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Valued Contributor

From Barron’s, January 13, 2020 (Part 2)

 

 

Pg 5, Up & Down Wall Street: Trump stock market thunders on even as SP500 fwd P/E at 19 is at 40-yr high; other valuation measures are also high [MV/GDP, P/S, P/B, etc]. It is fairly valued on Rule of 20 [undervalued when P/E plus %inflation is below 20; that is about 20 now]. 2019 rally was from P/E expansion as the Fed eased [a flip from tightening]. Even Bill Ackman had a fantastic year after a terrible 2015-17 stretch. 2020 earnings may be up 5-10%. Apple [AAPL] is no longer a bargain at fwd P/E 24; it should boost dividend [1% only now] and cut its buybacks. Contrarians may look at natural-gas [-25% due to a mild start of the Winter; futures-based ETF is UNG] or natural-gas companies COG, EQT, SWN, RRC. HY-energy is also rebounding. BAC is still attractive.

 

Pg 9, Streetwise: WEF 2020 January 21-24 in Davos, Switzerland may be boring. There is severe shortage of hotel rooms – one hotel in 2019 was charging $10K/night for 130 sq ft room for last minute bookings. 75% of attendees are men; average age of attendees is 50+. President Trump is expected to attend this year [he skipped it last year] and may propose to build a Trump property there. Company memberships are $60K-600K, plus $27K per attendee. Streetwise columnist will just skip Davos this year and will be willing to meet anyone at Ski Butternut near NYC.

Energy-drink producer Monster [MNST] is coming out with products with crazy names like Java Monster Triple Shot, Reign Inferno, NoS Full Throttle, Burn, Mother, Bang, Reign Total Body Fuel, Predator. There is new competition from Coca-Cola [KO] Energy and others.

 

Pg 10-11: 2019/Q4 earnings season starts on Tuesday.

 

Tesla [TSLA] became the largest US carmaker last week by market-cap [$86 billion]. But it still has ways to go as GM was in its heyday in 1955 when it was #1 [period] in the debuted Fortune 500 list and was 3% of SP500.

 

Biogen’s [BIIB; fwd P/E 10] multiple sclerosis drug Tecfidera [43% of BIIB revenues] is facing a patent challenge by generic drug maker Mylan [MYL]. There have been unsuccessful patent challenges by others in the past. BIIB is also facing uncertain approval prospects for its Alzheimer drug.

 

Data this week: CPI, small business optimism index on Tuesday; PPI on Wednesday; retail sales, housing market index on Thursday; UM consumer sentiment index, JOLTS report on Friday.

 

Closed: Japan on Monday.

 

Bullish Recommendations: US defense stocks [LMT, NOC, RTN; fwd P/E 16.2-17.6; defense spending will continue to be strong; pg 9];

Bank of America [BAC; yield 2.1%; fwd P/E 11.6; huge wealth management operation ML; shareholder yield 10% (%dividend + %buybacks); probably cannot buy anything; Buffett/BRK own 10%; reports Wednesday; pg 12].

 

Bearish Recommendations: Apple [AAPL; fwd P/E 24 (Barron’s was bullish when it was 13 and included it in its Top 10 picks for 2019); modest revenue and earnings growth; hedge after a huge run in 2019; alternate ideas include TSM, AMD, ETFs IGV, DDOG; pg 13].

 

Pg 15: Themes from CES in LV last week: 5G, autonomous driving, TV content, streaming, IoT, privacy and miscellaneous strange ideas.

 

Pg 16: Columnist looked hard to find weaknesses in otherwise strong job numbers [average jobs gain +174,000/mo for 2019; 50-yr low unemployment rate of 3.5%]. She found weak job areas for the less educated workers; low wage growth in the service sector; lower participation rate for prime-aged workers [25-54]; job cuts in manufacturing; lower quit rate.

 

Pg 17: Income from dividends and dividend-growth from:

Healthcare: ABBV, GILD, PFE, CAH, AMGN, BMY, LLY.

Tech: MSFT, AAPL, TXN, IBM, AVGO, CSCO, NTAP.

 

Pg 18: Cover Story ”2020 Roundtable: Markets Will Gain Despite Looming Risks”.

 

Todd Ahlsten, Parnassus Investments [PRBLX]:

James Anderson, Baillie Gifford:     New this year

Rupal Bhansali, Ariel Investments:

Scott Black, Delphi Partners:

Abby Cohen, GS:

Sonal Desai, Franklin Templeton/BEN [TPINX, FKSAX, FKBAX, etc]:     New this year

Mario Gabelli, Gamco/GBL:

Henry Ellenbogen, Durable Capital:

William Priest, Epoch Investment:

Merryl Witmer, Eagle Capital:

Highlights of broad discussions are in this issue [specific recommendations will be in the next issue]:

US Recession: Not in 2020. Consumer sector is strong [70% of GDP] while manufacturing sector is weak [only 11-13% of GDP]. Real GDP growth +1.5% to +2.75%.

US Stocks: Modest outlook for 2020 as valuations are already stretched. Leadership is narrow – top 5 SP500 stocks account for 16.7% of the market-cap and much of the performance. Buybacks will slow. Stocks and economy may become unlinked. While the number of listed stocks has gone down, the private-market has grown. There will be more downside risks than upside rewards and volatility will rise.

US Bonds: Overvalued.

US Fed: Accommodative. Real-rates are negative. It has expanded its balance sheet by +$448 billion to support money-market repos and that is like QE4 although the Fed doesn’t call it that.

US Deficits: Budget deficit [$1+ trillion and growing] and international trade deficit are large even when the economy and the stock market are strong. Total debt/GDP is high at 107% and growing These may lead to higher inflation and interest rates. Reasons for higher budget deficit include tax cuts, aging population, increased government spending, fast-growing Medicare expenditures. The first year of Medicare coverage and the last year of life are most expensive. Medicare Advantage plans are good models of public-private partnerships. Budget deficits will get worse if some or all of the following are adopted – student debt forgiveness, universal healthcare, new MMT.

Inflation: Low for now but debt binge will eventually bite. Inflation measurement is also an issue. Wage growth will eventually drive inflation. Service sector prices are going up at +4% while goods prices are stagnant at 0%. Other economic data lag in capturing the effects of the new economy.

US Labor Force: Growth will be limited due to immigration policies in the near-term and deflationary impact of tech [and resulting labor substitutions].

Tech Disruptions: From AI, automation, e-commerce, streaming, etc. 30% of S&P companies face disruption from tech. Disruption may work differently in different regions – food-delivery business is not working well in the US but is doing quite well in China; electronic payments are much more widespread in China and some European countries.

Energy: Alternative energy use will grow but distribution and storage will be bigger issues than production. Eventually, the impact will be disruptive.

Regulation: Inflationary impact. Areas include privacy, market share, drug-pricing, environmental, emissions, etc. Many recent changes have come from executive orders.

US Elections: Uncertainty in the control of WH and Senate will cause market volatility. Independents will be the swing voters.

US-China Trade: Uncertainty beyond phase 1 deal.

Geopolitical Risks: Middle East, N Korea, China. Also, cyberattacks and continuing deglobalization.

Global Regions of Influence: US, China, Europe will become more delinked. US tariffs were the Sputnik-moment for China and it is moving quickly to become self-sufficient and consumer oriented [consumer sector is only 40% of GDP]; it is also expanding its political and economic interactions/influence globally [ex-US].

 

Pg 32: Jason Subotky and Stephen Yacktman [a formar poster at old M* Discuss] of focused value YAFXX have added some cheap foreign stocks and US distressed debt. It has 26% in cash.

 

Pg 33: Chris Davis of NYVTX, SLASX, CFIMX thinks that it is a mistake to avoid financials and buy expensive utilities and REITs. Investors are still scared of financials, but they are much more sound than they were in 2008. All 3 funds are hugely overweight in financials [3-4% dividends; 4-7% buybacks].

 

Pg 34: Keith Alexander, IronNet Cybersecurity and formerly the US Cyber Command and Jamil Jaffer, IronNet Cybersecurity and former chief counsel for the Senate Foreign Relations Committee. In terrorism, sabotage and physical attacks, Iran has a pattern of testing the limits of the West but not to provoke devastating counter responses. It does so for cyberattacks also – 2012-13 denial of service attacks against US banks and a dam in Rye Brook, NY; 2014 hacking at Las Vegas Sands casino, etc. The US responses so far have been covert or clandestine cyber responses and sanctions. A national strategy is needed for defense against cyberattacks against US companies [tech, financial, energy, utilities, healthcare, defense, etc] and federal agencies and systems. This could involve cooperation and real-time information sharing among the US government and companies [large and small]. It is unreasonable to expect individual companies to defend themselves against nation-state cyberattacks.

 

Extras from Friday – I try to guess on Friday which features will make it in the weekend edition but the following guesses didn’t make it. Almost 75-80% of the weekend edition is now available by 9:00 PM Central on Friday. Barron’s revised website has “Interests” tabs similar to columns topics and that makes it easier to find potential items for the weekend edition. This is also the reason for earlier postings on Saturday – I do wait for my paper delivery [typically between 5:00-6:30 AM Central] to fill in some data.

 

None

YBB
6 Replies
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Explorer ○○○

Re: From Barron’s, January 13, 2020 (Part 2)

Many thanks!
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Contributor ○○○

Re: From Barron’s, January 13, 2020 (Part 2)

As always a thanks to yogi.

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Explorer ○○○

Re: From Barron’s, January 13, 2020 (Part 2)

thanks yogi,

                                         jj

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Valued Contributor

Re: From Barron’s, January 13, 2020 (Part 2)

"SP500 fwd P/E at 19 is at 40-yr high"

Looks like PE was a lot higher for several months from 1995 to 2009 (link

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Valued Contributor

Re: From Barron’s, January 13, 2020 (Part 2)


@FD1001 wrote:

"SP500 fwd P/E at 19 is at 40-yr high"

Looks like PE was a lot higher for several months from 1995 to 2009 (link


Those were trailing P/Es, not forward P/Es.

While fwd P/Es use earnings estimates that may change, trailing earnings can be hugely distorted by various writeoffs. Neither may be good for being predictive, but fwd P/E has a better shot at that.

YBB
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Valued Contributor

Re: From Barron’s, January 13, 2020 (Part 2)


@yogibearbull wrote:

@FD1001 wrote:

"SP500 fwd P/E at 19 is at 40-yr high"

Looks like PE was a lot higher for several months from 1995 to 2009 (link


Those were trailing P/Es, not forward P/Es.

While fwd P/Es use earnings estimates that may change, trailing earnings can be hugely distorted by various writeoffs. Neither may be good for being predictive, but fwd P/E has a better shot at that.


Absolutely, but I heard many times in the past about fwd P/E over 20.  If in 1997-98 the actual trailing PE was already over 25, any reliable analyst predicted fwd PE would be over 20 next year.  The same happened in 2002-2003.

"SP500 fwd P/E at 19 is at 40-yr high" isn't a correct statement by Barron.

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