Search This Blog

Wednesday, October 22, 2014

There are No One Decision Stocks

Occasionally I peruse what goes on at places like Seeking Alpha where individual investors produce homegrown stock analysis and recommenstations.

A craze over there for a long time has been "dividend growth stocks" often household name companies which are seen as guaranteed to produce a growing stream of income often with the extra imprimatur than Warren Buffett owns them. If the price's temporary market movement and besides there's that dividend.. And of course as the name implies the many individuals posting and reading there think it is relatively easy to generate alpha--better than maket returns on a risk adjusted basis. And since there is no systematic way to track the stock picks generated by the many that write on the site there would be no way to test if anyone actually is successful in doing so.

Earnings reports over the last few days show that investing is seldom if ever so simple.

 I am certainly a believer that price can deviate from value...certainly there is no economic rationale for the price fluctuations we have seen in the overall market of the past couple of weeks. And no doubt many stocks have been knocked down in prices that don't reflect value during that selling.I also do not in any way consider myself a stock picker...

But sometimes price does reflect underlying fundamentals (in the long term it does) and sometimes there are changes that can impact the long term prospects for a company.

I am not a stock picker in my approach but the recent news on IBM, McDonalds and Coke seems to point towards some real change in prospects

For IBM the problems seem most daunting . As Andrew Ross Sorkin reports in the NYT dealbook. IBM may gave known how to keep shareholders happy through dividends and buybacks...but it took its eye off the ball in terms of building the business.

The company’s revenue hasn’t grown in years. Indeed, IBM’s revenue is about the same as it was in 2008.
But all along, IBM has been buying up its own shares as if they were a hot item. Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt.
While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. (To be fair, Ms. Rometty has been following a goal set by her predecessor, Samuel J. Palmisano, to return $20 a share to stockholders by 2015. Ms. Rometty abandoned it only on Monday.)
All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.
Mr Buffett as Sorkin notes has been a big fan of IBM because of its stock buybacks and dividend growth investors have their eyes on the dividend. But as Buffett in his latest letter to investors  has noted (quoted by Sorkin)
“In the end, the success of our IBM investment will be determined primarily by its future earnings.”
The question for Ms. Rometty is whether she can figure out how to turn around IBM — not just its numbers, but also the company itself.
Both McDondalds (MCD) and Coke (KO) seem to be facing trends in consumer tastes away from their core products. More disturbing to long term investors is that the CEOs of both companies seem to be surprised by the developments and arent too clear on what they will be doing to turn things around.
Here's a great graphic from the WSJ illustrating the dilemma for both

Here is the WSJ on MCD  and here on KO I wont review the ugly details here.

One sign that is not very positive for KO is the CEOs statement that a cost cutting program will be implemented to improve profitability. Given the size of the companies revenues there would have to be massive cuts in expenses to have much impact on earnings. In my experience citing cost cutting to generate a major improvement in earnings is a sign that management doesnt have any real ideas on how to grow the company.

In any case these three examples point out that stock picking is never as simple as it looks, there are no one decisions stocks....and most investors are likely better off with a diversified portfolio of passive ETFs and/or index funds.

No comments: