Talking Points – August 2019

August 28, 2019 – Is All This Policy Uncertainty Bullish?

We have written on this topic before, but with all the noisy policy related headlines recently we thought that this would be a good review, especially for our newer readers.

Whether it is the trade war or something else, policy topics can all take a toll on an investor’s mindset. How much of this seemingly negative news media, adversely impacts the financial markets?

Today’s chart goes back to 1985. It demonstrated that when the Uncertainty Policy Index reached an extremely high levels, stocks had a much stronger three month forward return compared to low uncertainty.

The trade war with China is the most significant policy matter at this time. There is no question this issue has slowed the economy and could slow growth further. However, at some point negative expectations will be fully baked in. We admit it could still get worse, perhaps even much worse, but keep this chart in mind on those negative news days. 

August 14, 2019 – Eye Opening Dividend Valuation Chart

We review so much investment data each day, that it has become increasingly rare that we are extremely surprised by a particular chart. However, the chart below did in fact surprise us. With the drop in interest rates, high dividend areas, such as utilities, have done well and could be viewed as expensive. We would have assumed higher yielding stocks would be neutral to expensive versus other choices.

In fact, we are actually at an extreme in the opposite direction. Stocks that do not pay a dividend are historically expensive versus high dividend payers.

Source: Goldman Sachs

We are back to levels last seen during the tech bubble, which makes us think this scenario is more about how expensive the no dividend paying high flying tech stocks, especially recent IPOs, might be.

While we are open to all types of stocks, our preference tends to be for stocks that pay a dividend, but not too high, to allow for future growth of the dividend, as the company hopefully grows in a compounding manner.

This chart will make us even more alert to any potential cracks in the expensive sectors of the market.

August 7, 2019 – Thoughts on Apple Stock

Rarely do we discuss an individual stock. However, we felt today’s chart about Apple would be a good way to emphasize aspects of our security analysis.

Apple has a hugely popular brand and products, yet despite that, or perhaps because of it, the company itself and the stock receive a large amount of criticism. No company, or stock is without its faults.

Many companies, especially in technology, talk of all the shares they are buying back. When you take a closer look, they aren’t really reducing the share count (after all the stock compensation shares issued).

In the chart below, the orange line shows the massive amount of stock buybacks Apple has done in recent years. The blue line indicates it is having a dramatic effect on reducing the shares outstanding. This increases their earnings per share, but more importantly to our clients as shareholders, each of them owns a little more of the company now and will benefit from any future growth.

One of our favorite investment books is The Outsiders, by William Thorndike. He looks at a number of CEOs and how successful they were at allocating their capital.

Apple is a maturing company that is going through a slower growth period and thus trades at a below market P/E multiple. We approve of management’s decision to buyback an increasingly larger number of shares. This will reduce the share count for a potential growth cycle in the company next year accompanied by the launch of 5G technology.

Furthermore, Apple has abundant free cash flow and therefore can spend a significant amount on research and development. Additionally, they can pay a growing dividend on top of the share buybacks. Only time will tell if Apple has been buying their stock at a low or high price, but it appears to be a much more prudent use of their cash than we see many other management’s make.

Source: Greg Towner, CFA, CMT