metric needed to explain the recent M&A flurry; those that can’t grow it, buy it.
Even if it’s going to be ultimately successful as a company, Amazon (AMZN) in these formative years requires some myth-making – a narrative propellant to belief and momentum and human potential, no less, a story so compelling it chases away the non-fiction killjoys of profit margins, generally accepted accounting principles and conventional thinking.
In case you haven’t been paying attention, the narrative around Amazon is growing more complex – Stieg Larsson fans, pull up a chair – as it must: simply dominating online retailing, which by the way Amazon has accomplished without becoming wildly profitable, would no longer hold the attention of stock-as-a-story devotees. No, now the storyteller has added other dragons to be slain, and all the monsters are somehow related; Amazon must win every battle to prevail in multi-front war.
Stay tuned, kids, every 90 days there’s a new chapter. But unlike you’re favorite book, there’s no sign of an end to the story.
The new challenges:
--Amazon Web Services, an unlikely adjunct to a retail operation in that it rents out server capacity (a commodity service with inevitably declining prices and most likely ever-narrowing margins), is engaged in a bruising price war that will contribute to near-term corporate losses. Amazon recently cut prices for computing storage customers by between 28% and 51%, competing against Google (GOOGL), Microsoft (MSFT) and others. Sure, Amazon is big and powerful, but its opponents in this particular arena have lots more staying power, in the form of cash and short-term investments.
Starbucks (SBUX) in its third quarter ended June 29, for the 18th consecutive quarter, managed a comparable-store-sales gain of 5% or more (6% this most recent quarter), truly an astounding performance.
Profit margins are widening. Measures of customer loyalty are strengthening. And a new service launch expected in 2015 – an app enabling customers to order and pay from their smart phone, presumably before arriving at a Starbucks store – holds the potential to increase through-put in thousands of locations already seemingly capacity constrained during certain times of the day.
YCharts.com belatedly came to admire Starbucks and its self-regarding CEO Howard Schultz last January, after examining the company’s operating record and finding it a model of incremental improvement (alongside other grind-it-out companies Southwest Airlines (LUV), Wells Fargo (WFC) and United Parcel (UPS).) Then, on April 29 of this year, we wondered why Starbucks stock was lagging when its results remained so strong.
BlackRock (BLK) profit rose 11% in the second quarter as total assets under management ticked up to an astounding $4.59 trillion. As much as BlackRock is benefitting from the extended bull market, BlackRock’s chief investment strategist Russ Koesterich recently sounded a small warning signal on “stretched valuations” in the stock market, echoing the same Yellen-esque caution about small caps, social media and biotech stocks.
Though he pegs stocks in general as “vulnerable,” Koesterich fingers two market segments offering decent relative value: Mega cap stocks and value stocks.
A bundled approach to those two themes can be had in the Vanguard Mega Cap Value Index ETF (MGV). According to Morningstar (MORN), the portfolio of 150 or so stocks trades at 14.5 times estimated 2014 earnings. That’s a steep discount to the 19.7x for the Vanguard Mega Cap Growth Index ETF (MGK) and the 17.4x for the S&P 500 index.
To be clear, in a bull market dominated by small cap stocks, the mega caps have been decided laggards. Both the SPDR S&P 500 ETF (SPY) and the Vanguard Mega Cap ETF (MGC) have been smoked by the SPDR S&P 600 Small Cap ETF (SLY) since the March 2009 low:
With the broad S&P 500 measure of the stock market more than doubling over the past five years, it has been a tough time to be a short seller. Stocks keep going up. Valuations have been on the rise. And some companies that make no money have achieved spectacular market caps.
An extreme example of the hapless short seller played out earlier this week as hedge fund manager Bill Ackman gave a presentation he hoped would torpedo Herbalife (HLF) stock, once and for all. Instead, Herbalife shares rose while he was giving his presentation and ended up closing the day with a 25% gain. It’s as if Ackman’s short position was squeezed by, well, Ackman himself.
Retail yield chasers now have more than $150 billion riding on a risky income play that sure doesn't seem to provide commensurate reward opportunity. While junk-quality bank loans got some ink recently for net outflows in May, the $1.7 billion in outflows Morningstar (MORN) reported was barely a blip when measured against the $42 billion in net flows for the 12 months through May. Combined assets for retail bank loan funds and ETFs are now more than $150 billion.
Here’s what investors in the largest bank loan retail portfolio, the $7.2 billion PowerShares Senior Loan ETF (BKLN), earned in the 12 months through May, compared to the high-grade (read: boring) iShares Barclays Core Total U.S. Bond ETF (AGG):
That’s pretty much all a function of yield, as the bank loan ETF has a trailing 12 month payout near 4.5%, compared to 2.2% for the high-grade portfolio that tracks the benchmark Barclays Aggregate Composite bond index of corporate and government issues.
We have published a new type of industry-level research report we are calling a Competitor Snapshot.
This report precedes a Focus Report on Target (TGT) and covers the following competitors in the discount store industry: Wal-Mart (WMT), Costco (COST), Dollar General (DG), Family Dollar Stores (FDO), Dollar Tree Stores (DLTR), Pricesmart (PSMT), Big Lots (BIG), Burlington Stores (BURL), and Tuesday Morning (TUES).
In this report, we delve into market share, fundamental valuation drivers, and common valuation metrics. In addition, this report:
This report was published last week to subscribers to the YCharts Research mailing list. To sign up for the mailing list and to download a copy of this report, please click here.
One of the earnings season events we’re most looking forward to occurs July 30, a week from this Wednesday, when Weight Watchers International (WTW) reports results. The company is in a nosedive, its meetings business sent reeling by cheap competition from activity wrist bands and digital diet apps. And yet, when it reported first-quarter results were reported April 30, the stock’s movement suggested the company had discovered a cure for obesity, rallying nearly 20%.
Pity the buyers that day, as the stock has given up all of that gain and a tad more, reality reasserting itself. Revenue has fallen hard since the beginning of 2013 and, as we reported after the first quarter 2014 results, customer defections were accelerating. A turnaround plan wasn’t working just yet and the normally upbeat first quarter, when people temporarily make good on New Year’s resolutions, was a crummy one.
The shift in sentiment around Michael Kors (KORS) has been so strong and so widely bought into that one would expect to find an enterprising short seller making the rounds, retailing tales of dodgy inventory and specious financials. But there are none that we’ve yet heard of, only a shared sense that perhaps a fabulous momentum stock’s time is up.
Some perspective, however, is in order. The stock decline that began in June and gained speed this month certainly seems dramatic.
But it’s small stuff compared to the upward movement early this year, when investors were still agog at Michael Kors’ sales growth and lush operating margins.
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