- Celebrating Back to the Future… five days late!
- The best-performing stock since the first movie in the trilogy was released…
- … and the lessons it tells about massive 100x (or better) returns
- More proof the deck is stacked against new businesses
- Why the new businesses that are forming aren’t going public
- Readers go wonky on us and explore why productivity is down
So we don’t yet have a flying car… but the self-lacing shoes from Back to the Future are nearly reality.
We’re a bit late marking Back to the Future Day. Last Wednesday was the “destination” Marty McFly and Doc Brown traveled to in the second film of the trilogy.
To mark the occasion, Nike announced it will release actual Marty McFly shoes next spring.
The first pair was delivered to Michael J. Fox last Wednesday…
“This innovation advances what was coined the Nike Mag’s ‘power laces,’ combining the archetype invention with digital technology,” says a company statement. “The result is an individually responsive system that senses the wearer’s motion to provide adaptive on-demand comfort and support.”
Someone in Nike’s PR department likes to load up on buzzwords instead of focusing on customer benefit — heh.
The shoes are a limited issue — sold only at auction, with proceeds benefiting the Michael J. Fox Foundation for Parkinson’s Research.
Now ponder this: The best-performing stock since Oct. 26, 1985 — the date Doc implored Marty to fly with him to 2015 — is Nike Inc.
No kidding. MarketWatch ran the numbers last week. Here’s what they look like…
“The top seven were 100-baggers,” says Chris Mayer of Mayer’s 100x Club. The minimum return to generate a 100x stock is 9,900%. “Nike was almost a 500-bagger.
“Here is yet another example of a great stock that was right under our collective noses,” says Chris. “It’s not as if Nike was a big secret. All you had to do was buy and hold.
“I peeked into my 100-bagger database and found many more 100-baggers with start dates somewhere in 1985: Autodesk, Best Buy, Jefferies Group, Novo Nordisk and more.
“The list is a lot longer still if you include any stock you could’ve bought in 1985 and turned into 100-to-1 returns. You could easily have bought a different stock every week in 1985 that would’ve turned $1 into $100 at some point in the next year 30 years.”
The names are a motley assortment. But they all reinforce some points Chris has made in our virtual pages these last several months…
For starters, “You only have to be right once,” says Chris.
“Just a $5,000 investment in Nike could’ve turned into almost $2.5 million. That’s a life-changing amount of money. You didn’t have to make a dozen trades. You just had to make one.”
For another thing, “If you get the stock right,” Chris goes on, “a lot of other stuff fades into the background.
“Stuff” like the 1987 crash… the 1991 recession… the Asian crisis/Russian default of 1997-98… the tech bubble in 1999-2000… the housing bubble and Panic of ’08.
“At any point along this timeline, there was always a nearly endless list of worries and concerns to keep you away. All of it was a distraction. All you had to do was hang onto Nike.”
What’s more, “Nike had several stretches of poor performance and at least few where the stock was nearly cut in half. Sometimes it went sideways or down for years at a time. You had to sit with Nike as other stocks zipped by you.
“You just have to learn to buy stocks like you would buy a car or a house. You buy carefully and with the idea that you’re going to own it.”
And finally, “The power of compounding drives mind-bending returns.”
Nike’s return on equity was well over 20%. “ROE,” Chris reminds us, “is simply net income divided by equity. Say you start a business with $100 of your own money and earn a $20 profit in the first year. That’s a 20% ROE.”
Nike delivered an average 20% ROE from 1985 through last year. “There were one or two off years. But in each case, the company rebounded quickly.
“Over the long term, as many others have observed, your return as a stockholder will roughly equal the return on equity of the business you own.
“So once again, we see the template of 100-baggers emerge. We need high returns on equity, and we need to compound those returns over a long period of time. If you do that, you’ll have your 100-bagger. It’s just math at that point.
“Unfortunately,” Chris concludes, “we don’t have Doc Brown’s DeLorean to take us into the future to find out what stocks become 100-baggers in the years ahead. But we know how to get there. We just have to stay committed to that goal and we’ll find our 100-baggers.”
You can follow along every month with Mayer’s 100x Club. You can still grab a free copy of Chris’ book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them with a trial subscription. Enter the password “mayers100x” at this link and you’re in.
Stocks are starting a new week on a “meh” note. All the major indexes are in the red, but not dramatically. The S&P 500 is down six points, at 2,069.
Gold is clinging to support at $1,166 even as the dollar loses ground against other major currencies; the euro has strengthened to $1.105.
Crude is down more than 1% and in danger of breaching the $44 level.
The War on Small Business, continued: Our periodic chronicle, going back more than five years now, features a shocking but not surprising fact today. Big business grabs the lion’s share of state and local economic subsidies.
The organization Good Jobs First is out with a study of “economic development incentives” in 14 states, totaling $3.2 billion. These are subsidies that were made available to businesses of all sizes; the researchers threw out 500 other incentive programs that had barriers to entry all but ruling out small business.
The key finding: Big business lands 70% of the deals and 90% of the dollars.
“Our findings definitively confirm what many small-business people have long believed,” says Good Jobs First executive director Greg LeRoy.
Of course, if we had our way, no business would get state subsidies, because government wouldn’t be in the business of picking winners and losers. Regardless, talk about a stacked deck…
At least businesses are once again coming into existence faster than they’re going defunct. That’s the standout fact from a new report issued by the Census Bureau.
From 2008-2011, an average of 420,000 businesses were launched each year across the nation… while 450,000 went bye-bye. That was unprecedented — at least in the Census Bureau records going back to the late ’70s.
Finally, new numbers for 2012-13 show that trend reversing.
Still, we’re nowhere near the pre-2007 average of 120,000 net new businesses created each year.
As a reminder, it’s new businesses, less than five years old, that are the real job creators. The Kauffman Foundation has demonstrated this fact time and again.
Don’t look for a dramatic reversal in that chart: The 2015 Gallup-Purdue Index, a study of more than 30,000 U.S. college graduates, finds 19% of those with college debts saying they’ve delayed starting a business because they’re larded down with student loans.
“This translates to more than 2 million graduates saying they have delayed starting a business because of their student loan debt,” says Gallup’s Brandon Busteed. “If even a quarter of them had done so, we would quickly recoup our average surplus of 120,000 new businesses annually.”
And fewer of the businesses that do launch are going public as they grow.
“After a century of utter dominance, the public company is showing signs of wear,” says this week’s edition of The Economist. The reasons are many — more than we can get into in our 5 Mins. — but our point today is that the most promising companies of the future may never issue publicly traded shares.
The new breed of startups “go to great lengths to define who owns what. Early in a company’s life, the founders and first recruits own a majority stake — and they incentivize people with ownership stakes or performance-related rewards.
“That has always been true for startups, but today the rights and responsibilities are meticulously defined in contracts drawn up by lawyers. This aligns interests and creates a culture of hard work and camaraderie. Because they are private rather than public, they measure how they are doing using performance indicators (such as how many products they have produced) rather than elaborate accounting standards…
“Founders, staff and backers exert control directly. It is still early days, but if this innovation spreads, it could transform the way companies work.”
Don’t despair, though. We’ve uncovered a unique way to invest in the most promising startups. Even if they never go public, you can still profit. Better yet, every company has been vetted for you by venture-capital experts. Learn all about it when you click here.
“I think Jim Rickards and many others are missing the substantial productivity improvements because GDP can’t measure them,” writes the first of several readers responding to Jim’s musings here on Friday.
“While GDP measures goods and services, it doesn’t measure increased use of products already out there or a substitution of products out there with more efficient products.
“Uber is an example of increased use of products already out there. In the past, cabs were owned by taxi companies, and personal cars were owned by everyone else. That meant that auto companies produced autos for personal use and professional use by taxi companies. That resulted in more cars being produced. But with Uber making it possible for personal cars to be used as taxis, fewer taxis are being produced, so a lower GDP results. But in reality, productivity took a leap up.
“That sort of increased utilization is occurring in all kinds of markets as the Internet increases the use of products already out there.
“An example of the other case of substitution is the massive use of cloud computing. What that does is enable all computer storage and services to be run on virtual servers and storage devices. What used to be done on dedicated servers and storage is now moved into the virtual realm, where multiple users take advantage of the same assets. This means that it takes less of those assets to achieve the same functionality. So less production. Again, increased utilization increases productivity but GDP does not measure it.
“The same thing is happening in the service sector.
“I believe we are in the midst of a productivity boom that is substantially reducing costs. And because GDP doesn’t know how to account for that, it doesn’t get measured. It is a good thing that we get more out of less goods and services. The GDP measurement and the belief more stuff has to be consumed are antiquated and give false signals about the economy.”
The 5: Interesting. To be sure, Uber and cloud storage and similar phenomena are contributing to the deflationary tendencies in the economy the Federal Reserve is so desperate to fight.
Central bankers “never make a distinction between deflation and progress,” said Jim Grant of Grant’s Interest Rate Observer in 2013. “In the last quarter of the 19th century, thanks to everything from the electric light to progress in the process of steelmaking or the telephone, prices and costs fell for the better part of 30 years. Real wages went up, some people suffered, many didn’t, society progressed and people got richer…
“By insisting on trying to raise the price level, the Fed is in effect resisting the progress of our time.”
“I’d be willing to wager that at least a portion of falling productivity,” writes another reader, “can be attributed to a factor that has been widely mentioned but not discussed, at least in these pages: full-time workers laid off and more part-time workers hired to fill positions.
“This does a couple of things that I can see. The most obvious is that the full-time workers had experience in their jobs, while the new part-timers must be trained. Also, it will, obviously, take considerably longer (calendarwise) for the part-timers to acquire the experience than it did the full-timers.
“Second, there is the doubling of accounting load for keeping books on twice as many workers; doesn’t matter that each company may be paying less per worker — maybe even less overall because of ‘starting salaries’ — but the accounting department is still having to keep books and issue payments to twice as many workers as before.”
The 5: Good point. We used to mention the U-6 unemployment rate each month, and maybe we should start again.
The figure most often cited in the media is U-3, and it’s currently 5.1%. But U-6 includes people who’ve given up looking for work in the last year plus part-timers who want to work full time. That figure is nearly double — 10.0%.
“Interesting reviewing the labor force participation rate (LFPR) chart that goes back to 1960,” says one more reader reacting to Friday’s episode.
“It seems the LFPR was around 60% through the early ’60s and then began a steady rise from the late ’60s until about 1990, where it stayed between 66-67% until the 2008 recession.
“Two questions: Why was it so low until the ’70s? Was it that so many women were not working? Also, by Jim Rickards’ GDP growth formula combining the growth in the LFPR and productivity (currently 1+1=2% growth), it appears the increase in the LFPR accounted for a lot of the economic growth though the roaring ’80s!”
The 5: Yes, women entering the workforce contributed much to that rise. Did it account for the economic growth of the ’80s? If time allows, we’ll ask Jim when he drops into our offices in Baltimore later this week…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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