Articles filed under "moats"

Market-Beating Fund: 3 Consumer Spending Plays

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?

US Change in Personal Consumption Expenditures Chart

US Change in Personal Consumption Expenditures data by YCharts

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:

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Quarterly “Beats”: Bah, Here Are Real Growers

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.

US Total Business Sales Chart

US Total Business Sales data by YCharts

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.

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What Would Vonnegut Make of Amazon’s Story?

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.

AMZN Cash and Short Term Investments (Quarterly) Chart

AMZN Cash and Short Term Investments (Quarterly) data by YCharts

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Huh? Market-Beating Value Funds Buy Amazon

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.

AMZN Chart

AMZN data by YCharts

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Mid-Year Report Part Two: Not All Stocks Overpriced

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?

^SPX Chart

^SPX data by YCharts

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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Market Rarity: Great Company at Very Good Price

Express Scripts (ESRX), the largest pharmacy benefit manager, is a rare opportunity at this market juncture. It has a rock-solid demographic tailwind -- aging Baby Boomers -- in addition to an expected pick-up in prescription demand as more Americans gain coverage through the roll out of the ACA.

US Consumer Price Index Chart

US Consumer Price Index data by YCharts

Yet some short-term operational issues have kept a lid on price appreciation of late.

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Mid-Year Report: Not All Stocks Overpriced

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?

^SPX Chart

^SPX data by YCharts

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.

And it turns out, with YCharts’ focus on value investing, we’ve written about a fair number of these stocks during the last six months.

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Wide Moat Stocks Trading Below Fair Value

Six years into a bull market that has seen broad multiple expansion of late, it is ever harder to find anything that has the faint whiff of value. Interestingly, asset managers including Franklin Resources (BEN), Bank of New York Mellon (BK), Eaton Vance (EV), BlackRock (BLK), and T. Rowe Price (TROW) still offer a compelling valuation proposition even as assets have swelled in this bull run.

The Market Vectors Wide Moat ETF (MOAT) is stocked to the brim with asset managers. The portfolio -- which outpaced the SPDR S&P 500 ETF (SPY) since its start two years ago -- piggybacks on Morningstar’s impressive Wide Moat Focus. It’s reconstituted quarterly to hold the 20 stocks in Morningstar’s (MORN) small universe of stocks deemed to have wide moats, which trade at the most compelling discount to the research firm’s proprietary estimate of fair value.

(Full disclosure: Morningstar is an investor in YCharts.)

All but T. Rowe Price are in the portfolio for this quarter, trading at discounts to fair value of nearly 10%. And T. Rowe Price is in the batter’s box, barely missing inclusion as it trades at a 6% discount. Granted, single digit discounts are not exactly a wide margin of safety, but context is important. Morningstar says the overall market now trades at a 4% premium to fair value. And the 150 or so wide moat stocks now trade at a 3% premium. So even a modest discount is a relative plus. A year ago the wide moat stocks traded at an average discount of 3%.

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Norfolk, CSX: Coal-Dependent Railroads' Future

U.S. railroads represent the ultimate in wide-moat stocks, a category of transportation infrastructure that can’t on a practical basis be reproduced and which become more valuable as the economy grows and as national and international shipping and trade grow. That’s why Warren Buffett’s Berkshire Hathaway (BRK.B) bought one of the best railroads, BNSF, or Burlington Northern Santa Fe.

For Norfolk Southern (NSC) and CSX (CSX), which cover similar route systems across the Eastern part of the country, the economy’s growth hasn’t fully been reflected in their results because their biggest customer is the coal industry, and it’s shrinking rapidly. Electricity generated by coal fell almost 25% between 2007 and 2012, before rising slightly last year, while cheaper natural gas enjoyed a roughly 33% increase in use for electricity generation during that period, according to the U.S. Energy Information Administration. Tightened emissions standards are also leading to coal power plant shutdowns.

Coal accounts for nearly 25% of revenue at Norfolk Southern and CSX. So, the railroads had to scare up a lot of increased business from manufacturers and other shippers over the last couple of years just to keep revenue sliding sideways, while Union Pacific (UNP), which operates in the West, enjoyed stronger revenue growth. As we wrote earlier this year, Union Pacific outperforms BNSF of late.

NSC Revenue (TTM) Chart

NSC Revenue (TTM) data by YCharts

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Bloody Disruption: New Threat to Quest, LabCorp

What sounds more threatening: the combination of Obamacare and giant private insurers like UnitedHealth Group (UNH) moving to reduce the cost and at times frequency of medical testing; or a 30-year old vegan and college dropout with some famous friends?

If you’re Quest Diagnostics (DGX) and Laboratory Corp. of America (LH), it may be the dropout, named Elizabeth Holmes, who left Stanford to launch a medical testing startup, Theranos, that has raised $400 million of investors’ money, valuing the company at $9 billion, and already operates testing sites at a handful of Walgreens (WAG) stores, with the potential of thousands more to follow.

Theranos and Holmes a week ago were the subject of an admiring Fortune magazine article that had a former Stanford chemical engineering professor of Holmes – now her employee at Theranos – comparing her to Steve Jobs and Bill Gates. Make that super admiring.

The back issues of business magazines are full of the Next Big Things we’ve never heard from again, of course, and problems with regulation, technology, competition or management could upend this Cinderella story. Theranos (you really should read the Fortune article; it’s fascinating and well-reported, and asks all the right questions even if it can get them all answered) performs conventional blood tests with a fraction of the amount of blood used by Quest and LabCorp and others, we’re told in the article; it charges less and provides results faster; there’s less pain involved (Holmes, we learn, is also needle-phobic). And it builds its own diagnostic equipment, while Quest and LabCorp buy theirs from the likes of Siemens (SIEGY), Olympus (OCPNY) and Beckman Coulter.

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