The news cycle appears to be churning ever faster. Whether as a reaction to events, an attempt to manage the narrative or obscure the message is a debate that will occur for some time with the real answer becoming apparent in the hindsight of history. Not to minimize the Charlottesville tragedy or the headline grabbing Bannon ouster, but these stories are playing out in several flavors depending on the source. As one who attempts to discern the impact of issues on my investments, two (possible) financial headlines crossed my desk amid the other events that intrigued me.
Naysayers of this market (of which I include myself to a degree) have been voicing a concern regarding market valuations. When reviewing my February results I noticed the average size of dividend increases was lagging last years’ pace (12.3% in 2016 vs. 7.96% YTD 2017). One could say it’s too early to make an assessment and that could be true. But it could also be said that companies are being cautious due to uncertainty in regulations, taxes, inflation and economic growth. If this were a one-off issue, that would be one thing. On the other hand I’m starting to see some parallels to times when bubbles existed.
Exhibit #1 – SNAP
When was the last time an IPO was launched successfully with an increased price, profitability uncertain, a twelve month lockup for outside investors and founder retention of roughly 88% of the voting rights? If so inclined, the safest play is through Comcast (CMCSA)’s roughly 5% ownership of Class A shares. Can we say dot-com revisited?
Exhibit 2 – Target
Target (TGT – #19) whiffed on earnings and guidance last week. On one of Lanny’s posts, my comment How many were blindsided by TGT’s report yesterday, how many updated their forward estimates and how many incorporated the fact (illustrated by mgmt) that a turn around was (minimally) two years out and would incur additional costs in store conversions and IT expense? raised the question Did you, by any chance, seize the opportunity, by the way, at TGT? Or waiting for some dust to settle?.
The short answer is no and not likely near term. All retailers are struggling against Amazon (AMZN). I have exposure to Wal-mart (WMT) through a trust I manage. WMT is about a year ahead of TGT via their Jet acquisition but still significantly lag AMZN. The good news is TGT now recognizes a problem. My question surrounds their execution (and time required). Yet several bloggers bought this dip. They may be correct but this one currently carries more risk than reward in my book.
Exhibit 3 – Caterpillar
It’s always disconcerting to have Federal agents raiding corporate offices. To have it broadcast live on television raises the stakes. Caterpillar (CAT – #32) experienced this treatment last week. Not overly surprising as CAT has been embroiled in a dispute with the IRS regarding alleged shifting of profits offshore to a Swiss subsidiary. What I found interesting was that FDIC regulators participated … which perhaps raises a new question of money laundering?
Exhibit 4 – Costco
Sliding back to the retail space, we have another DGI darling illustrating how customer loyalty should be rewarded. Costco (COST- #156) reported Y/Y revenue growth due only to new stores and membership fees. Their response? Let’s boost revenue growth by raising membership fees further! Talk about a counter-intuitive response.
These are but a few reasons I believe this market warrants an abundance of caution.
Long: CMCSA, WMT (trust). Ranking based on DGI popularity list.
In my inbox I found a message inspired (?) by my last post. In a nutshell, it was a request for further insight into my October purchases. I have to admit that, on the surface, the appearance is that I was throwing stuff against the wall to see what would stick. I would like to think I’m slightly more calculating. To set the scenario, I had an oversized cash position due to a merger, the markets had started their pre-election downward drift and the FBI just breathed new life into Candidate Trump’s aspirations.