In the world of
investing, you have to see things a little bit differently than everyone else. You don’t win by following the “big dumb
trends”. These are the things that
everyone already knows about. These
trends are - at best - fully reflected in the stock price. At their worst - they create the types of
bubbles we have seen balloon out of control and then pop.
The danger in
the stock market comes when everyone starts to see things the same way. When investors start all herding together
towards the same industry (see Technology in the late 1990s and early 2000s) or
stock (Apple’s recent tumble from $700) or idea (homes will never decrease in
value) - that is when things are most dangerous.
Investors who
buy or sell based upon what that they read about in the Wall Street Journal or
see on CNBC don’t find out about the party until after it has happened. They miss out on the biggest returns before
the trends start or get scared out of good opportunities.
A key to
long-term stock market performance is
to pick up on the small trends and historical information to project a reasonable expectation out into the future. Over the past few months, we have observed several “small, smart trends” that we believe will influence the markets over the next 6-8 months:
to pick up on the small trends and historical information to project a reasonable expectation out into the future. Over the past few months, we have observed several “small, smart trends” that we believe will influence the markets over the next 6-8 months:
Industrials Pushing Forward
Companies like
Emerson Electric Co., W.W. Grainger, Cummins, and Dover Corp. are all moving to
new highs - despite lackluster fundamental (earnings and dividends) performance
over the past 12 months. This makes
little sense. How can a stock move
higher without underlying value also increasing? Has the market overvalued these
companies?
On the surface,
it appears that way. When you dig a
little deeper, a story starts to unfold.
First of all, very large and sophisticated investors are pouring a ton
of money into these companies. Everyday
investors cannot drive stocks like this - it takes a lot of money to drive
these huge corporations’ stock prices higher.
Institutional investors clearly see something in the future that leads
them to place very large bets ahead of the fundamental value. What do they see?
These companies
have technology and expertise that the world needs and cannot grow
without. They all do different things,
but all of them have something to do with capital goods. They produce things that other corporations
buy to make products for end consumers (you and me). These companies are all technology leaders in
the industry. Diesel engine manufacturer
Cummins, Inc. is making significantly more durable, efficient, high-quality
engines than they were even a few years ago.
The large push
into Industrial stocks is a bet that the global economic outlook is improving
and will lead to better earnings for the companies that drive economic growth
(Industrials). The United States economy
is muddling along, but Europe has started to turn up. The larger European countries have shown
positive GDP growth numbers and are expected to continue improving. A stronger Europe means more demand for other
nations’ goods, which will spur investment - especially from the emerging
market nations such as Brazil and China.
Acquisitions
Low rates and
high levels of cash have driven purchases and acquisitions. Verizon Wireless’ $49 billion bond issuance
was the largest in history. They used
the proceeds from the sale to buy out Vodafone’s 45% stake in Verizon’s
spectrum network.
This acquisition
and many others like it have never made more sense than now. Even with the slight uptick in interest
rates, money is still extremely cheap.
The above-average pace of acquisitions and investment of business cash
will continue as long as it is.
Activist Shareholders
There have been
many activist shareholders speaking out to influence the companies they have a
large stake in. The view of activists is
that every major company in the U.S. has got some fat in it - things that reduce
profitability. They believe that a more
focused strategy leads to a leaner and more easily managed enterprise and
ultimately higher earnings.
These activist
investors are looking for companies with sustainable long-term growth prospects
that can be improved. They are going for
companies currently growing at, say, 7% that - with a little fat trimming -
could grow at 10%. Take Pepsi, for
example. Activist investors want Pepsi
to spin off its underperforming beverage unit to create a snack food growth
machine. If that were to happen, the
growth prospects for the snack giant would increase dramatically - along with a
drastic increase in earnings multiples.
Whether it is
making the business more efficient or influencing the way it distributes cash
to investors - we believe the majority of these activist shareholders are
positive for the stock market as a whole.
The influence of these investors could be a driving force for the market
looking ahead.
The stock market
is all about taking measured risks.
There is only so much information you can gather before you have to put
your money on the table. Whether it’s
about the Fed tapering, crisis in Syria, the U.S. Federal budget, or anything
else - a bit of pessimism and fear is a good thing in the stock market. It creates opportunity.
Investors who
are willing to take risks that others are not will likely gain a profit for
it. If you sit around and wait for all
of the bad news in the world to clear up, it’s already too late.
DISCLAIMER: Donaldson Capital Management, its clients, and employees own shares in GWW, EMR, and CMI.
DISCLAIMER: Donaldson Capital Management, its clients, and employees own shares in GWW, EMR, and CMI.
