- Investing in the future? Second thoughts about “short-termism”
- The most important decision a CEO makes…
- … and how it can drive stocks to 100-fold gains
- Crude’s next move to new lows, underway now
- IMF to China: Come back in a year
- The solar-powered VW bus… another illustration of how “health insurance” really works… a “peaceful” world and how you might die… and more!
“After five years, you turkeys have cost-cut as much as you possibly can. If you expect to keep growing your earnings, you jolly well better start investing in the future of your businesses to attract more customers. You do think such investments will pay off, right? Don’t you? Anyone? Bueller?”
In April of last year, we paraphrased an open letter written by Larry Fink, the CEO of BlackRock — the world’s biggest money manager. He was addressing the CEOs of the other 499 S&P 500 companies.
Fink’s own language was a bit more circumspect. “It concerns us that in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
This past spring, Fink doubled down in another open letter. Corporate America is “underinvesting in innovation, skilled workforces [and] essential capital expenditures necessary to sustain long-term growth.”
Now the politicians are getting involved. Hillary Clinton is decrying the same phenomenon Fink does — only she’s come up with the pithy label of “quarterly capitalism.”
She has a solution, natch — redefining short-term capital gains in the tax code. Under her plan, if you want to pay the lowest capital-gains tax rate when you sell an investment, you’d have to hold onto that investment for six years instead of just one.
Consider yourself on notice…
“I think the concerns are overblown,” says our own Chris Mayer. “And more importantly, I’ll share with you the most important lesson out of all this that you can use as an investor in search of 100x returns.”
As you’re likely aware, Chris is on a quest for stocks that turn every $1 invested into $100 — definitely a long-term proposition. Still, his quest is turning a lot of conventional wisdom on its head. Only yesterday, we showed you how Amazon became a 100-bagger even though its profit margins are razor-thin and sometimes nonexistent.
On the “quarterly capitalism” phenomenon, Chris picked some valuable insight at a conference in New York last month — attended by many heavy-hitter investors and members of the Clinton coterie, it turns out.
It’s true that dividends and buybacks set a record last year — if you’re talking about absolute dollar amount. But as a percentage of market cap, dividends and buybacks have been in a steady range between 2-6% going back to at least 1980. They’re around 4% now.
That’s according to research by Michael Mauboussin, managing director at Credit Suisse. “Mauboussin’s presentation,” Chris goes on, “also showed us where companies spend their cash. If you’ve ever wondered where the cash goes, here is a chart that shows you:”
Notice research and development has grown slightly over the decades. As for the fall in capital expenditures, Mauboussin chalks that up to the U.S. economy’s shift away from manufacturing and energy toward technology and health care.
“To me, the debate isn’t really about short term versus long term,” Chris sums up. “A decision made for the short term should not automatically be considered the bad choice.
“After all, the long term is nothing but a series of short terms. Long term can be a wall for poor performers to hide behind.”
What really matters is how a CEO chooses to deploy his cash among the seven options on that chart. “Smart capital allocation decisions,” says Chris, “are essential to making a 100-to-1 on a stock, as I’ve seen in my study of the 100-baggers of the last 50 years.”
Which brings us to the point made by another speaker at the conference where Chris was in attendance: “Tell me how [CEOs] are paid and I’ll tell you how they behave,” said Bill Priest, founder and CEO of Epoch Investment Partners.
That’s the “O” in Chris’ CODE criteria when he examines a stock — owner-operators. “We like stocks insiders own a lot of,” Chris reminds us. Having skin in the game doesn’t guarantee good capital allocation decisions. But it sure helps the odds.
“Owners are less likely to pursue value-destroying acquisitions or do dumb things to boost short-term performance at the expense of long-term prosperity. Owners, as in real estate, tend to take better care of property than renters.”
Owners show up time and again in Chris’ new book, 100 Baggers: Stocks That Return 100-to-1 and How to Find Them. We still have a supply of hardback copies we’re making available FREE, as long as you can cover shipping and handling. But that supply is dwindling fast. Follow this link and enter the password “100x” to claim your copy.
Tech issues and small caps are leading the market higher today: As we write, the S&P 500 is up three-quarters of a percent, to 2,109.
Bonds are selling off, the yield on a 10-year Treasury back to 2.27% at last check. Gold is slipping again, the bid $1,084.
The big economic number of the day is another weak one: The payroll firm ADP estimates private-sector employers added 185,000 jobs during July — less than even the lowest guess among dozens of economists polled by Bloomberg.
ADP’s report is looked at as a harbinger for the Labor Department’s monthly jobs report due Friday — although its predictive powers have been rather lacking of late. In any event, the number is one more shovel of dirt on the coffin of an increase in the fed funds rate come the Federal Reserve’s next meeting in September.
Crude sits little changed from yesterday’s close at $45.68 — despite a heavy draw on inventories. The Energy Department says crude inventories fell nearly 1% last week, to 455.3 million barrels.
So we couldn’t even get a bounce in the crude price off a healthy drop in inventories. That bolsters the case hedge fund manager Erik Townsend made here yesterday for oil in the low- to mid-$30s come October.
China’s entry to the old boys’ club has been delayed a year.
The International Monetary Fund issued a report yesterday saying the Chinese renminbi still isn’t ready for inclusion on the IMF’s “super currency,” formally known as the special drawing right (SDR). At present, the SDR comprises the dollar, the euro, the British pound and the Japanese yen.
“China wants to do what the U.S. has done,” our Jim Rickards explained in this space last May, “which is to remain on a paper currency standard but make that currency important enough in world finance and trade to give China leverage over the behavior of other countries.”
China will get there — but apparently not this fall, when the IMF is set to formally decide whether to rejigger the SDR. Still, the report left the door open for revisiting the issue next year instead of waiting until the next review in 2020.
Bottom line: The renminbi will stay loosely pegged to the dollar for another year. “More deflation,” Jim Rickards tweeted this morning.
OK, so this reinforces solar power’s image as a hippy-dippy thing… but it’s still oddly intriguing.
Daniel Theobald — chief technology officer at a health care IT company called Vecna Technologies — has taken a 1966 Volkswagen van and turned it into an electric vehicle.
No, it’s not elegant — that’s a solar panel mounted atop the vehicle — but it does work, and you might see it tooling around greater Boston.
Boston magazine tells us Theobald bought the old bus in 2013, and has been using it for short trips since he finished the modifications.
No, the range isn’t great… but by the same token, he never has to plug in the bus to recharge. It all works off the solar panel. One of Theobald’s colleagues is hatching a plan to do the same with a VW Beetle.
[Ed. note: Mr. Theobald couldn’t have pulled off this trick a few years ago — solar panels simply weren’t efficient enough.
But as we’ve been saying for months now, solar has become efficient enough… and cheap enough… that smart investors can’t afford to ignore it. The story’s been building since 1969… and tomorrow could prove to be a huge profit catalyst, according to Matt Insley of our energy team. Matt shows you how to grab your share of a $3.7 trillion profit bonanza when you click here.]
“It doesn’t take a ‘rocket surgeon’ to see that health insurance increases the costs for everybody,” a reader writes on an ongoing topic. “You (theoretically) have two industries, insurance and health care, competing for your dollars.
“The thought is, ‘Oh, I’ll pay for health insurance so my health care will be cheaper’… The reality is the health care industry and the insurance industry are in collusion with one another.
“Here’s one example: My CPAP machine needs a microfilter every so often. It’s about the size of a very small Band-Aid. My insurance company has agreed to reimburse my medical supply company $6 for each of these little filters. Of course, I am the one paying $6 for the filters because I haven’t reached my deductible.
“However, I can go to Amazon and buy a package of 48 of these filters for $10.95 plus shipping. Let’s see…. $6 times 48 equals $288…. Why should I pay $288 instead of $10.95?? I DON’T.
“The shame of it is most people have no idea this is going on. It should be illegal for these industries to fleece people like this.”
“Unless my brain doesn’t work anymore, what are these pundits smoking?” a reader writes after we explored the notion that the world’s becoming a more peaceful place.
“The Middle East and Europe get worse by the day. Russia, Iran, North Korea, ISIS et al. are always looking to foment trouble — yeah, it’s not WWIII, but the world is a mess. Look at all the suicide bombings… must have killed many thousands.”
The 5: The Global Peace Index we mentioned yesterday had two interesting stats. Since 2008, deaths caused by “external conflicts” have decreased by three-quarters. But deaths caused by terrorism have more than doubled.
Which reminds us of another interesting stat: You still stand a better chance of being crushed to death by a piece of furniture you own than you do being killed by a terrorist.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As noted earlier, Chris Mayer’s new book will change how you look at investing — and how you invest.
It’s all in your hardcover copy of 100-Baggers: Stocks That Return 100-to-1 and How to Find Them.
Chris and a half-dozen researchers have put in 15 months at a cost of $138,545 to uncover the key traits the 365 most famous stocks in history all share.
Do you own any of these 365 stocks? Do you know how to make sure every stock you buy has 100-bagger potential? Enter the password “100x” at this page to claim your free hardcover copy of 100-Baggers and find out!
