A tale of two growth rates; GDP and US corporate profits

June 3, 2014
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A tale of two growth rates; GDP and US corporate profits

Last week’s “second” 1Q14 GDP print revised to a -1.0% annualized growth rate relative to the prior print of +0.1%. The second 1Q14 GDP print was shrugged off, with equity markets rallying to new highs, in impressive fashion, given the seasonally low volumes around Memorial Day. While the 1Q14 print is still not “final” (there will be third print, and an ultimate benchmark revision) there is little fear for two consecutive down GDP quarters; the typical definition of a recession. Nonetheless, the real economy is still punk. The performance between the real economy, and the environment for corporate profits, is often confused, and wrongly, treated as one and the same thing. CJF holds the view that what’s ok for the economy is a nirvana for corporate profits. If the...

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1,900; now what?

May 27, 2014
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1,900; now what?

The US stock market, the best market in the world for a multitude of reasons, hit new highs on Friday, ascending to the 1,900 level, on a closing basis. The market is confounding because of the lack of normal draw-down (no meaningful pull-backs in a long enough time to be scary) and because many high profile stocks or stock indexes are way off recent highs. Yet the market is at a new high. This is based on capitalization weightings. An example can be found in the Russell 2000; comprised of the smallest 2,000 stocks within the Russell 3,000 (top 3,000 stocks in the US). The Russell 2000’s market capitalization is only about 8% of that of the Russell 3000. Select internet, growth, biotech, and small-cap stocks are under significant...

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Big Orange; Home Depot 1Q results soft on weather – outlook a positive signal for housing

May 20, 2014
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Big Orange; Home Depot 1Q results soft on weather – outlook a positive signal for housing

Home Depot (HD) 1Q14 results reflect a benefit to earnings, net of tax, of $61m from a sale of a portion of the company’s equity ownership in Home Depot Supply Holdings (HDS). Exclusive of this gain, HD reported EPS of $0.96 relative to consensus estimates of $0.99. A miss in a difficult to predict quarter with spring arriving late. Nonetheless, the stock is bid based on commentary for “robust” May sales, a period less impacted by weather, and likely reflecting some pent-up demand from the spring. The colder than seasonal weather in 1Q also weighed on gross margin indicating that margin trends remain on plan. HD doesn’t see evidence of a slowing housing market; commented on heavily in financial markets. HD’s big ticket items are outperforming small ticket and...

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The widow maker trade spreads from Japan to the US

May 19, 2014
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The widow maker trade spreads from Japan to the US

Since 1990, one trade that has always lost money, over any reasonable time period, has been the shorting of JGBs (Japanese 10-year). This trade, unique in its consistency, developed its own name; “the widow maker”. With JGBs yielding 57 bps today, the widow maker is alive and kicking. Over the past 24-year time period, JGB yields peaked around 8% in 1990, and trended steadily lower since. Within the US bond market, through the second half of 2013, into 2014, consensus developed on the inevitability of a sell-off, and potentially severe one. A one-sided consensus view is always dangerous in any market, creating heightened risks as new information is gleaned. The recent bout of inconsistent economic data, and degree to which active market participants were on the same side of...

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Whole Foods proactively lowering prices; an opportunity for the patient

May 7, 2014
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Whole Foods proactively lowering prices; an opportunity for the patient

For a retailer, cutting prices generates a certain amount of self-inflicted pain through the P&L. The problem is rather intuitive; existing customers continue to purchase the same amount of goods at the new lower prices (hurts sales growth) and it takes time, to an uncertain extent, to attract new customers to the better value offering. Whole Foods faces a dilemma because its tremendous success over three decades has attracted new competition in the form of copy-cat stores and a change to more up-scaled/organic offerings at traditional grocers. On the company’s conference call, founder, John Mackey, pointed out clearly: “Whole Foods is no longer a bunch of hippies selling products to other hippies”. Anyone visiting the stores knows he is exactly right – Whole Foods is now main-stream for the...

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April employment report; strength broadens to lower-end

May 2, 2014
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April employment report; strength broadens to lower-end

This month’s job report will rightly be questioned; late-winter/early spring weather for much of the country was horrible in February and March, and this morning’s report reflects payback from depressed activity making results appear better than they actually are. Nonetheless, trends in April, and thus far year-to-date, reflect a potentially important change in labor market dynamics; the broadening of job creation to the lower-end segment of the job market. This emerging trend represents the start of a sea-change towards “normalization” in the job market – looking more like what it used to look like pre-financial crisis, finally. The implications for lower/middle income consumption, the housing market, inflation, and corporate input costs are crucial. Data points supporting signs of broadening: U6 unemployment rate fell to 12.3% from 12.7% (this metric...

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Energizer Bunny gets a boost; how ENR’s split-up creates immediate shareholder value

April 30, 2014
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Energizer Bunny gets a boost; how ENR’s split-up creates immediate shareholder value

Energizer (ENR) stock is up 15% this morning based on a corporate action that is long overdue; the company is splitting itself into two separate and distinct public companies. Energizer contains products within two segments; household products (batteries) and personal care (razors, shaving, skin care, feminine care). Going forward, the stock will be split into two stocks enabling the market to place a separate valuation on each business. This is a good thing for Energizer investors, particularly today! The batteries category (Energizer, Eveready) isn’t a very good one. Margins are high (and have been historically) as a simple/commoditized product is sold with brand based pricing power. The disposable battery business is a good one from a margin, cash flow generation, and return on capital standpoint. But the battery segment...

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Wealth Effect; gaining steam from asset returns and persistence

April 29, 2014
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Wealth Effect; gaining steam from asset returns and persistence

The ongoing economic tug-of-war remains tied. Growth spurts with better momentum (housing, auto, healthy corporate profits, job market) are almost immediately met by numerous automatic stabilizers (higher mortgage rates, deteriorating housing affordability, satiation of replacement cycles). But weighing the good and the bad, we are in a fine environment for the stock market. The environment is good enough to drive slow, yet relatively stable, economic growth but weak enough for corporate input costs (labor, materials, interest rates) to remain very well contained. Margins are elevated, cash flow is healthy, and the market performs well (big picture). The wealth effect is a key item on the “good” side of the economic ledger that is set to gain steam in terms of economic drivers. “Wealth” matters because it is the secondary...

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Boeing at cruising altitude; the world needs more planes!

April 24, 2014
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Boeing at cruising altitude; the world needs more planes!

Boeing’s investment performance has been spectacular since the announcement, and subsequent investigations of battery fires in late 2012. The stock price marched from $70 to $140, achieving a rapid 16-month double. The opportunity in late 2012/early 2013 was outsized; it is rare to purchase a company as dominant as Boeing, in the early stages of a multi-year cycle at a severe discount to the market valuation. Today, the investment opportunity is less of a moon shot, but a good one nonetheless. Boeing continues to perform well across several important investment attributes; a combination of continued strong performance and above average visibility will keep the stock going. 1Q14 results: total sales growth of 8% led to… solid margin expansion of 30 bps (10.2% from 9.9%), and… core operating profit growth...

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Student debt bubble; should school loans be repaid, or not?

April 23, 2014
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Student debt bubble; should school loans be repaid, or not?

Tuesday’s WSJ presented an interesting cover story on student debt forgiveness. Push back is growing with respect to managing the amount of total debt forgiveness or capping it to a maximum amount; the article states $57,500 as potential forgiveness cap per student. Bubble aftermath is never pretty and the fascinating case of runaway US student debt will be no different. Let’s be frank, there is no black and white solution to any of this. Per the American Student Assistance association, there are approximately 37 million Americans with some form of outstanding student debt. Each instance is unique from the standpoint of two important factors: 1) capacity to repay 2) the ability to earn a return on a debt-financed education spending If individual students were mini-corporations, its credit worthiness would...

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Google is getting cheaper; valuation attractive after consistent growth and stock pullback

April 17, 2014
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Google is getting cheaper; valuation attractive after consistent growth and stock pullback

Google continues to roll. The share price will zig and zag but the company is making strides by investing for growth and positioning for better results in the future. Current results are still quite respectable today and earnings and cash flow growth are catching up to the stock price. The GOOG investment theme has been a good one since 2011 (this stock has been a CJF favorite) and multi-month periods of stock price pauses are generally good times to consider an entry point for enduring growth stocks. Some general dynamics for GOOG investment have been in place for several quarters: Very strong sales growth, generally north of 20% adjusted for one-time items and currency. Dramatic market share gain within advertising markets as spend shifts from traditional media to digital...

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Risk-reduction driven market corrections are healthy; this one presents opportunities

April 14, 2014
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Risk-reduction driven market corrections are healthy; this one presents opportunities

The pullback in the market should not be a surprise. The real surprise is the extent of the market’s ascent over the past 18-months, without a single significant draw-down. Corrections are normal during the course of a bull market, and aid in accomplishing a number of items: building the wall of worry; an important source of future buying activity, stocks stop rising which bides time; earnings and cash flow growth can catch up to stock prices, and most obviously improving valuations and avoiding bubble-like conditions. There are a few types of corrections, all with different implications in terms of the correct response. Fortunately, for investors today, the current correction, although sure to impose short-term losses (and potentially heavy ones) is benign for longer-term oriented investors. 1) Corrections before a...

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Alcoa is “reinventing the wheel” – potential to be a big multi-year investment theme

April 11, 2014
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Alcoa is “reinventing the wheel” – potential to be a big multi-year investment theme

Back-to-back posts on Alcoa (AA) to follow up on a powerful investment theme with the potential for outsized returns over several years. There is a time and a place for each individual stock investment, and the proper synchronicity is all the more important for out-of-favor / out-of-consensus investment themes like Alcoa. The classic elements for contrarian investors are aligning with AA, and big returns will ensue for investors who stick around until a healthier pricing environments for overall metals end-markets. In the meantime, CJF continues to focus on AA’s ability to evolve the business model to execute well during tough times which is driving the stock price higher despite a poor operating/pricing environment today. AA is growing EBITDA in today’s environment of  8% aluminum price declines; visualize the P&L...

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Alcoa (AA); well positioned and stock worth revisiting

April 7, 2014
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Alcoa (AA); well positioned and stock worth revisiting

Alcoa (AA) just hasn’t received respect over the past several years. This is in the process of changing today, and AA has the potential to continue its rally to the low $20s from $12-$13. AA morphed into a classic out-of –favor stock since the financial crisis but lackluster stock performance created value amidst horrible sentiment. The stock moved sharply over the past 6-months, rising from $8 (where it traded give or take for 5-years) to $12. Alcoa reached $40 pre-financial crisis and the shares were never permanently impaired by a meaningful amount of distressed equity issuance – one crude measure to demonstrate upside. Pre-crisis, times were different, with a more consistent appetite for commodity exposures in an environment of rising commodity prices. Contrast to recent developments: Commodity exposures have...

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Earnings preview for a bull market; what to expect for 1Q14

April 4, 2014
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Earnings preview for a bull market; what to expect for 1Q14

1Q14 earnings will begin in earnest by mid-April with the market flirting with new highs over the past several sessions. Geopolitical concerns, and Fed taper fears, are gradually fading into the background, and investors are in for a period of individual earnings results driving stocks, and ultimately, market performance. The setup for 1Q is unique; the weather was abysmal this quarter, depressing spring seasonal business activity. The issue of poor weather is well known, particularly for those living in the northern half of the US, so expect the market to look through depressed results. In a sweeping bull market (a good characterization of today’s market) investors tend to provide the benefit of the doubt, looking for excuses to stick with, and build positions. The focus turns towards “what could...

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Time to go global with hydraulic fracturing investments

April 1, 2014
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Time to go global with hydraulic fracturing investments

Ukraine is dependent on Russian energy sources; an unsustainable co-dependence, which is now set to change. In fact, Europe, more focused on green initiatives, is woefully behind the US with respect to energy independence. Putting aside the environmental arguments, geopolitical events have a way of focusing policy actions, and just this past week, there has been gentle prodding of European leaders to do more from, take a guess….President Obama. Let’s give this a wow. No, a double-wow! Russia’s aggressive posturing in, and around, Ukraine’s borders, highlight the need for Europe to come up with a plan to extract and benefit from its own 470 million cubic feet of potentially recoverable shale resources. Three countries have the majority of recoverable shale gas deposits with the potential for meaningful recovery of...

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Crimea Annexation; the implications for global capital allocation

March 27, 2014
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Crimea Annexation; the implications for global capital allocation

  Around geopolitical events, political posturing is generally the short-term focus for all parties involved, and markets, but the longer-term implications are often unrelated to what is obvious in the short-term. The despotic approach of Vladimir Putin, and his “damn the torpedoes” approach to dealing with market/economic consequences exacerbates this effect. A fascinating take on the longer-term consequences of Putin’s bravado is detailed in the Journal of Foreign Affairs.  Recent actions are presented as a negative for Russia and a positive for the Ukraine. While this will take several years to validate/invalidate, the article is provocative and provides at least a partial justification for financial markets (outside Russia/Ukraine) to come to terms with the annexation issue, and largely ignore it. Perhaps Ukraine/Russia geopolitical issues become 2014’s version of last...

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