Articles filed under "moats"
What was supposed to be the victory lap stage for technology stocks is suddenly looking a bit wobbly. While tech stocks tend to outperform in the later stages of a bull market and the economy’s mid-cycle -- just where we are at right now -- that hasn’t been the case over the past five weeks, as volatility has picked up.
Apple (AAPL), was a relative outperformer, losing just 2% over the past five weeks. Neutralize Apple’s market-cap impact, and tech’s lag widens. Here’s the equal-weight index performance for the S&P 500’s tech sector and the overall index:
If you’re an investor in traded securities in this country, you should daily give thanks for the Securties Act of 1933, the Securities Exchange Act of 1934 and some follow-on legislation that helped turn a once-shady, caveat emptor marketplace into the world’s model for transparency and fair dealing.
Companies and their lacky consultants love to complain about onerous disclosure laws enforced by the Securities and Exchange Commission. But without these, we’d surely be treated to a never-ending string of accounting and stock manipulation scandals, the likes of which one can still witness in less-developed countries.
Thus, I was both peeved and felt a renewed sense of appreciation for our securities regulatory scheme reading last week that the SEC was investigating Western Union (WU) for possible securities fraud in connection with statements and accounting concerning the money transfer giant’s digital operations. Peeved because I’d written twice in recent months about the unit’s apparent robust growth and how Western Union stock wasn’t getting credit from investors for that achievement, while the market was rewarding tiny Xoom (XOOM), a digital startup that appeared to be growing more slowly that Western Union’s online operations.
It was just three years ago that Berkshire Hathaway (BRK.B) stock was unloved enough for Warren Buffett and Charlie Munger to codify that they would consider stock repurchases if the price-to-book-value ratio made its way down to the vicinity of 1.1x.
Here’s how “badly” Berkshire Hathaway stock was trailing the market coming out of the ’08-’09 bear market up until the formalization of the buyback ground rules.
In late 2012 Berkshire in fact repurchased more than $1 billion (buying back from a shareholder) and announced it was raising its buyback floor to 1.2x book value, which was close to where the stock was trading at that juncture. There were no additional buybacks, but for the naysayers, the next time Berkshire trades down to that level you might want to take notice. Price to book value is now 1.4x, and the dividend-less Berkshire stock has easily outpaced the total return for the SPDR S&P 500 ETF (SPY):
Xoom (XOOM), a digital money transfer company, has a board full of VCs, a 10-K that talks about the “antiquated” business model of its far-bigger competitor, without actually naming Western Union (WU) in that passage, and declares: “Our modern digital platforms disrupt the traditional forms of money transfer.”
Xoom also has a stock that has underperformed Western Union – and the broader market, as measured by the S&P 500 – since its February 21, 2013 initial public offering; a CEO who is already unloading Xoom shares in an automatic selling program; and a big hole in the story it seeks to tell: Western Union, in addition to its hugely profitable cash-changing-hands system of money transfer, supported by some 500,000 agents in more than 200 countries, has its own digital money transfer business and it’s bigger than Xoom and just might be growing more rapidly.
Who’s being disrupted, now?
With economic growth picking up a smidge, and seemingly stable enough for the Federal Reserve to get serious about a potential rate rise in the first half of next year, there’s little to suggest any need to get your inner bear on. But at the same time, with valuations anything but cheap, getting a bit more smart/defensive in your stock allocation seems like a reasonable pursuit.
Enter, the Schwab U.S. Dividend Equity ETF (SCHD). Its got the sort of high-quality large cap issues -- Johnson & Johnson (JNJ), Microsoft (MSFT) and Chevron (CVX) -- that participate plenty on the upside, but also have the nice habit of holding on better when the markets correct. And as Morningstar Analyst Abby Woodham recently noted in Morningstar magazine, about two-thirds of the portfolio is invested in stocks that have been designated by Morningstar to have a wide moat. That compares to less than 50% of the S&P 500.
For income investors, the Schwab US Dividend ETF does indeed provide a dividend yield premium to the SPDR S&P 500 ETF:
The projected yield for the Schwab portfolio is an even more compelling 3.1%. (You can now find an ETF’s prospective yield on its main quote page, under the Fundamentals section on the right side of the page.)
The Internet, asset bubbles and other large-scale economic changes can make it difficult to choose stocks that benefit from consumer spending. Will Amazon (AMZN) ruin the party for other retailers that in past economic cycles performed predictably? Will our turbocharged mortgage finance system lead to another housing bubble? Which auto, retail, gambling and travel stocks will come out on the winning side of consumers’ rapidly changing tastes?
The makeup of a market-beating mutual fund, Vulcan Value Partners, suggests a way to be agnostic on precisely how consumers spend their money, yet still benefit as consumer spending chugs along quite nicely, with a potential upturn in the second half of 2014. Three of the fund’s top-10 positions, accounting for a combined 12.9% of assets, are companies engaged wholly or in large part in payments processing for consumers: MasterCard (MA), Visa (V) and eBay (EBAY).
Sarah Max of Barron’s, in a smart article this past weekend on Vulcan and its recent stellar performance, quotes portfolio manager C.T. Fitzpatrick thusly on MasterCard and Visa:
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.
As if the public heat from playing hardball with book publisher Hachette wasn’t headache enough, Amazon (AMZN) now has to face the ignominy of suddenly being attractive to, gulp, value investors.
The managers of the Oakmark and Oakmark Select mutual funds just revealed that in the second quarter they established sizable Amazon positions. The $15 billion Oakmark fund had a 2.1% stake at the end of June, and the more concentrated $5.7 billion Oakmark Select established a 4% position.
Oakmark certainly had a lower entry point to capitalize on. At its second quarter low in early May, Amazon stock was trading nearly 30% below its late January peak, though it has recovered some since.
As we reported in our Mid-Year Report Part One, halfway through 2014, stocks are looking pricier. As investors who choose individual stocks mull the taking of profits, eating of losses and some judicious rebalancing, it’s worth asking very broadly: what’s still cheap?
Rather than search for super-low-priced shares at this point, we’re looking at the S&P 500 components and using the YCharts Stock Screener to sort out companies trading at a forward PE ratio of below 15. That gives us a pretty big list, ordered by market cap here and also featuring dividend yield and payout ratio. There are 125 stocks in all.
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