The success of any active money managers often relies on his or her ability to sift through and analyze data without being distracted by outside noise. This concentration allows them to base their investment decisions on actual metrics rather than on the media interpretations of them. They look at market drivers, consumer sentiment, sector growth, each company’s fundamental and technical health, industry structure and sustainable competitive advantages. Our investment team, for instance, has been tracking companies related to cloud computing for more than five years and that persistence has paid off. Stocks driven by cloud computing have outperformed the S&P by 8.53% year-to-date, by 9.28% in 2019 and by 21.37% in 2018. Examples of this type of stock include Amazon, Microsoft, Google, Salesforce, Alibaba Group and Adobe. Companies related to cloud computing have been outperforming analyst’s predictions and have become some of the fastest growing on Wall Street with high profit margins and return on capital. According to a recent article in Bloomberg Magazine, though, many active managers missed this trend, with just 37% beating their benchmarks in January. One major reason for this lag has been the tendency of these active money managers to shy away from the technology sector, believing many of its strongest performers have run their course. Based on metrics, though, this sector – and those companies related to cloud computing in particular – still have room to grow. The companies enjoy high barriers to entry, maintain power over their suppliers, possess pricing power and face little threat of substitute products. When the economy does slow down, cloud-related companies should remain resilient due to their efficiency, lower operating costs and easy access to state-of-the-art innovation. As with any sector, the technology sector will face its challenges and our analysts will be working hard to take advantage of new opportunities and to mitigate any losses these challenges present. An added advantage our active managers enjoy is that… | Read More »
After posting negative returns in the months of December, January, and February, we have experienced a significant counter-trend rally in the stock market since mid-February. The bulls are reading this as a sign that the seven-year long bull market has regained its footing. We are not as confident in that assessment and see this as a mini run-up in the broader context of an overall bearish market. This fall we wrote a post about why, at the 2,100 level on the S&P 500, we were cautious. Since then, we had a deep correction in the stock market followed by a sharp rally that takes us to today’s level of approximately 2,050. While the market is a bit lower than the 2,100 level where we initially blogged about key market risks, we reiterate our cautious view and hesitancy in chasing the short term upside volatility in the stock market. This brief list of fundamentally-based facts illustrates the reasons for our continued cautious stance towards the stock market: Stocks are expensive – the S&P 500 is currently trading at a lofty 16.7x price to earnings multiple. This compares to the 10-year average multiple of 14.0x. Sales growth and earnings growth are negative (we are in a revenue and earnings recession). Corporate America just finished reporting calendar year’s 2015 fourth quarter results. Companies provided guidance for Q1 2016 and the outlook is not very enticing. The S&P 500 is forecast to post year-over-year sales growth of negative .8% in the first quarter of 2016. The S&P 500 is forecast to post year-over-year earnings per share growth of negative 8.3% in the first quarter of 2016. Profit margins have peaked and are starting to decline. Total debt to total capitalization (financial leverage) is starting to increase. It is clear that the fundamental data is contradicting the short term rally we have seen in the stock market. It is hard to be bullish when sales… | Read More »
In the Winch Financial Investment Department it feels like we just completed evaluating first quarter earning’s reports from corporate America. However, it is now time to start digging through second quarter reported results. Approximately 75% of S&P 500 companies will be reporting second quarter results over the next three weeks. While every earning’s season is important, this quarter’s results might be more important than typical. As reported economic data demonstrated firm signs of growth over the past few months, investors bid the stock market up to all-time highs just last week. With most stock market valuation metrics being stretched, it is now incumbent on corporate America to come through with strong earning’s results and guidance for future results. Corporations need to demonstrate that the strong economic data we have been receiving is flowing through to the bottom line. Last night we received results from the first real corporate stalwart in Alcoa. Alcoa delivered strong results that handily beat Wall Street consensus sales and earning’s expectations and offered a favorable fundamental and financial outlook. As I write this short blog, Alcoa’s shares are being rewarded with a 5.7% surge in early trading today and the stock is trading near three-year highs. Alcoa continues to be a core long-term holding of Winch Financial and we are pleased to see the strong corporate results from Alcoa being recognized by investors. While second quarter earning’s season is off to a good start on the heels of Alcoa’s results, it is just the first of many company scorecards the Investment Department will be scrutinizing over the coming month. Given previously mentioned lofty stock market valuations, we are going to need to see more “Alcoa-like” results throughout earnings season to maintain recent stock market strength.
Just last week, the S&P 500 Index pierced the 1900 level for the first time in history. However, some important divergences still exist in the stock market. For example, small-cap stocks, as represented by the Russell 2000 Index, are down approximately 5% year-to-date. In addition, technology stocks, as represented by the PowerShares QQQ ETF, are only up 1% year-to-date and are below their all-time highs. The S&P 500, which represents large-cap stocks, is up over 2.5% year-to-date. Thus, there has been significant variation in stocks returns across many equity benchmarks leaving investors confused by the volatile market action. The heavy selling in technology and small-cap names over the past few months is indeed making some investors nervous. While divergences among market indexes typically can be a cause for concern, we believe the market has just been self-correcting the high valuations in some areas of the market. We are believers in the sustainability of the recent market highs set by the S&P 500. Indeed, since the beginning of the year, we have been pruning many of the higher valuation stocks in our Portfolios and replacing them with large-cap core and large-cap value stocks. We are of the belief that these types of stocks will continue to offer a superior risk/reward tradeoff versus the tech-heavy NASDAQ Index and small-cap stocks. It is all a matter of valuation and fundamental positioning. While the S&P 500 is not cheap, we do not find it expensive either given the backdrop of low interest rates and signs of an accelerating industrial economy. We believe the importance of being in the right stocks is paramount right now. This is not a market that is driving all stocks higher. There are clear fundamental and valuation concerns within some pockets of the stock market. While we would clearly prefer to see more market breadth with all market averages setting all-time highs, we recognize it has become a stock-picker’s market. … | Read More »
What is earnings season? Every quarter, publicly traded companies are required to file a report stating their sales and earnings as well as to provide a general business update. For lack of a better description, it is like a quarterly report card. Typically earnings season starts a few weeks after the completion of the calendar quarter and runs for approximately four weeks. At Winch Financial, the Investment Team is busy sifting through all of the various earnings reports and listening to management conference calls summarizing the business results of the first quarter of 2014 and analyzing the operating direction for the remainder of the year. Earnings season is an important time in the Investment Department. It presents an opportunity to analyze the most recent financial statements of a company and get a key read of operating results and direction. For our stock and bond investments we want to make sure everything is on track with our forecasts. Earnings season also gives the Investment team the opportunity to evaluate trends in corporate America and reposition our holdings, if necessary, to capitalize on emerging trends. It also provides the Investment Team with the data it needs to develop new financial models and assess individual company valuations. Just like a child’s school report card, an earnings report provides insight into a company’s strengths, weaknesses and opportunities. While it is still early in earnings season, our initial read shows companies handled the impacts of a harsh winter effectively. Importantly, corporate America sounds confident a pick-up in economic activity in the developed markets will accelerate as the year progresses. The one worrisome trend is a general slowdown in activity in emerging markets. Overall, companies appear well positioned and confident on future business activity. Winch Financial remains optimistic the bull market for stocks is still intact and we are seeing clear signs of acceleration in economic conditions. Lastly, Winch Financial is expecting interest rates to start… | Read More »