Michael Santoli at Michael Santoli 2 yrs ago
Walt Disney Co. (DIS) has been enjoying a sort of endless winter of winning for nearly eight months, a charmed season for a company with plenty of magic moments marking its past. And r arely does a company have so much to look back on with pride and such an abundance of exciting things to anticipate.
When “Frozen” hit theaters the day before Thanksgiving, it touched off a global box-office bonanza, countless little-girl singalongs and a new Disney “franchise” – one of its handful of powerful stories and character sets to be leveraged across film, Broadway, consumer goods, theme-park rides and vacation cruises over many years.
Meantime, the company broadly introduced its smart-tech enabled MyMagic+ theme-park reservation and navigation tools. The result of years of heavy investment, the little bracelets allow for a more efficient, customized park experience, and have been generally embraced by Disney loyalists. Park spending per visitor was up 4% in the March quarter from a year earlier.
These windfalls are no flukes
The road ahead
Maybe the best thing about the Magic Formula stock-picking method is that there’s no magic to it at all.
Devised and popularized by Joel Greenblatt – a devotee of the Ben Graham/Warren Buffett school of value investing and a top-performing hedge fund manager since the 1980s - the Magic Formula uses two financial measures to find high-quality companies trading at attractive prices.
In market environments such as the one we’re in now – with the indexes trading at above-average valuations, profit growth getting scarcer and investors lacking conviction – screening for stocks using this formula can help identify pockets of value that are going largely unnoticed.
Greenblatt, founder of Gotham Capital, popularized his approach in “The Little Book That Beats the Market” in 2005, and anyone can register to use www.magicformulainvesting.com to screen for stocks that meet the Magic Formula criteria.
Putting up a strong defense
Your father’s tech stocks
The media is the message
The Hatfield-McCoy stocks
The former prom queens
It probably makes sense that the stock market took the surprisingly weak first-quarter economic-growth estimate in stride.
But the longer-term failure of corporate capital spending to accelerate, despite record company profits and years of under-investment, should give pause to those many investors who have been banking on such a capex revival to justify 2014 growth estimates, earnings projections and stock-price targets.
Investors collectively seemed to determine that the scant 0.1% expansion of the U.S. economy to start the year, far short of the 1.1% forecast, was in large part due to the messy winter weather that's gotten so much attention (even though the weather trend from January to March was already known to forecasters).
Good excuses to hold back
In contrast, the market has consistently rewarded companies that make acquisitions in the months after they announce a new deal, reinforcing the idea that buying beats building in this environment. Strategas also calculated that share buybacks, debt paydown and cash dividend payouts have all delivered more shareholder value since 2008 than capex has for S&P 500 companies.
A direct drag
Believe me, it’s no fun for a journalist to miss the big story, especially one staring him in the face. In 20-plus years writing about finance, I’ve muffed some juicy ones that were sitting right across a desk from me.
In the summer of 2002, as the Enron and WorldCom accounting scandals were hogging business headlines, I sat in the Birmingham, Ala., office of Richard Scrushy, CEO of HealthSouth (HLS), a big operator of physical-therapy centers that was fending off charges its finances were similarly suspect.
Nine years later, I visited Jon Corzine, former Goldman Sachs co-CEO, U.S. Senator and New Jersey governor, on the trading desk he liked to sit at after becoming chief of brokerage firm MF Global. In retrospect, the fact that Corzine was preoccupied with his quote screens while talking about his vision of raising the risk appetite of the firm should’ve been a clue his trading ambitions would outstrip his smallish firm’s financial wherewithal. I again wrote the markets were overreacting, the firm sound and well-positioned in a post-Lehman world.
Maybe we should call them hyper-activists. Those noisy, pushy, demanding fund managers known as activist investors have been unusually busy for the past year or so, and especially aggressive in recent months.
Few stocks appear outright cheap five years into a bull market — and the cheap companies usually have an obvious flaw or challenge. So hedge funds have increasingly attempted to catalyze investor-friendly changes and forcibly knock value loose.
Yet not every effort to buy a slice of a company and then publicly agitate for shareholder-enriching strategic or management changes is equally clever or effective. Here’s a rundown on some recent prominent activist campaigns and the lessons we can take from them.
When you think you’re holding an unbeatable hand, bet huge
In poker, it’s called “the nuts” – the best possible hand in a given deal of cards. Pershing Square Capital 's Bill Ackman, one of the most widely tracked activists, found a way to approximate such an advantage, and wagered with gusto.
Don’t bring a Daisy Duck air rifle to an elephant hunt
Don’t expect the help of Mom and Pop, and define victory narrowly
Do your homework, and hire a ringer
Last year Wall Street flashed back pleasantly to 1995, a year of relentless ascent for stock prices, supported by a determined Federal Reserve and broadening faith in a healing economy. Investors looking for a suitable playlist for 2014 might want to skip ahead a decade to 2005, a year of sideways churning in which stock indexes digested big gains, and market pros searched for the next growth catalyst as Fed policy turned less generous.
The past, of course, is never perfect prophecy, no matter how carefully one listens for the rhymes. But patterns and rhythms at roughly similar points in a market, economic and public-psychology cycle tend to be similar, and can offer a rough analog to current times.
A year ago I pointed to the 1995 similarity as a possible upside scenario, based on the multi-year cloud of gloom and doubt lifting and investors re-embracing risk through stocks. That tune tracked pretty well, with both ’95 and ’13 logging 30%-plus returns in the Standard & Poor’s 500 index without dramatic pullbacks, powering a surge in investor optimism.
The stock market will stop quaking when the smart money is through selling. That might sound glib or obvious — something that’s more or less true by definition of each market drop. But it’s a particularly fitting observation now, because the current market tremors are more a matter of Wall Street’s elephants running from risk than the ground giving way underneath the economic recovery. The dominant themes of the sharp pullback have been a reversal of the winning investment trades of 2013 (which got very crowded and expensive), a rush by startup-backers and buyout artists to jam stock offerings into new investors’ hands, and heavy selling of shares by corporate insiders. This is all on the up-and-up, and all are typical features of a bull market. Yet there was just too strong a sense in recent weeks that those early to many winning ideas were done pressing their bets and wanted to – or were forced to – cash them in. Consider: The first quarter saw the highest volume of initial public offerings since 2000, with 70% of debuting companies having yet to turn profitable. About a third of the deals in the past month had traded below their offer price, a sign that supply was swamping demand or that the quality of the companies was slipping. The offering for Ally Financial Inc. (ALLY), while a relative victory for the U.S. government, which rescued it with a big investment during the financial crisis, has sagged in its first two days on the market, a decent example of supply-driven action. For good measure, Kenneth Moelis, the veteran investment banker who began at Michael Milken's Drexel Burnham Lambert ion the 1980s, is looking to take his 7-year-old advisory firm Moelis & Co. public at a $1.5 billion valuation. Private-equity firms have been exiting rapidly from companies they bought in recent years. According to data tracker Dealogic, buyout firms have raised $13 billion this year in 31 IPOs of their portfolio companies, a record level to this point in any year. Blackstone Group’s secondary offering of 15 million SeaWorld Entertainment Inc. (SEAS) shares — about one-sixth of all outstanding equity — as the company reported weak results further sent a message of the sharp guys ringing the register. Corporate insiders have been selling heavily in recent months, as executives take advantageof all-time highs in many stocks and the big indexes. While this isn’t a great market-timing indicator – and selling always tends to be active ahead of the tax deadline following a great year for stocks, as 2013 was – it fits neatly with the story that those with the best knowledge of businesses are not seeing good value in their shares. Perhaps most important to the day-to-day action, certain popular hedge-fund positions — no doubt amplified by margin-borrowing balances at all-time highs — have been upended. Merrill Lynch global strategist Michael Hartnett points out that the winners so far in 2014 (emerging-markets stocks, bonds and gold up) match exactly last year’s losers and vice versa (with the Nasdaq, Japan and the U.S. dollar suffering). Michael Block, chief strategist of Rhino Trading, points out some telltale behavior in certain instruments makes it obvious some big players were caught badly offside as momentum trades faltered. The exchange-traded fund for Brazilian stocks, iShares MSCI Brazil (EWZ), has been almost perfectly negatively correlated with the U.S. Standard & Poor’s 500 index this week, as if they sat on opposite ends of a seesaw. Brazil has been a popular short, and the S&P 500 and Nasdaq’s growth stocks very trendy longs, and liquidation on some level is washing over it all. Similarly, Facebook Inc. (FB) has traded as the virtual inverse of Petrobras Argentina SA (PZE). Another odd move? The surge in the price of nickel on the London Metals Exchange, another seeming beneficiary of desperate speculators being chased from bearish commodity bets, perhaps as their brokers demand they curtail risk exposures and investors withdraw funds. As Block puts it: “This is all about pain. Managers came into this long growth stocks, and short things like emerging markets and metals. When someone yells fire, crowded positions take on a life all their own. I fear that we will hear more about certain managers taking losses in [the first quarter] and April in the coming days. There’s no two ways about it. Prime brokers are tightening reins, as are fiduciaries. That’s what this is. Trying to rationalize any of this by citing fundamentals is a dangerous wild goose chase.” This doesn’t mean fears of a first-quarter lull in U.S. economic growth and a stalling housing recovery are irrelevant, or that China’s weak export data and broader slowdown signs are meaningless. Sure, the market is reassessing its expectations for a growth acceleration come spring and summer. Yes, there is nervousness about Federal Reserve intentions as it slowly dials down its asset purchases and eyes frothy financial markets. Long-term Treasury yields have receded while short-term rates have held steady, flattening the yield curve, which implies slower growth and/or marginally less-easy money down the road.
When Adam Nash mentions that he twice hit the Silicon Valley IPO jackpot as a tech-startup employee before age 40, he doesn’t expect anyone to feel sorry for him. Still, the experience of being enriched as a senior executive of LinkedIn Corp. (LNKD) in 2011, and before that as a project manager at e-commerce software maker Preview Systems Inc. in 1999, presented its own unfamiliar challenges. Like thousands of other young members of fast-growing companies, he suddenly found himself with a block of an employer’s stock representing a large portion of his net worth and facing a variety of questions about whether, how, when and how much to sell, what to do about taxes and where to put the proceeds. Now, as CEO of the fast-growing software-driven investment firm Wealthfront, Nash is helping create a product to handle this process for the current generation of IPO beneficiaries, beginning with a large group of Twitter Inc. (TWTR) insiders who will be able to sell an aggregate $20 billion worth of shares come May 6. The company is unveiling a single-stock diversification service, initially for Twitter employees only but eventually for all clients, which automates the process of selling shares, covering taxes and reallocating the proceeds among spending needs and a long-term investment portfolio. While a limited number of Twitter-insider shares were freed for sale in February, on May 6 the broadest restrictions on selling by current and former employees and early Twitter investors will be lifted. A total of some 475 million shares, valued at $20 billion based on the stock’s current price of $42.41, will be unlocked for potential sale.
Any parent knows a surprise treat will draw complaints from the kid with the slightly smaller piece of candy. And grownups love a cheap lunch – unless we think someone else is getting a free one. It’s an established fact of behavioral research: Even if people are getting a good deal they did nothing to earn, they tend to become indignant when they think others are getting a better one.
This helps explain part of the public’s stance of righteous outrage over high-frequency stock trading practices, which have been thrown into harsh light by the release of Michael Lewis’s book “Flash Boys” and the author’s repeated characterization of the market as “rigged” in favor of these algorithm-wielding middlemen. Small investors, whether they acknowledge it or not, are tremendous beneficiaries of the cutthroat cyber-jockeying among electronic trading firms. Competition for public orders and a huge investment in the technological plumbing of the markets have given stay-at-home investors $8 commissions and instant trade executions at the best available price for a stock or exchange-traded fund.
Like emails pushing discounted polo shirts and beach totes, shares of Lands' End Inc. will arrive unbidden in the accounts of Sears Holdings Inc. (SHLD) shareholders Friday evening. Such investors should welcome the gift and hang on to Lands' End stock, given its sturdy brand, prospects for financial improvement and the broadly favorable track record of investing in corporate spinoffs. The deal is good news for Sears, too, representing further progress in chairman and principal shareholder Edward Lampert’s long effort to realize the value of the company's better business assets and store real estate as the core Sears and Kmart retail operations continue to erode. Before liberating Lands' End, which Sears bought in 2002 for $1.9 billion, Lampert had hived off most of Sears Canada Ltd., Sears Hardware and Outdoor Stores Inc. (SHOS) and Orchard Supply (which later filed for bankruptcy), and the company has also said it might look for ways to separate or sell its automotive-service unit and a warranty business. All the while, Sears is actively marketing many of its 2,000 stores (of which it owns 700) for sale, re-lease or redevelopment. Sears shareholders of record as of March 24 will receive 0.300795 shares of Lands' End for each Sears Holdings share they own. Lampert, importantly, will own 48.4% of Lands' End upon the distribution of shares, matching his ownership of Sears. Lands' End shares, which will begin trading formally Monday on the Nasdaq under the symbol “LE,” have already been trading on a “when-issued” basis for the past couple of weeks, under the ticker "LEDMV". At a recent share price of $32, Lands' End carried a market value of $1 billion – near the upper end of the anticipated range based on several comparable companies. In February, I suggested Joseph A. Bank Clothiers Inc.'s (JOSB) deal to buy Eddie Bauer (which was later terminated when Men's Wearhouse made a $1.8 billion cash deal to buy Jos. A Bank) offered a rough gauge of Lands' End potential value, and arrived at $1 billion as the higher end of fair value.