Expect Analysts to Expect

“Another thing that always amazes me is that the media outlets suggest that a company tops or misses earnings expectations. Whilst this is true, delivery versus expectations of earnings and revenues are reality, who really “missed” here? The company had real life customers using their services, whether they are subscribing for streaming music or buying refrigerators. Perhaps a more accurate picture would be if the analyst community misses what the company posts.”


 

To market to market to buy a fat pig Markets locally caught the up-draught from Wall Street Friday, stocks here in Jozi, Jozi added nearly a percent on the day. Resources had a cracking day, up over two percent and now have a one year return (the Resources 10) of nearly 52 percent. 10 years? Believe it or not, whilst there have been index shuffles and changes (there was no Glencore in the index 10 years ago, and South32 was still part of BHP), the index is down nearly 21 percent. 5 years? Down over 35 percent. The bounce back from depressed levels has been breathtaking, the proof will be in the earnings and whether the commodity prices can stay at these levels. I am sure that there are plenty of governments around the world, in economies that haven’t progressed beyond pumping oil, or digging holes in the ground to extract minerals, that continue to hope for high prices. Whilst South Africa isn’t entirely reliant on higher commodity prices, they are certainly VERY helpful.

Hulamin rallied to a 12 month high off of a trading statement, bouncing off depressed levels. Since the stock unbundled from the previous structure (From Tongaat Hulett), the return for shareholders has been a desperate minus 78 percent. June 2007 to present. Sigh. Whilst the manufacturing and supply of aluminium is a critical business for the global economy, transport, construction and packaging (tin foil and cans), being an investor in these businesses is tough. Heavy capex, consumers squeezing you all the time, cyclical at the best of times. Like airlines and construction, businesses to admire and be thankful for, as an ordinary retail investor, give it a skip. There is of course money to made through the cycles, otherwise these types of businesses would have a problem attracting long term capital, they may be too long to bear for retail investors.

Leading the charge in the ALSI top stocks column was Amplats, with an incredible nine and one-quarter of a percent gain, Kumba rose nearly seven and a half percent, Anglo clocked three percent. Pretty much all stocks large and in charge, the ALSI around 5-6 odd percent from the all time highs. A move northwards in industrials, the prices of which are largely dictated to by a weaker Rand to the Pound/Dollar/Euro will see us through to that level. For the time being, you get the sense that the Emerging Market outlook is a little more favourable than in the last couple of years. Perhaps the yield hunters are back, the whole idea that rates will remain lower in the developed world means those in fixed income have to eke out returns hedging the currency risks. Lucky we are not fishing in that pond.


 

Across the seas and oceans, stocks on Wall Street bounced off their midday lows, alas, not enough to squeak into the green. The Dow lost 0.14 percent, the broader market S&P 500 gave up just over one quarter of a percent. The nerds of NASDAQ fell a little short of break even, not by much. Energy stocks were the losers, materials (resource) stocks were YUGE. Alphabet (The parent company of Google and “other bets”) added nearly two percent, ahead of their earnings which are this Thursday, post market. Excitement levels are rising. McDonald’s had numbers that showed whilst US comparable sales fell, they bested expectations (see below on that), the stock sank around three-quarters of a percent. The dividend is as predictable as the burger form, the same year in and year out. McDonald’s belongs to a select bunch of stocks that have an unbroken history of paying higher dividends year after year, in their case that streak goes back to 1976, when the company first started paying dividends.

QUALCOMM sank nearly 13 percent, Apple is suing the business for 1 billion Dollars, see the Reuters story – Apple files $1 billion lawsuit against chip supplier Qualcomm. Eish, that is getting ugly. See Barron’s too – The Biggest Loser: Qualcomm Tumbles 13%. Apple added a little on the day. Remember that they have results a week today after the market closes. I don’t think that I am going to sleep tonight, or for the next week. Just kidding!

I am not too sure whether to go down that slippery slope, what Mr. Market expects or not from the analyst community. I think that those incredibly talented people have a tough old job. It is one thing to analyse a business and figure out whether over the next three years that they are likely to continue to sell their products and services at a higher click than before, all the while improving margins steadily. It is another thing entirely to then predict what the stock price is likely to be. This year. And then the next. There are a whole multitude of factors beyond your control. Stock analysts, most of who are exceptionally smart and supremely talented, are forced to stick a price target on the company. Regardless of the short term market moves, these folks are then held accountable by how close they are.

Another thing that always amazes me is that the media outlets suggest that a company tops or misses earnings expectations. Whilst this is true, delivery versus expectations of earnings and revenues are reality, who really “missed” here? The company had real life customers using their services, whether they are subscribing for streaming music or buying refrigerators. Perhaps a more accurate picture would be if the analyst community misses what the company posts. Potatoes/potatoes, tomatoes/tomatoes, Fred Astaire and Ginger Rogers (as well as Ella Fitzgerald and Louis Armstrong) would agree to call the whole thing off. It is what it is, and I should just get over myself. It is not the obligation of the company to meet, beat or definitely not fall short of analyst expectations. It is the job of the analysts to get close enough to the company real numbers. What is your take on this matter?


 

Linkfest, lap it up

I found this on Quora – Why are casino carpets so ugly? The answer is pretty simple, it refers to the Gruen transfer or the Gruen effect. This fellow, Victor Gruen, is basically responsible for having built the first indoor air-conditioned shopping centre – Southdale Center. The basic premise is that the floors are designed to be so unappealing that you keep your eyes on the machines. What other practical applications can you think of? With the internet era having dawned on us, Amazon is the modern day shopping mall.

What? I had a double take when I read the headline, surely not? The headline reads Pokemon Go unleashed on game-mad South Korea six months late. The reasons are pretty simple: “Pokemon Go relies on Google Maps to work. But in most of South Korea those functions have been limited by the government, which is technically still at war with North Korea, for national security reasons.” Nintendo stock is up 46 percent (in Japanese Yen) over the last year, the last decade has been disappointing, the stock is down just over 25 percent. In that “entertainment” space, we like Naspers’ holding of TenCent, which have the biggest online platform in the world, League of Legends. The TenCent share price (in Hong Kong Dollars) is up 42 percent over the last year. Naspers? One year return of nearly 15 percent.

This is always a good read, at the beginning of the year, from Byron Wien – Byron Wien: Trump Will Pivot to Moderate Stance. The one that catches my eye is that Wien expects the S&P 500 to return 130 Dollars in earnings, and sets his “target” at 2500 points on the index. It is what it is, and that is his opinion.


 

Home again, home again, jiggety-jog. Stocks across Asia are mixed. Again. Japan down, Shanghai and Hong Kong are higher. We have started mixed ourselves, the markets across the oceans are also likely to be “mixed”. Consolidation? Perhaps. Earnings are likely to be all the focus today, and that I like. Of the ones that are important to us include JNJ and Stryker.


Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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