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Showing posts with label Company News. Show all posts
Showing posts with label Company News. Show all posts

Oct 25, 2021

Company News : PayPal says it's not looking to buy Pinterest right now; shares jump 6%


Sam Shead

The PayPal app shown on an iPhone.

Katja Knupper | DeFodi Images | Getty Images

U.S. payments giant PayPal said Sunday that it is not currently interested in buying social media platform Pinterest.

Responding to what it called "market rumors," the financial technology company said in an update on its website that it is "not pursuing an acquisition of Pinterest at this time."

Shares of PayPal were up over 6% in pre-market trading on the Nasdaq stock exchange, while shares of Pinterest were down over 12%.

A person familiar with the matter told CNBC that PayPal was in late-stage talks to buy social media company Pinterest on Wednesday, after it was first reported by Bloomberg.

Shares of Pinterest soared on the back of the report. The company's stock was halted twice, before closing up more than 12%. PayPal, meanwhile, closed down nearly 5%.

PayPal had discussed acquiring the company for a potential price of around $70 a share, which would value Pinterest at about $39 billion, according to Bloomberg.

Pinterest, which allows users to create and share image boards, went public in April 2019, where it was valued at just more than $10 billion. Its market cap today sits at around $37 billion.

Social commerce

PayPal had been pushed to consider buying Pinterest following competitive pressure from e-commerce platform Shopify, the CNBC source said. Shopify has heavily invested in blending e-commerce and fintech.

PayPal has largely benefited from the boom in online shopping since the start of the coronavirus pandemic. Last year, it pitted itself against the growing buy-now-pay-later companies with its "Pay in 4" offering. A potential acquisition of Pinterest could push the company into social commerce, a growing space that other tech giants are already working on.

Facebook, for example, has heavily pushed into making Instagram shoppable. Last summer, it began testing a dedicated "Shop" tab on its home screen. It also lets users shop through regular Instagram posts, Live, Stories and its Explore feed, and has tested shopping on its short-form video feature Reels.

Social commerce lets companies track clicks and purchases within their respective apps, so they can prove the effectiveness of ads to advertisers. It also could allow the companies to receive a cut of each transaction.

Monetization issues?

Andrew Jeffrey, Trust Securities analyst, told CNBC last Thursday that he was skeptical of a PayPal-Pinterest merger.

"A move to make another online deal, even in social media, just doesn't make a lot of sense long term," Jeffrey said, adding that PayPal needs to monetize in the physical world.

"Unless the company can monetize off of e-com (instore) with Venmo, we think it's growth is ultimately going to revert toward e-com growth and that kind of deceleration is not currently priced into the stock," he added.

— CNBC's Jessica Bursztynsky and Kate Rooney contributed to this story.

Apr 25, 2019

Company News | Comcast is in talks to sell its 30% stake in Hulu to Disney

Alex Sherman

Comcast has had a frustrating run as a partial owner of video streaming platform Hulu, but that doesn’t make the decision to sell its minority stake in the company any easier.
Disney and Comcast are holding talks about working out a deal for Comcast’s 30% stake, according to people familiar with the matter. Comcast is now weighing the pros and cons of doing a deal now rather than later, said these people, who asked not to be named because the discussions are private. It’s still unclear if a deal will transpire.
The two companies are the last remaining owners of a company that was originally founded as a joint venture between several media giants. Hulu last week bought back a 9.5% stake in itself from Time-Warner owner AT&T, in a deal that values Hulu at $15 billion. That 9.5% stake will be split between Disney and Comcast, unless Disney consolidates the entire company.
“On Hulu, the relationship with NBC, it’s very much in everybody’s interest to maintain,” Comcast CEO Brian Roberts said Thursday during an interview on CNBC’s “Squawk Box.” “And we have no new news today on it, other than it’s really valuable. And we’re really glad we own a large piece of it.”
For years, Comcast was barred from having a say in Hulu’s direction — part of a consent decree Comcast agreed to when it acquired NBCUniversal in 2011. (NBCUniversal is the parent company of CNBC.)
Seven years later, Comcast’s ownership in Hulu switched from passive to active, when the consent decree expired in 2018. That gave Roberts and NBC CEO Steve Burke some say in the company’s future.
But just as Comcast came off the sidelines, 21st Century Fox agreed to sell its 30% stake in Hulu to Disney. That deal, which closed last month, effectively silenced Comcast once again. Instead of being an equal owner with Fox and Disney, Comcast now owns a minority stake to Disney’s 60%.
“Fifty years from now will we be in Hulu? No, I don’t think we will,” Burke told Variety in January. “But I don’t think we’ll sell in five minutes.”
As of today, NBC provides about 17% of Hulu’s content. NBC has no plans to remove content from Hulu, which will continue to serve as NBC’s vessel for same-season shows even after the launch of the company’s new streaming service in 2020, according to people familiar with the matter. (NBC’s streaming service will showcase the company’s library of TV shows and movies.)
There are compelling reasons for Comcast to hold and to sell. Here’s what Comcast is debating, according to people familiar with the company’s thinking.
The case to hold
There are several reasons for Comcast to hold on to its stake.
Valuation. If Comcast believes in Hulu, the biggest reason to hold is valuation appreciation.
Right now, Hulu has 25 million subscribers, less than half of Netflix’s 58 million paying U.S. customers. But Netflix’s valuation, at $167 billion, is more than 11 times that of Hulu. While Hulu’s valuation has expanded from $5.8 billion to $15 billion since August 2016, a gain of 158%, Netflix has gained more than 300% over the same period.
If Comcast expects Hulu’s value to rise as much as Netflix, it would be silly to sell now unless Disney offers an insanely high premium.
Negative controls. While Comcast doesn’t have majority control over Hulu, it does hold so-called negative controls on Hulu. These rights give Comcast certain veto power over different corporate actions associated with the company. While the specifics are private, protective provisions typically include veto power over raising capital, paying dividends, future acquisitions and potentially going public. Three of Hulu’s nine board members are from Comcast/NBCUniversal — Jeff Shell, Linda Yaccarino and Matt Bond.
Future leverage. Keeping control of 30% of Hulu is also leverage for Comcast over Disney. If Comcast ever wants a Disney asset down the road, the minority stake would give Roberts and Burke a bargaining chip.
The case to sell
Valuation. Just as valuation is the main reason to hold, it’s also ultimately the reason to sell.
Comcast and NBC have long been skeptical of the business model behind streaming video. This is why NBC decided to hold back on going whole hog into streaming video like Disney has done with Disney+. Burke has viewed Netflix skeptically over the years, suggesting the company may not be able to live up to its lofty valuation.
“To be worth $150 billion, someday you’ve got to make at least $10 billion in EBITDA,” Burke told CNBC last year. “There’s at least a chance Netflix never makes that.”
If Comcast doesn’t believe in Hulu, especially under Disney’s control, there’s simply no point in dragging this on. Keeping a stake in a company it doesn’t control may not be the best use of Comcast’s funds.
Losses. Hulu will lose $1.5 billion this year, Disney said at its investor day last month. The company won’t turn profitable until about 2024, Disney estimated, and that’s not taking into account potential international expansion, which will come with its own added costs.
If Comcast wants to rid itself of those losses and take the cash from a sale to pay down debt from its $39 billion acquisition of Sky, selling soon may be an appealing option. Comcast also pays a dividend and could use the cash to support it. At a valuation of $15 billion, Comcast would walk away with $4.5 billion from the sale. (Comcast has more than $100 billion in debt).
Strategic reasons. Comcast’s minority control means that Hulu does not always match the company’s long-term strategic plans.
For instance, Hulu would probably be ad supported today if Comcast had an active say in the company’s plans, one of the people said. NBCUniversal’s preference with streaming video is to include ads, as it’s doing with its upcoming service.
Selling the Hulu stake also would remove this strategic uncertainty — and could help right a severely strained relationship with Disney, which bubbled over when the companies battled over 21st Century Fox last year.
Comcast and Hulu declined to comment on this story. Disney did not respond to requests for comment.
Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.
Watch: What Hulu’s stake buyback from AT&T means for the streaming wars

Source: CNBC

Mar 29, 2019

Company News | A Grand Master's Secret to 10 Years of 20% Stock Returns

By Mark Kolakowski Updated Mar 29, 2019

As increasing numbers of active investment managers fail to meet their benchmarks even over relatively short time spans, the rare one with a lengthy track record of beating the averages demands attention. Samantha Lau, co-manager of the AllianceBernstein Small Cap Growth Portfolio (QUASX), fits the bill, having delivered average annual total returns of nearly 20% over the past decade.
She's also co-chief investment officer (CIO) of small and SMID cap growth equities at AllianceBernstein, and offers several key words of advice to investors, as summarized below.
A Top Stock Picker's Top Rules for Investors
  • "Never sell half of your position."
  • "If you think something is wrong, exit and revisit."
  • It's never too late to sell a loser.
  • "CFOs don't quit to spend more time with family."
  • When CFOs quit, the company's prospects often are diminishing.
  • "A good company is not always a good stock."
Source: Samantha Lau of AllianceBernstein, as reported by Barron's.

Significance For Investors

Lau has been one of the four co-managers of the AB Small Cap Growth Portfolio since Dec. 31, 2004. Over the past 10 years, it has delivered an average annual total return of 18.85%, beating the average for the small cap growth category by 2.94% per year, and its benchmark, the Russell 2000 Growth Total Return Index, by 2.70% per year, according to Morningstar Inc., based on data through March 27, 2019.
This performance has placed the fund in the top 5% among 385 funds in its category with 10-year track records. It also is in the top 9% over the past 15 years.
By contrast, a growing majority of actively-managed funds are underperforming the indexes and passively-managed funds. Among 4,600 actively-managed funds across various asset classes, only 24% beat their passive rivals across the last 10 years, per other research by Morningstar.
Top Holdings: AB Small Cap Growth Portfolio
(% of Assets)
  • Etsy Inc. (ETSY), 2.1%
  • iShares Russell 2000 Growth ETF (IWO), 1.9%
  • Five Below Inc. (FIVE), 1.8%
  • Planet Fitness Inc. (PLNT), 1.7%
  • Trade Desk Inc. (TTD), 1.7%
Source: Barron's
Lau and her colleagues look to identify small companies that will grow faster than the market expects, based on a process that the fund has used for 25 years. Starting with the 1,200 stocks in the Russell 2000 Growth Index, they cut the list in half based on liquidity, growth, and quality criteria. They then divide these stocks by sector, with Lau focusing on technology companies.
The managers subjectively assess the outlooks over the next 12 to 18 months for the stocks that they review. Meanwhile, they also run a model that scores all 600 stocks on fundamental factors such as earnings and revenue revisions, in addition to price and earnings momentum, updated weekly.
Ultimately, the process narrows the field to 200 stocks that they will consider buying or continuing to hold. The fund currently holds 98 stocks, per Morningstar, many of which have been in the portfolio for years, Barron's notes.

Looking Ahead

While Lau's fund uses a rigorous multi-step process to make investment decisions, she believes that the case for each stock ultimately should be clear and succinct. "I don't like to dawdle. As I say to my team, 'If you can't explain in five minutes why we should keep a holding, we need to move on,'" she told Barron's.

Source: Investopedia

Mar 28, 2019

Company News | 10 Stocks That Can Outperform Even as Corporate Costs Spiral

By Mark Kolakowski Updated Mar 28, 2019

Rising costs are crimping profit margins for S&P 500 companies, which peaked in 3Q 2018 and are now falling for the first time since 2015, per the Financial Times. With the U.S. unemployment rate at its lowest level since the 1960s, labor costs are surging. "Data indicate that the tight current labor market is presenting an exceptional challenge to corporate managers," as Goldman Sachs observes in their recent "U.S. Thematic Views" report.
Goldman recommends 50 stocks with below-average labor costs, including these 10: Monster Beverage Corp. (MNST), ONEOK Inc. (OKE) , Lincoln National Corp. (LNC), Synchrony Financial (SYF), Unum Group (UNM), Anthem Inc. (ANTM), Align Technology Inc. (ALGN), AES Corp. (AES), and Host Hotels and Resorts Inc. (HST), and Discover Financial Services (DFS).
10 Stocks That Can Survive Rising Labor Costs
(Labor Costs Compared to Revenue)
  • Monster Beverage, 4%
  • ONEOK, 2%
  • Lincoln National, 4%
  • Synchrony, 4%
  • Unum, 5%,
  • Anthem, 4%
  • Align Technology, 8%
  • AES, 5%
  • Host Hotels and Resorts, 1%
  • Discover Financial, 7%
  • S&P 500 median stock, 13%
Source: Goldman Sachs, "Where to Invest Now," March 2019

Significance for Investors

A recent survey by the National Association for Business Economics shows a record 58% reporting rising wage costs, but only 19% increased prices as a result, the FT reports. Goldman thus recommends stocks with pricing power, the ability to pass along cost increases to consumers without offsetting declines in sales volume.
An alternative approach is to seek stocks, such as those listed above, that are relatively insulated from the negative effects of cost inflation, especially wage inflation. "Stocks with low labor costs should also outperform as inflation expectations rise," Goldman writes.
Align Technology developed the Invisalign system. Computerized 3D printing technology creates clear, custom-fitted plastic teeth-straightening trays, a cosmetically superior alternative to braces. Over 6 million people worldwide have used Invisalign through Sept. 2018, per the company. Consensus estimates reported by Goldman anticipate 23% sales growth and 4% EPS growth in 2019.
Roughly 300 million people worldwide "could benefit from straightening their teeth, but are unlikely to seek treatment through a doctor's office," per a filing from Align Technology quoted by USA Today. This has spawned competitors such as SmileDirectClub and Candid that offer cheaper alternatives directly to consumers. Invisalign addresses a broad spectrum of tooth alignment problems, but these alternatives are suitable only for minor or moderate issues.
Monster Beverage is in the expanding market for energy drinks. Net sales in 4Q 2018 were up by 14.1% year-over-year (YOY), while EPS rose by 22.7%, per the company. Per consensus estimates cited by Goldman, projected full year 2019 growth rates are 10% for sales and 13% for EPS, versus respective figures of 4% and 6% for the median S&P 500 stock.
The Coca-Cola Co. (KO) has a 17% stake in Monster and is its principal distributor. However, the beverage market has relatively low barriers to entry apart from winning shelf space at retailers and is marked by fads. Indeed, Coke reportedly is developing its own line of energy drinks, which Monster argues is in breach of their agreement, per Beverage Daily.

Looking Ahead

While Goldman's low labor cost strategy makes sense given the macro environment of low unemployment and rising wages, other factors inevitably will affect the performance of these stocks. For example, Align Technology's expenditures on R&D and marketing are still growing rapidly, reducing the bottom line impact of increased sales revenue. Monster, meanwhile, may be undercut by its supposed partner, Coke.

Source: Investopedia

Mar 21, 2019

Company News | Bear Market Rally’ Running Out of Steam as Insiders Sell Shares

By Matthew Johnston Updated Mar 21, 2019

It’s time to buy gold and dump stocks as the current stock market bubble is about to burst. That’s the view of Crescat Capital LLC, a Denver-based firm with a strong track record of outperforming the S&P 500 and whose Global Macro Fund returned 41% last year. The firm points to corporate insiders’ frenzied stock selling over the past two years as one of the major warning signs. These insiders heavily sold in 2017, in 2018, and now, “the third time should be the charm for the stubborn U.S. market,” predicts Crescat, according to Bloomberg.
The firm’s current hedge fund strategy is overwhelmingly long gold while shorting global stocks. “There is so much more ahead to profit from the short side of the market,” the firm wrote to clients. “The bear-market rally is running out of steam!”
Crescent Capital’s Bear Market Strategy
  • Buy gold, dump stocks
  • 75% of firm’s strategy
  • Sees recession looming
  • Warning signs are insider selling in 2017, 2018 and early 2019
Source: Bloomberg

What It Means for Investors

Calling the 13% rebound in the equities market just a bear-market rally is a clear indication that Crescat thinks economic fundamentals are pointing to the downside. Along with corporate insiders selling stocks, Crescat cites deteriorating economic data and the inversion of the yield curve as reasons to be concerned.
The current consensus is that the economy will enter into recession in either 2020 or 2021, Tavi Costa, global macro analyst at Crescat told Bloomberg. Among that consensus view are Nobel prize-winning economists Paul Krugmann and Robert Schiller, as well as financial commentator Gary Shilling and at least three-quarters of business economists. Tavi, however, thinks the downturn will happen even sooner. “We think [a recession] is a lot closer than that,” he said.
If and when a recession does occur, equities are likely to get hammered on falling earnings. Goldman Sachs, in a recent “Where to Invest Now” report, outlined the average peak-to-trough change in earnings per share (EPS) over the past seven recessions since 1970. The materials sector saw a 56% decline, while consumer discretionary, industrials, and energy all declined by 33%, 20%, and 19% respectively. Those declines were far worse than the S&P 500’s average EPS decline of 13%.

Looking Ahead

While the bulls are currently taking advantage of the market rebound, economic data that continues to deteriorate may affirm the bearish view and deflate the bubble. In that case, investors will want to be short. “Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That’s how bear markets work,” Crescat wrote to their clients.

Source: Investopedia

Company News | Investopedia | 9 High-Margin Stocks Seen Leading in Fed's New Dovish Era

By Shoshanna Delventhal Updated Mar 21, 2019

Analysts at Goldman Sachs expect the Fed's dovish policy eventually could to lead to a gradual increase in inflation, favoring high-margin stocks with “pricing power.” In its policy statement today, the Fed said it expected 2% inflation in main and core indexes over the next 2 years, in line with its targets. Per a recent report from the investment firm’s research group, a basket of stocks that has posted well above average performance in the past year is even better positioned to outperform in the upcoming period. Analysts add that this group of high-margin stocks is particularly well equipped to perform in 2019 as rising material costs, labor costs and slowing economic growth weighs on corporate profits this year and during an economic downturn.
"Growing margin pressures have driven the outperformance of stocks with high pricing power," wrote Goldman. "Our screen of stocks with high and stable gross margins has outperformed low pricing power stocks by 20 percentage points during the past year."
Goldman screened for stocks with high and stable margins, implying high pricing power. The basket includes Penumbra Inc. (PEN), Amgen Inc. (AMGN), Monolithic Power Systems Inc. (MPWR), National Instruments Corp. (NATI), Citrix Systems Inc. (CTXS), VMWare Inc. (VMW), Eli Lilly & Co. (LLY), Expedia Group Inc. (EXPE) and Xilinx Inc. (XLNX). This is part two of two Investopedia articles covering this particular Goldman research report dated March 15, 2019.
9 Stocks With Pricing Power
(5-Year Average Margin)
  • Penumbra Inc. (PEN); 66%
  • Amgen (AMGN); 81%
  • Monolithic Power Systems Inc. (MPWR); 54%
  • National Instruments Corp. (NATI); 74%
  • Citrix Systems Inc. (CTXS); 83%
  • VMWare Inc. (VMW); 85%
  • Eli Lilly & Co. (LLY); 75%
  • Expedia Group Inc. (EXPE); 74%
  • Xilinx Inc. (XLNX); 69%
Source: Goldman Sachs

Rising Input Costs Put Firms at Risk

Goldman Sachs points out that corporations' profit margins - recently at record levels - are already under increasing pricing pressure.
"Profit margins have experienced substantial negative revisions in recent months, driving a decline in equity EPS estimates," wrote Goldman. "Even with the Fed’s current policy stance, raising prices enough to offset rising input costs has been a challenge for U.S. corporates.”
As margin pressures increase, the equity market is now starting to reward firms with ample pricing power available to maintain their profits. Others that are less capable of passing through costs, either via higher prices or accepting lower profit margins, are beginning to fall out of favor among investors and will continue to do so, per Goldman.
“The outperformance dynamic of stocks with high pricing power has accelerated this year, possibly boosted by the rising probability of Fed pivot in favor of higher inflation and the risks such a shift would pose to corporate profit margins,” read the report.
This movement to favor high pricing power stocks has led Goldman’s list of high-margin picks to beat its list of stocks with low pricing power by 17 percentage points (+13% vs. -4%) since the firm published the list in May 2018. Analysts note that the recent trend follows the historical pattern during periods of profit margin pressure. Since at least 1985, stocks with higher pricing power have typically outperformed when the market perceived an imminent decline in corporate profit margins. On the other hand, during periods of expanding profit margins, such as through 2012 to 2017, investors removed the scarcity premium assigned to strong pricing power firms and stock with more cyclical profit margins outperformed, per the Goldman report.

Cloud Computing Company

Shares of software provider VMware have already significantly beaten the broader market in 2019, up 33.7% year-to-date (YTD) and 47.4% in 12 months, compared to the S&P 500’s 12.4% and 3.9% return over the same respective periods. VMware’s average 5-year margin stands at a whopping 85%, compared to the Russell 1000’s 35% average margin over the period and the basket’s median at 56%.
Last month, the tech firm posted Q4 results in which revenue grew 16% over last year to reach 2.59 billion. Earnings on a per share basis came in at $1.87 for the quarter, also surpassing estimates for EPS of $1.68.

Looking Ahead

While these companies could continue to rally as investors applaud firms more capable of combating higher costs, a severe downturn would likely weigh on many of these companies. Given the list is sector-neutral, any industry-specific headwinds could also drag down shares.

Source: Investopedia

Mar 19, 2019

7 Stocks That Can Lead as S&P 500 ROE Growth Peaks

By Shoshanna Delventhal Updated Mar 19, 2019

Stock investors now face a greater challenge in finding shares of companies with upside potential for return on equity (ROE) growth as S&P 500 ROE peaks. Moving forward, analysts at Goldman Sachs expect thinning profit margins, and the wearing off of the positive impact of the Trump administration's tax cuts, as resulting in flat ROE growth for the broad index in 2019. That being said, analysts indicate that there are still plenty of stocks with superior ROE growth in a position to outperform the market in the upcoming period.
Goldman has screened the market and created a sector-neutral basket of 50 stocks that it believes can continue to lead the market by posting the highest ROE growth over the next year.
"The basket has outperformed the S&P 500 by 5 pp YTD, consistent with other growth themes," wrote Goldman analysts in the firm’s U.S. Weekly Kickstart Report dated March 15. “The median stock in the list is expected to see ROE improve from 16% to 19% during the next 12 months,” read the report, noting that the basket outperforms especially well when growth is scarce.
This is Investopedia’s second of two stories on high-ROE stocks. (Read part one here.)
7 High-Return Stocks as ROE Peaks
(ROE Growth)
  • Ball Corp. (BLL); 25%
  • IQVIA Holdings Inc. (IQV); 17%
  • Fluor Corp. (FLR); 43%
  • DXC Technology (DXC); 43%
  • Cisco Systems Inc. (CSCO); 40%
  • Fidelity National Information Services (FIS); 31%
  • UDR Inc. (UDR); 39%
  • Median S&P 500 Company; -4%
Source: Goldman Weekly Kickstart Report, March 15, 2019

Limited Potential for ROE Growth in 2019

According to Goldman, ROE growth is peaking and getting leaner. ROE reached 18.6% in 2018, its highest level since 2000. While last year’s ROE growth was fueled by factors including Trump’s massive corporate tax cuts, which cut the effective tax rate from 22% in 2017 to 17% in 2018, Goldman is less optimistic about broader S&P 500 ROE gains this year. New threats to companies include forecasts for flat margin growth through 2020, with risks tilted to the downside, as well as heightened cost pressures. Goldman likes companies with high and stable gross margins, making them more likely to pass through higher input costs and outperform. The firm also notes that while investors punished companies with high leverage and borrow costs in 2018, it does not expect that trend to continue in 2019, thanks to the Fed’s more dovish stance.

Legacy Tech Titan Cisco

Networking giant Cisco has seen its shares gain 23.4% YTD, compared to the S&P 500’s 12.7% increase over the same period. ROE growth is at 40%, compared to the broader index at negative 4%.
The tech company’s earnings have been fueled by a successful transition away from legacy hardware businesses, towards high-growth industries like the Internet of Things (IoT), cybersecurity and software. The company has been on an acquisition spree as it doubles down on its restructuring. Its strong free cash flow has allowed the San Jose, Calif.-based company to return billions of dollars per quarter to shareholders in the form of dividends and share buybacks. After posting several consecutive quarters of revenue growth above expectations, guidance for the upcoming period has confirmed a continuation of this trend.

Looking Ahead

Despite positive drivers for the strong ROE stocks in Goldman’s basket, not all of the 50 stocks in the basket are doing well YTD, with analysts indicating that 72% outperforming. Given some stocks in the basket, such as TripAdvisor Inc. (TRIP) and Coca Cola Co. (KO), are lagging the broader market, investors should be sure to not pick these names blindly.

Mar 8, 2019

Company News | 3 Reasons Big Investors Are Pouring Billions Into ETFs

By Mark Kolakowski Updated Mar 8, 2019

Contrary to their reputation as an vehicle designed for retail investors, especially individuals with relatively small accounts, ETFs are finding increasing favor with large institutional investors. Indeed, ETFs represented 24.8% of institutional asset managers' portfolios by late 2018, up from 18.5% in 2017, according to a survey conducted by financial data firm Greenwich Associates, as reported in Business Insider. Three of the major reasons for this trend are summarized n the table below.
Why Big Investors Love ETFs
Source: Business Insider

Significance for Investors

Greenwich Associates surveyed 181 investment managers, institutional funds, insurance companies, investment advisors, and other entities. Most of them had $5 billion or more in assets under management (AUM).
Risk management. The institutional investors surveyed by Greenwich Associates named managing risk as their number one priority by far. Among the biggest contributors to market risk right now are the U.S.-China trade conflict, Brexit, and the uncertain economic outlook in China. Respondents cited the ease and low cost of using ETFs as a risk management tool.
Poor performance of active managers. The poor performance of active managers in the volatile market of late 2018, an environment that was supposed to be ideal for them, convinced many respondents to switch to index-tracking ETFs that outperformed the stock pickers. An increasing number of institutional investors also are switching to ETFs in place of index mutual funds and individual stocks.
Passively-managed large cap equity mutual funds and ETFs now control more assets than actively-managed funds. This is largely the result of deteriorating performance by active managers, according to research by Morningstar.
Indeed, a key impetus for the rapid growth of ETFs during the past decade was the failure of actively-managed funds to protect investors during the financial crisis of 2008 and the recession of 2007 to 2009. "People were disappointed that active management didn't help them. They said they'd be able to protect you on the downside and a lot of managers didn't deliver on that promise," as Alex Bryan, director of passive strategies research at Morningstar, told CNBC.
Facilitating portfolio shifts. The increasingly wide variety of investment themes that ETFs follow are making them attractive means for establishing and changing core allocations, getting international diversification, and even managing cash and liquidity. ETFs also are gaining popularity as a means to make fixed income investments.
Rapid growth. U.S.-listed ETFs controlled about $3.75 trillion of assets as of the end of Feb. 2019, per This is more than seven times their value in 2008. Retail investors have been trading individual stocks for ETFs at an accelerating rate, per analysis by Bank of America Merrill Lynch cited by CNBC.

Looking Ahead

The trend towards passive investment management, increasingly through ETFs, is gaining momentum. With big institutional investors now embracing those trends, active managers are under escalating pressure to prove their worth.

Mar 7, 2019

3 Strategies to Survive the Looming Liquidity Crisis

By Mark Kolakowski Updated Mar 7, 2019

Stock market liquidity, which offers the ability to buy or sell shares with minimal delay and minimal impact on the price, will trend sharply downward over the next decade, raising the risks for investors, per a detailed report from investment management firm Bernstein, as reported by Business Insider. In a worst-case scenario, constrained market liquidity can spark a meltdown in stock prices that sets off a new financial crisis. Three major recommendations from Bernstein are summarized below.
3 Ways to Survive the Liquidity Crunch
  • Increase cash allocations
  • Avoid unduly large positions and be wary of crowding risk
  • Develop active strategies to exploit the negative impact of liquidity
Source: Bernstein, as reported by Business Insider

Significance for Investors

The rationale for increasing cash allocations is straightforward. The same is true for reducing risk by avoiding unduly large portfolio positions and by being wary of crowded trades with the potential for severe selling pressure once market sentiment turns. Investors should also know how many trading days it may take to close a position in an orderly fashion, without having to dump shares at distressed prices.
Meanwhile, strategists at Jefferies recently identified stocks with heavy ownership by high-turnover hedge funds, as reported by CNBC. These stocks are at risk of coming under sudden and intense selling pressures once these funds head for the exits.
On their third recommendation, Bernstein says that the rise of passive investing is reducing liquidity. While they offer no specifics, they believe that active investment managers, like themselves, have the stock-picking expertise to thrive in this environment.
Bernstein identifies five forces that are draining liquidity. First, a combination of high frequency trading (HFT) and regulation have been factors spurring a drop of nearly 75% in bid-ask spreads during the last 10 years, but they say that volumes and turnover also have decreased.
Second, fewer investors in the public markets are driven by fundamentals. Instead, investors are turning to passive vehicles such as ETFs. "It can also pressure the more liquid holdings of investors if a larger share of their assets are tied up in illiquid positions that cannot be sold," as Inigo Fraser-Jenkins, head of global quantitative and European equity strategy at Bernstein, writes in a recent note to clients, as quoted by BI.
Plunging liquidity also a major concern of analysts at Deutsche Bank. They see worrisome parallels today with the opening stages of the 2008 financial crisis and warn that a surge in market volatility is a likely consequence. Marko Kolanovic, global head of macro quantitative and derivatives research at JPMorgan, foresees a "Great Liquidity Crisis" in which the disappearance of willing buyers turns a stock market selloff into a full-blown crash.

Looking Ahead

A longstanding best practice for active traders is to be aware of average trading volumes and average bid-ask spreads. Trading in illiquid stocks with wide spreads is risky in normal times, let alone in times of market panic. Moreover, a trend towards lower liquidity market-wide also has ramifications for buy-and-hold investors who anticipate long holding periods, since eventually the day may come when closing a position is warranted.

Source: Investopedia

Mar 6, 2019

Company News | Pullback Strategies .|10 Stocks That Could Fall the Fastest

By Mark Kolakowski Updated Mar 6, 2019

When stock market sentiment suddenly turns bearish, the exits are bound to get crowded. As a result, cautious investors should be wary of owning stocks that are likely to come under heavy selling pressure from funds that trade heavily. "In times of stress, investors need to focus on who owns what stocks, which funds are more likely to 'blow out' a name and impact performance," as Steven DeSanctis, an equity strategist at Jefferies, warned in a note to clients cited by CNBC.
"The thought here is that when the market gets rocky, who is likely to purge names and who would likely add to positions. Knowing this may help investors decide whether to buy or sell a stock; also just to understand who owns names that you hold is becoming increasingly important," DeSanctis added. The table below lists 10 stocks that Jefferies finds are particularly vulnerable to mass selling by hedge fund managers with short investment horizons and a hair-trigger approach to trading.
10 Stocks Vulnerable to a Downdraft
(Weightings in High-Turnover Hedge Funds)
  • Inc. (AMZN), 1.8
  • Facebook Inc. (FB), 0.9
  • Red Hat Inc. (RHT), 0.7
  • Boeing Co. (BA), 0.6
  • Alphabet Inc. (GOOGL), 0.5
  • Honeywell International Inc. (HON), 0.5
  • Visa Inc. (V), 0.5
  • Netflix Inc. (NFLX), 0.5
  • Bank of America Corp. (BAC), 0.4
  • Adobe Systems Inc. (ADBE), 0.4
Source: Jefferies, as reported by CNBC

Significance for Investors

To find crowded trades that may unwind rapidly, putting severe downward pressure on prices, Jefferies looked at quarterly SEC Form 13F filings for the top 100 hedge funds, using this data to identify the 25 funds that trade stocks most frequently, and to determine which stocks are most heavily owned by them. Tech stocks dominate the list above, contributing 7 of the 10, the result of heavy buying by hedge funds during their Dec. 2018 bottoms.
"U.S. economic growth has sharply decelerated since early December. Consensus revenue growth estimates for S&P 500 firms also have been cut," as Goldman Sachs observes in a recent release of their US Weekly Kickstart report. Presently the market appears to be shrugging off these negative trends, but they eventually may touch off the mass selling that Jefferies warns against.
Meanwhile, investors who bet on momentum, chasing the best-performing stocks in the expectation that they will continue to lead, should exercise some caution of their own, according to Sarah McCarthy, an Ireland-based global quantitative and European equity strategist at investment management firm Bernstein, per Barron's. She notes that high momentum stocks ended 2018 at higher valuation premiums versus low momentum stocks than in 2009, when they suddenly plummeted by 53% within six months.
"There is a high level of fragility in the [momentum] factor," McCarthy warned in a report quoted by Barron's. "We strongly caution against exposure to the factor and retain our short position," she added.

Looking Ahead

At the other end of the spectrum, Jefferies also identifies stocks that are among the top holdings of the 25 hedge funds in their study sample that are the least active traders. These stocks theoretically should not be at risk from mass selling by hedge funds, and the top names on this list are Seattle Genetics Inc. (SGEN), Procter & Gamble Co. (PG), Incyte Corp. (INCY), CVR Energy Inc. (CVI), and Microsoft Corp. (MSFT). Interestingly, both and Facebook, favorites of the high turnover hedge funds, also are among the top 10 holdings of the low turnover funds as well.

Source: Investopedia

Feb 22, 2019

Company News | Why Morgan Stanley Loves Defensive Stocks As Market Rallies

By Mark Kolakowski Updated Feb 22, 2019

The U.S. stock market has rebounded smartly from its Dec. 2018 low and the bulls anticipate continued gains, but Morgan Stanley is skeptical. "We have been vocal around the idea that we are in a bear market, an environment where defensives typically outperform," as their U.S. Equity Strategy team led by Michael Wilson writes in their most recent Weekly Warm Up report.
"With the US equity market so overbought, fully valued and the beta trade somewhat overplayed at this point, we think it makes sense to keep our overweights on Utilities and [Consumer] Staples," the report adds. In fact, these two sectors are among those that have beaten their expected returns by the widest margins since Sept. 20, 2018, the date of the all-time record high close for the S&P 500.
Morgan Stanley on the Defensive: Favorite Sectors
(Outperformance vs. Expected Returns, 9/20/18 to 2/15/19)
  • Consumer Staples: +2.46%
  • Utilities: +6.48%
Source: Morgan Stanley

Significance for Investors

Morgan Stanley computed expected returns, or projected performance, for all 11 sectors in the S&P 500, plus several industry groups within those sectors, based on their betas, or long-term correlations with the entire S&P 500. From the close on Sept. 20, 2018 to the close on Feb. 15, 2019, the S&P 500 fell by 5.29%.
Utilities should have dropped by 1.44% (implied beta of 0.27), but they rose by 5.04%, representing outperformance of 6.48%. For consumer staples, the expected return was a decline of 3.71% (implied beta of 0.70), but they fell by only 1.25%, for outperformance of 2.46%. Within consumer staples, household and personal products were the standout, with 12.18% outperformance.
"Looking at industry group price reactions vs EPS revisions, we find that several defensively oriented groups (Household and Personal Products, Real Estate and Utilities) appear to be positive outliers on price vs revisions while negative price moves in Retailing and Tech Hardware appear to be overstating the severity of the downward revisions," Morgan Stanley says. These relatively subdued reactions of investors to recent earnings disappointments are part of the report's case for defensives going forward.
"We think idiosyncratic factors and a generally defensive tilt to the market help explain these relationships," the report adds. Real estate beat expected returns by 8.19% in the period from Sept. 20 to Feb. 15.
Among the leading Wall Street firms, for several months Morgan Stanley been the most bearish regarding S&P 500 earnings, and their latest base case forecast calls for profit growth at a mere 1% in 2019. *Our call for a Rolling Bottom is playing out. From the lows in December, the market has rewarded beta almost indiscriminately--the greater the beta, the greater the performance," they say. They project that the global economy will hit its own bottom in the first half of 2019.

Looking Ahead

Morgan Stanley has been leading the Wall Street pack in revising earnings estimates downward in recent months. If their bearish outlook is correct, a tilt towards defensives is a logical response. On the other hand, if the more optimistic forecasts of their rivals pan out, investors may miss significant upside. Further complicating the picture, research by JPMorgan finds recent historical precedents for stock market rallies in the face of plummeting earnings forecasts.

Source: Investopedia

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