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Consumer Stocks: Happy, Healthy Home

Like everything else in the pandemic era, going back to school is no longer a sure thing. Even amid phased re-openings and pressures to restart the economy, wary consumers continue to center their lives around the home. This status quo could persist at least until there are widely available and widely distributed vaccines. Experts from our partner Argus examine how consumer priorities and behavior have changed and what’s to come in the post-pandemic “new normal.” They focus on the retail, media, and consumer services companies that are facilitating these changes in creating a happier, safer home.

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Video Transcript

JOHN EADE: Well, hello, everybody and thank you for joining us this afternoon for our Yahoo Finance Premium Argus Research research webinar. This is a different voice, you may recognize. This is John Eade. I'm the president of Argus Research. I'm not Jim Kelleher, who is typically our moderator and host but is out on a well-deserved vacation. So I'm stepping in for Jim today.

Our topic today is going to be consumer stocks, particularly consumer stocks related to a happy, healthy home. And I'm going to be joined today by one of our consumer analysts, Chris Graja, CFA. Chris is a veteran at Argus and award-winning analyst, and I'm sure you'll appreciate his insights, perspectives, and forecasts.

I'd like to say that this is an interactive event this afternoon, and we look forward to answering questions that you may have. You can type your messages in the message board and shoot them over to us, and we will look to address them after we get through the prepared remarks. We're grateful for Yahoo Finance and our partnership in the Premium offering. And again, we thank you for your time. So with that, we will move onto the next slide.

OK, I'm going to talk briefly here about some of Argus's macro forecasts. Argus follows a top-down approach to research. That means we start off by forecasting GDP, interest rates, sectors, and the market before we drill down to buy, hold, and sell recommendations on the stocks that are our analysts cover. So we'll start off with GDP. And of course, during this pandemic, this is a remarkable time for our economy. There was a remarkable drop, historical drop in GDP in the recently completed second quarter. And I think in the quarters ahead, we're going to see some pretty astonishing recovery numbers as well.

The percentages are-- I'm not going to say meaningless, but they're kind of mind blowing. It's hard to understand a 33% annualized GDP decline, and that's what the chart is showing. You see the blue-- light blue line that's sticking right down. And if you go back to some of the worst recessions we can remember, back in '08 and '09 and '07, those declines were not nearly as sharp, more like 9% or 10%. This was three times as dramatic a decline in GDP. Although, on an absolute dollars basis from quarter to quarter, the GDP fell about 10%. And so when you annualize that-- and that's what the Commerce Department does. You get the annualized decline of 33%.

Whether it's 33% annualized or 10% quarter to quarter, we all know it was very, very painful. And the pain was really distributed across the economy. Consumers stopped spending. Businesses stopped investing. Exporters stopped exporting. I guess the one segment that kept chugging along was the government segment. And you know, they're now spending over $3 trillion with probably another $1 trillion or so coming down the pike. And it's that government spending that has, you know, really kind of taken hold and prevented the economy from declining even more steeply.

So I think instead of the absolute numbers, it makes more sense to try to get a sense of the shape of the cycle, right? We were cruising along at 2%, 2.5%, 3% growth '16, '17, '18 then a sharp plunge here in the first half of 2019. And I think we're going to see those, you know, sharp recovery quarters bouncing around for the next few quarters until by the end of 2021, things are settle down again, we're back on an absolute level of where we were in GDP prior to the pandemic, and we're kind of back to that, you know, 2%, 2.5%, 3% growth.

And the economy is going to be different at the end of the pandemic than it was prior to the pandemic. We don't think that exports will recover to pre-pandemic levels. There's going to be a lot of rebuilding of supply chains here in the US. It's unlikely that consumer spending on services recovers to pre-pandemic levels in such a short time, even by the end of next year, with, you know, where the airlines and the hotels and the restaurants are.

But some sectors are probably going to be better on the other side of the pandemic. We think investments into intellectual property, like software, like entertainment-- that's a segment that's going to grow. And we do think that home-related expenditures, which we'll be talking about soon, are also going to grow.

So moving from the GDP to the Treasury yield curve, rates-- the current rates, the current yield curve is that pink line there. And you can see that interest rates are lower than they were a year ago. That's the purple line. They're really near all-time lows, and that's because the Federal Reserve has pulled out all the stops to cut short-term interest rates-- that lowers the rates on the short end-- to buy-- to rev up the quantitative easing machine and buy bonds at the long end. And that pushes the long-end interest rates down. And the Fed has basically said they're going to do that as long as it takes. They're going to use whatever tool they can.

So we do think that interest rates are probably going to be drifting higher from these historical lows, and that's the green line looking out six months. But the 10-year bond is the benchmark bond, and we're looking for a 10-year benchmark bond yield of 1% or less out over the next year and into 2021. So maybe rates tick a little bit higher, but there's still going to be historically low. That's with the Fed acting aggressively.

And with interest rates so low and income so hard to achieve, that pushes a lot of investors more towards stocks. And I think that's what we've seen-- part of the effect of the recent rallies that we've had that have lifted the S&P 500 to all-time highs.

So the third chart, the one in the lower left hand corner, is quarterly earnings growth. And we just wrapped up the second quarter earnings season, although we're in the final stages of it I guess, with the retailers reporting these days. And again, let's look more at the shape here than the absolute numbers of the declines.

So there was a sharp decline in the first quarter, a substantial decline here in this second quarter, but we're going to start to see some rebounds in the quarters ahead. And the same with the GDP, by the end of next year, we're anticipating that S&P earnings are going to be back at the level they were prior to the pandemic. And they were at all-time highs prior to the pandemic. And those all-time highs supported the all-time high stock prices. And I think what we're seeing in the market today is that investors are expecting those earnings to recover to those all-time highs and perhaps then some by the end of 2021. So again, it's more the shape of the curve here than the absolute numbers.

And then as we move onto our fourth chart and, you know, where people are investing, you can see at the bottom there, the tech sector has the longest bar. The tech sector now accounts for more than 25% of the overall market. Healthcare is up a little bit. It's a green bar, two or three up from that. And healthcare is the second biggest at 15%. And those have been two of the real strong sectors here in this recovery.

The green bars are the sectors that we are recommending that investors overweight in their portfolios, including technology, healthcare, utilities, and communication services. The red sectors are the sectors that we're recommending that investors underweight, including, you know, volatile sectors like basic materials and energy. Energy is a sector that, you know, is deep value here, but we don't really think they're very good values, given what we expect to see as far as deteriorating demand for oil over the next 10, 15, 20 years. So that's a sector that you're probably going to see us have red underweight for quite some time.

OK, we'll move onto the next page. And here, we'll touch on performance. So we've been running these webinars for several months now, and typically this page is full of red. And here, we're starting to see some green. And in the upper left hand corner, you can see green bars for NASDAQ composite. That's a lot of tech stocks and growth stocks, again, the more tech and healthcare stocks. So those are some of the investment indexes that are performing very well.

This is-- also in this chart, you see something that's fairly rare, where you've got the Lehman US Aggregate Bond Index-- that's bonds-- outperforming the S&P 500 when we put this chart together. By the end of this month or next month, maybe the S&P will have caught up to the bond index. But for most of the year, bonds have been outperforming stocks. And that's why a lot of investors, you know, look to have diversified portfolios because there are certain periods under certain circumstances where it's good to offset your equity exposure, which is riskier, with more stable return exposure from fixed-income investments.

At the bottom of this chart, the sectors that are lagging include the small caps. The large caps have the better balance sheets, the better management teams that we think are going to carry companies through the pandemic and lead them to the other side.

And then value stocks-- growth stocks have been outperforming value for really the last 10 years. And as long as the outlook looks positive for sectors like technology and healthcare and the sector-- the outlook does not look positive for sectors like materials and energy, we're going to expect growth to continue to outperform value. I think another factor driving this trend-- usually, you know, for many, many years, growth and value performed together. But in a low-interest-rate environment, when managers look out to capitalize projects, the cost of their capital is lower and the returns on the projects are higher, which just values-- which favors growth investments, as opposed to hidden values. So as long as interest rates stay low, we're going to continue to expect growth to outperform.

So we talked about the sectors. You know, here's how they're performing. No surprise that technology and healthcare are at the top there and, you know, energy is at the bottom. We'd expect to see that, given what we saw on the previous page.

In global equity markets, China was the first to shut down for the pandemic, the first to recover and has been attracting capital. The US is now in positive territory. Eurozone is lagging. You know, UK investors are still concerned about Brexit. And-- but at least there's more green on this page, whereas in previous calls, this page has been entirely red.

So with that, that wraps up our overview of the markets and the sectors. And I will turn the call over to my colleague, Chris Graja, to talk about consumer stocks.

CHRIS GRAJA: Hey, good afternoon, everybody. It's great to be here. It's an exciting time to be here. And let me begin with my three sort of best and most telling anecdotes from-- you know, right from the executives of the companies I cover. On July 30, Masco, which makes Delta Faucets and Behr paint, which is a buy-rated stock, and I boosted my price target.

Their CEO Keith Allman said that the COVID-19 pandemic may have lasting, structural effects on the economy, consumer behavior, and home ownership. Masco thinks there could be increased interest in single-family homes with more living space and distance from neighbors. He said that increased remote working could lead to higher remodeling spending, and people may do more projects themselves, rather than having someone else in their home. And he thinks that record-low mortgage rates, a lack of supply of homes on the market could lead to home price appreciation, which gives people comfort in investing in their homes and thinking that's a good investment.

Walmart, which reported yesterday, there is a new note today out on the Yahoo Premium service, and I raised my price target to $150 from $145. Walmart's CEO also acknowledged people are spending more time at home, spending at Walmart, the world's biggest retailer. They're spending on TVs, computers, outdoor living, and sports and things for kids to do. With people not going out, Walmart's benefiting from people eating more meals at home and buying more food at the grocery store, and they're also seeing higher sales of cleaning products.

Home Depot also reported yesterday. The note's out today, and we raised our price target to $320 from $300. Home Depot's CEO said their home has never been more important-- you know, extremely telling statement. And Home Depot's surveys show that their customers show-- have a continuing willingness to do projects.

Another interesting point in there that is important to-- a number of the buy-rated stocks we'll talk about in this call is Depot sees that people are looking to consolidate their spending with more retailers. And Home Depot is actually increasing their product line online to take advantage of that.

So on the slides, I think the biggest catalyst for stock performance in the pandemic has been that the crisis has caused investors to differentiate between business models, the ones that are well-positioned for the future and the ones that face significant challenges. I think the reason COVID has accelerated the process is number one, it's accentuated the need for an online business. And I think the other thing that it's done is forced a lot of retailers to really look at their business models and how they're doing.

Retailers can sort of maintain four-wall profitability. And you know, as we've seen-- I won't name names, but there are a lot of retailers that, historically, have hung on for a very long time. And this has caused a shakeout.

So I think probably the big question everybody's asking is, you know, many of these home-related companies have had a good run. Why do we think it can continue into the future? You know, I think number one, as John referenced earlier, I mean, there have been years of under-investing, going back to the Great Recession. Residential fixed investment went into this recession at about 3.1% of GDP, and the average since the end of World War II is 4.6%. So there is a lot of investing to be done in housing just to get back to normal levels. And normally, that will, you know, even run beyond that.

We've got a huge demographic wave of Boomers start-- not boomers, millennials starting households. The housing stock in the United States, 70% of homes are more than 25 years old, which is the point where they need upgrades and enhancements. And we've had a lot of technological advancements in the home, and these range from, you know, better, healthier building materials, decking, siding that will last longer, you know, even to things like 5G and connected home, you know, where you'll be able to see if you left your stove on or even things that Best Buy is leading that will allow you to install some monitoring software so that an aging relative can be monitored so that they can stay in their own home longer. And these are even using machine learning and artificial intelligence. So there are a lot of exciting things happening in the home space that could drive the stocks for a long, long time.

You know, in the near term, certainly low interest rates are creating a catalyst for people to act now. There is a shortage of affordable housing. Remote learning and remote working continues. I think there's a new awareness and appreciation for home. As I said earlier, you know, Boomers are wanting to age in place. The focus on being clean and healthy certainly continues.

And you know, with the sector now at-- you know, in the market at new highs, I think that only enhances the need for fundamental analysis to really differentiate. I mean, we've certainly seen that the way the market's reacted, you know, there have been very clear winners and very clear losers. And I think some of the things that will be important going forward are retailers that shoppers have confidence in, convenience is going to be very important, as people want to avoid trips and innovation as well. People have gone back to some tried-and-true products during the pandemic. But I think going forward, there will be a focus on new and healthy and innovative products.

Very quickly, our view of the sector, you know, from the bottom up that enhances our top-down view is that gross margins are likely to decline. We don't have the outsourcing John talked about. Exports and foreign trade, we no longer have the cheap outsourcing benefits from overseas. Competition is obviously very high and keeping pricing down. And e-commerce fulfillment will weigh on gross margin. SG&A will probably rise. Healthcare spending is going up. Minimum wage and wages are going higher, and companies will need to invest to stay relevant.

I won't go through all of these metrics. But basically, it pretty much boils down to companies aren't opening stores. It's very difficult to raise prices. So the retailers and the consumer companies that do well are the ones that are relevant and attract interest and recurring traffic.

Within the context of stock selection, I think the thing that's guided us through this whole pandemic is the Argus six-point system. And you know, my mantra has sort of been that the solution to uncertainty is discipline. The six-point system is as a framework that's been around for a long time that helps you to make complex decisions in an organized way. And when it seems like everything's going crazy, you have a very clear and clean way to assess companies and then bring all of the information down into the facts and numbers that actually guide the valuation process and the valuation model.

And you know, so how much-- the factors that really drive how much a company's worth, you know, how much cash can the company pay to shareholders? I mean, that's a function of our growth analysis. It's a factor of our financial strength analysis, in terms of how much free cash flow to equity is left after debt and after reinvestment needs. How long can the company grow is a factor of competition, competitive advantage, and how skilled the management team is at reinventing itself and coming up with new projects to grow sales or make the business more efficient and more profitable. And how risky are the cash flows?

You know, again, it is a factor the choices management makes and our risk analysis. How cyclical is the business? How capital intensive is it? How leveraged is it? And in Masco is one example of, you know, a company in our coverage that I think has done a great job in making the business less cyclical, making it less capital intensive, reducing the leverage. So-- and that's a case where, you know, on the surface, maybe not the most exciting-looking business but management's done an excellent job of making good decisions.

And the other thing that's very important to us is competition. And we look at Michael Porter's model, you know, where the rivalry in this sector-- and we've got a lot of it in retail and the consumer space-- comes down to the bargaining power of suppliers, the bargaining power of the buyers, the threat of new entrants, and the threat of substitutes. And on almost all of those levels, this is a very, very competitive space. And I think the thing I'd also add that we have to pay attention to in the consumer space is that there are a lot of retailers and players in this space who are going to hang on as long as they possibly can, and that affects the competitive environment.

So some surprises during the pandemic-- focus on home, which we've been talking about, the surge in online sales, even groceries. I think that's one of the things that I think people thought groceries would come, you know, very late or it might be slow to adopt. And people have adopted very quickly, and it's going to continue.

And costs have increased. To their credit, a lot of the big companies-- Walmart, Costco, Home Depot, Lowe's-- have all been very generous in compensating their employees. They've also spent a lot on order fulfillment and enhancing their online capabilities.

You know, I think going forward, a couple of things that have come up in the last couple days as surprises, the comment from Home Depot that, you know, people may be looking to do business with fewer retailers. And Walmart mentioned in the call yesterday that the back-to-school season is off to a slow start, which isn't exactly a huge surprise, given all of the uncertainty in opening schools.

I think another surprise is that July retail sales were up 2.7% on a year-over-year basis. But when you look at the components of that, again, it stresses the importance of analysis and being engaged with the companies in the markets. I mean, you've had department stores and clothing where the numbers have been absolutely dismal. And you know, the home building supply numbers that have been absolutely stellar.

So some of the companies we favor going forward and some of the themes we favor, the first not necessarily housing related, but we think there will be a consumer focus on value going forward. And Walmart is one of the stocks we like here. There's a note just out on the Premium service.

We raised our target to $150 from $145 on very strong cash generation. E-commerce grew 97%. And you know, in addition to the fact that they provide food and they're an essential business, you know, I think Walmart is very well positioned to benefit as home becomes more important. They sell furniture and linens and housewares, as well as hardware and paint.

They-- the CEO confirmed-- there have been rumors out there that they are looking at testing a membership program where they feel like they have the ability with their stores-- I think 90% of Walmart stores are within-- or yeah, are within 10 miles of almost the entire US population. And they feel like they have the ability to deliver food, as well as discretionary products. One caveat in that call is that, you know, they see sales normalizing, as the stimulus-- the benefit of the stimulus checks have faded. But again, I mean, that's nothing unexpected, and that's not something that-- you know, we've been expecting a normalization, and that's in all of our models.

I'm not going to say too much about TJ Maxx. They-- TJX is out with earnings today.

JOHN EADE: Hey, Chris?


JOHN EADE: Chris, you mind if I step in for just a second?

CHRIS GRAJA: Yeah, of course.

JOHN EADE: This is John Eade, the moderator. Chris mentioned that the Walmart report is available on the Premium site, and I just wanted to give a quick minute on how to find it. So if you go to the Premium and you click on Research Reports, there'll be a window where you can put in the ticker symbol, WMT. And you click on that, and the report is right there, Chris's updated report on Walmart, which he increases his target price and reiterates his buy rating. So those reports are very easy to find and, you know, right there on the Premium section of Yahoo Finance. Chris, sorry for cutting in. Back to you.

CHRIS GRAJA: No, that's great, John. Thank you. That's very helpful. A couple of the catalysts for TJ Maxx, in addition to having home goods, is the treasure hunt atmosphere, the fact that historically, traffic has been very strong to these stores. I mean, they were closed for the-- you know, for part of the pandemic. But historically, as other retailers have had a tough time, they've cleared merchandise, and TJX has had access to outstanding merchandise, which drives traffic.

Kroger, the grocery store chain, which has had a good run but we think it can continue. And one reason is that they have a very large proportion-- almost 30% of their sales are from their own branded products, which can save people money going forward. The other thing that's unique about Kroger is they are a leader in using big data and machine learning. They use this to offer deals, and they're even entering the business of using their insights to sell advertising in the store, so a very well-managed business there.

We can move on to the next page. Among the homebuilders, Lennar is one I like very much. This sector's had an excellent run. And one of the things we're seeing is a very strong rebound in demand for the homebuilders. Lennar stands out because it's actually the largest homebuilder, in terms of sales. DR Horton has the most deliveries.

But with housing being a cyclical sector, Lennar's size, its broad geographic diversity, solid financial strength, a big focus on affordability, which is going to be the key to the housing market over the next several quarters, and they're using their relationships with contractors and builders to create sort of a more stable supply chain. But the one thing I'll emphasize and underscore is the focus on affordability. Offering affordable homes will be where the growth is. And Lennar, as well as DR Horton, are very well positioned there.

Home Depot, there's a new note out. I just raised my price target. A couple of the things that are exciting is that, you know, they're winning new business. They're seeing record number of downloads of their apps. They have new customers who are shopping more broadly across the store.

And you know, the story there over the years is an outstanding return on invested capital. It came down a little bit this quarter, but most of that is because they boosted their cash position just to weather the crisis. And also, they haven't been repurchasing shares.

But you know, their return on capital is 41%. Their cost of capital is very low. And as John said, when you get a company like a Home Depot-- and we go back to the six-point system-- where they can maintain their financial strength and their financial ratios, they have the ability to borrow a little bit more. They use the borrowed money, and they repurchase relatively expensive shares and replace it with relatively inexpensive debt. That spread between the return on capital and their cost of capital even widens. And that's the miracle at Home Depot that their management has executed so well. And showing signs of improvement is one of the catalysts-- was one of the catalysts for our upgrade at Walmart.

Lowe's actually reported today. I won't say too much about it, but I think some of the takeaways-- you know, our thesis has been that it's an excellent business, but their profitability has greatly lagged Home Depot's. Their new CEO, relatively new CEO, Marvin Ellison was a former executive and a former very effective executive at Home Depot. One of the things Mr. Ellison has been skilled in doing is in reallocating tasks around the store so that the managers and the employees spend less time doing paperwork and looking at reports and more time in front of their customers. And we saw it in the first quarter when they were able to benefit from, you know, the first wave of COVID-related spending.

The things he's doing seem to be helping the company. He's hired experts. They made a big investment in internet infrastructure. Back on-- back at Black Friday in the fall, their website was crashing. This time around where they've had many days that were busier than Black Friday, the web has held up very well. They are also managing their labor much more effectively.

I talked about Masco a little bit before. They're certainly benefiting in their paint business. Their Behr paint is the premier paint brand at Home Depot. People are doing projects. And one of the things Behr has done with a lot of innovation is making it easier and more pleasant for individuals to paint by adding primer and providing more coverage. They're also adding pro sizes. And so now they're a paint and faucet business-- much less cyclical, much less risky than they were before.

And Williams-Sonoma is not just housewares, but it's also Pottery Barn brands and West Elm. They have the biggest online presence of the retailers in my universe, over 50%. And you know, their legacy as a catalog business gives them a lot of analytics and a lot of expertise. And the ability to sort of transition away from those catalogs to online is a big cost savings.

They're a very innovative business. West Elm, which they incubated from scratch, has been one of the strongest businesses, in terms of a comparable sales. And they're also investing in their delivery business, which is very important in furniture. So they've had some momentum lately, and I think they're well suited to serve people who are living and working at home.

And an ongoing focus on washing, cleaning, health, you know, Procter & Gamble is probably the poster for this. And this is a company that we had had our eyes on. You know, it had looked a little bit expensive. We got an opportunity, as a result of the early stages of the pandemic, to upgrade it, put it on our buy list. It's a high financial strength stock. They've been paying a dividend for 130 years. It's got a 2.3% dividend yield.

So I think when you look at the paltry yields in the treasury market, I mean, obviously there's risk in equities. But you know, the company's been paying a dividend since Queen Victoria was in charge. And they've got very high credit ratings. They've got great margins. And when you look at what's going on in the world, the fact that they sell Tide and Pampers and Bounty and Charmin and Pepto-Bismol certainly boosts their relevance.

The next three stocks are from my colleague John Staszak. The first is Nike, which certainly fits in very well with the theme of people exercising because they've got more time at home, wearing comfortable clothes, and wanting to stay healthier. One of the things John likes a lot about Nike, and it kind of goes back to our bargaining power, that he was great at calling out is that Nike is a traffic driver at retailers.

People come to get Nike products, and they especially want the hottest Nike products. So that gives them bargaining power as a supplier. They have the ability to drive traffic, and that's a great advantage for them. They have a strong digital business. John likes their level of innovation, and he likes the Jordan brand as, you know, certainly something that's very relevant.

Church & Dwight is a new cover for Argus. John recently raised his price target. I think he raised his price target, and there's a new note on the Premium service as of yesterday. And again, very innovative company-- they owned the Arm & Hammer brand and business, which goes into, you know, more and more products. They also own the OxiClean franchise. And John sees it as a margin story that should benefit from integrating new acquisitions and becoming more profitable.

And Clorox is another, you know, like Procter & Gamble. Their products are kind of synonymous with killing germs. It's been very difficult to find the products for a long time because demand is strong. And in addition to bleach, they have products like Brita, the water filter, and kitty litter. So another stock that the John is very bullish on. So with that, why don't we pause and take some questions?

JOHN EADE: Chris, thank you. Thank you for your thoughts and your outlooks and your forecasts. Let me, once again, ask participants to submit questions in the text box in the corner of the dashboard. We have a few that have come in. A couple of them are on more of a macro level. So Chris, why don't you grab a glass of water, and I'll try to grab these two questions here.

The first is about government spending. And with all the government's spending that is occurring, someone will need to pay later. Who will pay and how? So a couple of thoughts on this. First of all, at Argus, we address these kinds of economic and market issues in some of our reports that are available on the Premium Yahoo Finance offering.

Those are going to be under Reports, under Report Type, under Market Outlook. That gets to our Market Watch report when we are addressing these types of issues. And I think this is a timely issue, and there will be reports on it out very soon.

So is the government spending too much money? Chris, I'm going to reference you again because in February, one of the few weekends prior to when the pandemic hit, there was an economist's conference down at Princeton University. And Chris and I were both able to attend. And so they had, you know, some of the famous Princeton economists-- Alan Blinder, Chris Sims. Bill Dudley was there, the former head of the New York Fed. So quite a bit of brain power talking about the federal deficit. And is it too high? Should we be rethinking how economists think about debt levels and GDP?

And the conclusion from the conference was even though debt levels are now higher than GDP-- and that is very rare here in the US-- it really isn't a problem right now. And two ways of kind of confirming that-- one is looking at the yield on the 10-year bond. If there was some concern that the US was going to default on all this debt, the 10-year yield would be 0.65% or whatever it is. It'd be 30.65%. So yields are at all-time lows, suggesting that lenders have an enormous amount of confidence that the US will be able to manage its debt, even if it's above GDP right here.

And the second kind of checkpoint in the marketplace is the level of the dollar. And the dollar is down a little bit this year, but it's still very, very close to all-time highs. And that's signaling there's a lot of confidence among global investors in the US economy and in the US Federal Reserve to keep the financial system up and running and to keep the economy running.

So at the seminar, the issues were, like, today, this isn't an issue. However, we, as a country, should start to put a plan together to address these high levels of debt and to reduce them. And the plan doesn't have to come up, you know, 4Q20. I'm talking about a plan in the next 10 or 15 years. And without that plan, the view at the Princeton seminar was that our country would be in a bad position to address some of the other long-term fundamental problems that our country might have, like crumbling infrastructure or climate change.

So again, this high debt level isn't something to worry about today, next week, next quarter. But the economists now are thinking about putting a plan together to address it in order to be in position to address other longer-term issues. So thank you for that question. And Chris, thanks for taking me to that Princeton seminar. You learn a thing or two.

CHRIS GRAJA: That was great. And everybody said that in light of the COVID crisis and the downturn-- likely downturn in GDP, you definitely have to borrow. You can't let the economy falter. You need to be aggressive. And you know, that's-- that was a great takeaway.

JOHN EADE: So Chris, it sounds like your voice is back. Here's a question, and I think it may refer to your comments on your Home Depot target price increase. How do you decide to what value to raise your price forecast? So Chris, if you could talk for a minute or two, you know, what you think about when you-- when the Home Depot price approaches its current target price and you've got to make a decision to either downgrade the stock or raise the price target. What goes into that decision?

CHRIS GRAJA: Yeah, so-- you know, so the things that drive it is-- I usually use a discounted cash flow or a dividend discount model. And I think the important thing there is that it saves you from relying on rules of thumb. I mean, if you only looked at price to book, you'd never buy Home Depot. The price to book is very high, but why is the price to book so high? Because they use their capital so productively.

I mean, a lot of price-- low price-to-book companies are, you know, the cigar butts that Ben Graham talked about. You know, it doesn't traded a particularly low price to sales because the margins are high. You know, for each dollar of sales, you could get a relatively, you know, high amount of net income. And the business has been stable.

So you know, what we're looking at are-- you know, the company's earnings power, which has been going up. You know, I try not to spend too much time messing with the-- you know, the post-growth phase. So as companies are able to grow or show that they can grow more and more, you lengthen the number of growth years. I mean, one of the things that's certainly been beneficial is the drop in interest rates has helped a little bit. But you know, a key factor for Home Depot is that they're increasing their EPS, and the sustainability of the business is excellent.

So you know, it's not looking at rules of thumb. It's not making it up. It's sitting down each time I look at the stock with a dividend discount model, putting the assumptions in the note, and making sure that the numbers are, you know, all numbers that if somebody calls me on the phone, they can question me on them and I feel like I can justify each number at the bottom of the published note, you know, with facts and reasons. So-- and you know, when you get to a stock to the point where you feel like you're pushing on things a little bit too far or you don't feel like you can justify your reasoning when a thoughtful client calls and asks about it, then-- you know, then that's maybe where you'd look somewhere else for opportunity. Hello?

JOHN EADE: Chris, sorry about that. I muted myself.

CHRIS GRAJA: Oh, no worries.

JOHN EADE: Our dog was barking, but she's quiet now. OK, here is a another question. I think this is about M&A in retail. The question is, are there any options for these companies to buy out smaller competitors in the retail space? But maybe the bigger question there, Chris, is, you know, what's your outlook for M&A in retail? A lot of times you see it in a beaten-down industry.

CHRIS GRAJA: Right, and I think it goes back to return on capital, using capital. And I would think that where companies are likely to do M&A or make acquisitions, you know, it may, in some cases, be businesses that are apart from retail. So you know, it could be a data analytics business. It could be a business that-- you know, that's expert on, you know, measuring consumer sentiment or improving aspects of their online capacity. Maybe they're-- you know, maybe their supply chain, their ability to manage trucking or something like that.

You know, most of these companies aren't looking for more store space. And you know, a really good retailer like, you know, a Home Depot or a Kroger is perfectly good at opening stores. There are plenty of opportunities to get store space at this point. And I'm even optimistic about the fact that Walmart is opening fewer and fewer stores because it means they're using their existing capital more productively.

You know, when you have fewer stores, there's less competition. There's less stores around to take sales away from that, and you're able to get more sales per square foot. And that's part of the miracle we've seen at Home Depot. They've raised sales per square foot, and you get more leverage on, you know, the advertising and the marketing and the cost of the store. So I don't see a lot of successful retailers buying other retailers, but I do see them looking for ways to boost their e-commerce or logistics capabilities.

JOHN EADE: OK, Chris, I'm going to address a macro question here, and then we'll wrap up with one last question for you. So the macro question that came in was, do you foresee any impact with the upcoming elections? And if so, how long will it last?

So we've got a report coming out on that, in which we've looked at the market returns in election years and even in third quarters and fourth quarters of election years. And what we found was that of the four-year cycles, the election years were always the worst year for performance, just with so much uncertainty over not just who is going to be the president but what that might mean to tax or fiscal policy, you know, antitrust philosophy or regulatory focus.

Drilling down on a quarterly basis, what we found was kind of up buy the rumor, sell the news where the third quarter was strong in an election year and then the fourth quarter was weak. And if you think about that for a minute, that goes really against the typical pattern you see where the fourth quarter is almost always the strongest quarter of the year for the markets. So election years are different from normal years, for sure. And here, we're in an election year with the deepest recession the company-- the country has ever endured and a pandemic.

Early in the year-- you know, you go to the United Kingdom, and you can get odds on who's going to be president. And odds favored President Trump to win another term. The odds now favor President Biden, but there's a long way to go till election day.

I think the shift that we've seen from Trump to Biden has had an impact on defense stocks. They've sold off a little bit, while the rest of the market has gone higher. And I think that's a real good buying opportunity for a company like Lockheed Martin or Northrop Grumman. It doesn't matter to those companies whether it's a Democrat or Republican. They're well-run. They beat their guidance. They pay a lot of dividends. They buy back stock. Those are good opportunities here in all this volatility.

I guess the one thing I'll say about-- because the question says, how long will it last, how long will the impact last. And whoever wins, I don't think is going to have a long impact-- that it's going to have a long impact, so long as the transition is orderly, you know, that we know in a relatively short period of time and it's an orderly transition. And I think, you know, there'll be signs of that in some of those metrics we were talking about earlier about interest rates, about-- you know, if, all of a sudden, interest rates start spiking higher, there's less confidence in the US economy and political structure. If the dollar starts to plummet, again, that's less confidence. So you know, we may see that in the market, but we'll look to see if that's confirmed in some of these other metrics as well.

So Chris, time for one last question for you. And that is, what do you-- you've given a lot of ideas here. What do you think is the best value overall-- best value? So I'll leave it to you to define value and to sign off with your best value idea here.

CHRIS GRAJA: Um, you know, I still like the home improvement retailers. I think they have-- I think they have some room to run. So I think the home improvement space has got some opportunity. I mean, I can't really comment on Target or earnings, but I mean, historically, Lowe's is a turnaround in a favorable sector, and Home Depot keeps doing good things. So that's probably a place I'd continue to look.

JOHN EADE: Well, thank you, Chris. And thank you all today for bearing with us. I know we went a minute or two over. But we appreciate your participation. Thanks for all the great questions. And we, you know, wish you well and hope to see and hear from you again in upcoming webinars. That concludes our webinar for this month. Again, we thank Yahoo Finance Premium for the partnership, and we wish everybody a great rest of the afternoon. Thank you.