Investors seem to be suffering from bipolar disorder or a serious lack of imagination. Despite tapering and the widely held view that Treasury yields can’t go anywhere but higher (a theory that’s at least 30 years old), investors continue to live in an all or nothing world. Either they distrust stocks to the point that the 10-year rate of 2.7% seems appealing or they stuff their cash into Tesla (TSLA) and Facebook (FB).
It’s easy to dismiss the stock market as crazy but that’s never made anyone any money. The market is talking and what it's saying is that it values growth over financial chicanery. Buybacks and dividends are nice but when money is cheap it’s time to invest in growth, not hoard capital. There’s an element of lunacy in Facebook spending stupid amounts of money on WhatsApp but from a strictly pragmatic view Facebook would be foolish not to gather properties while cash is cheap. Facebook’s options aren’t to either sit on $19 billion or make a long-shot acquisition. The choices are either use its wampum currency now or don't use it all.
It seems to never dawn on anyone that a stock like McDonald’s (MCD) is spitting out a 3.4% yield that’s safer than a suckling pit-bull puppy. In the attached clip SunAmerica’s Heather Hughes marvels at the fact that investors don’t seem to see any value in value stocks.
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“High quality and relatively cheap stock selection is not working,” Hughes muses. The stocks that are making money are the ones with no earnings power whatsoever. “The NASDAQ Biotechnology Index (^NBI) is up 25% in the last 10 weeks, yet of the 122 companies that comprise that index 1/3 of them have no revenues! They’ve made no money in the last 12 months.”
Taking an easier example, look at Tesla. The company just diluted shareholders by issuing $2 billion in convertible securities. The stock didn’t sell-off because Tesla had a place to invest the money and the cost of capital was low. Tesla is being rewarded for investing in growth, even if those investments come with risk.
If you’re an investor you can put your money wherever you want but if you’re a CEO trying to create value for shareholders you can either find a project and put money into it or push your balance sheet in different directions and watch your stock flat-line.
Executives aren’t paid to talk to the stock market. Their job is to listen and deploy capital accordingly.
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