This FTSE 100 share has crashed 50%, but I’d keep buying it today!

first_img I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. This FTSE 100 share has crashed 50%, but I’d keep buying it today! Cliff D’Arcy | Monday, 3rd August, 2020 | More on: HSBA I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Image source: Getty Images. This isn’t an easy time to be a stock-picker, especially one focused on finding value within the FTSE 100 index. Thanks to Covid-19, there are several sectors (airlines, travel & leisure, etc) that are practically uninvestable right now.Hence, my search for hidden value within the FTSE 100 has tended to concentrate on a few key sectors. I’ve been bargain-hunting mostly within the oil & gas, mining, and banking sectors. And yet prices keep falling, pushing these sectors further into bombed-out territory.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…This FTSE 100 share is bombed-outFor example, take FTSE 100 behemoth HSBC Holdings (LSE: HSBA), whose shares keep dropping every time I rate them as a value buy. They’re down nearly 50% in a year.Exactly a week ago, I claimed that HSBC shares were ‘as cheap as chips’ at 354.3p. Today, after unveiling half-year results, the FTSE 100 bank’s shares hover around 326p. That’s a further fall of 8% in a week, so now they must be even cheaper than chips, perhaps?HSBC faces huge headwindsAs Europe’s largest bank and a leading lender in Asia, HSBC is suffering a perfect storm right now, thanks to these five factors:Being in the firing line of the emerging US-China ‘Cold War’.Concerns over a no-deal Brexit at the end of 2020.The impact of a second wave or rolling Covid-19 waves on lenders.The shape and pace of any post-Covid-19 economic recovery.Falling interest income due to zero or negative interest rates.In short, now is not a great time to be a lender, never mind a FTSE 100 mega-bank with close to $3trn in assets.Another FTSE 100 bank takes a beatingAs for HSBC’s latest results, they make for grim reading, with hugely increased provisions against bad loans almost wiping out profits.In the second quarter, HSBC set aside $3.8bn in loan-loss provisions, roughly $1bn more than analysts estimated. This takes the FTSE 100 firm’s loss provisions to $6.9bn over six months. For 2020 as a whole, total provisions could be as high as $13bn or as low as $8bn, the bank reckons.For the half-year, HSBC’s reported revenues dropped by 8.9% year-on-year to $26.7bn. Reported profit before tax crashed by two-thirds (65.2%) to $4.3bn. Worse still, earnings per share at HSBC collapsed by three-quarters (76.2%) to just $0.10 (from $0.42). Ouch.Hence, the FTSE 100 firm will accelerate its cost-cutting programme, including bringing forward the 35,000 job cuts already flagged up.This FTSE 100 share is cheapToday, HSBC shares dropped another 5% to 326p, their lowest since the darkest days of 2009. Before the global financial crisis, the FTSE 100 bank’s share price last plumbed these depths in 1996 – almost a quarter-century ago. As I said, they’ve fallen sharply in just a year and for the record, they’re actually down 49.6% over the past 12 months. So HSBC’s market value has halved, blowing up £70bn of shareholders’ capital in a year.As a value investor, you have to ‘buy boldly when there is blood in the streets’. Things look bleak for this FTSE 100 share today, but it will bounce back. That’s why I would grit my teeth and fill my boots with HSBC shares today! See all posts by Cliff D’Arcycenter_img Our 6 ‘Best Buys Now’ Shares Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. Enter Your Email Address Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! “This Stock Could Be Like Buying Amazon in 1997” Simply click below to discover how you can take advantage of this.last_img read more

‘We will find a way’ – Atletico struggling with injuries ahead of Real Madrid UCL clash

first_img But Gimenez was the latest player to go down, hurting a left leg muscle in the Liga win at Las Palmas over the weekend. Gimenez is a central defender but was playing as a right back to replace Torres, who was out with a hamstring ailment. Torres’ immediate substitute at right back is Sime Vrsaljko, but he has been sidelined because of a left knee injury, and is not expected to be back in time for the first leg, even though he has already returned to training. Without a specialist right back, Simeone could use his other central defender, Sefan Savic. That would mean adding youngster Lucas Hernandez to the middle of the defence to replace Savic, who has played as a right back for Montenegro. That would break up the solid duo of Savic and Diego Godin, who have started most matches in central defence. “The absences are important because it will be a new situation for the player who will have to play in that position,” Simeone said. “But this is a team sport and the rest of the squad can make up for that.” The coach may also improvise by playing a midfielder such as Saul Niguez or Jorge “Koke” Resurreccion on the right side, where Real is expected to do most of their attacking through Cristiano Ronaldo and left back Marcelo. Ronaldo, who prepared for the entire season to be in his best physical condition at this point, scored five goals in the quarterfinals against Bayern Munich. Marcelo, Real’s assist leader, scored the winner against Valencia in the Spanish league on Saturday. Atletico’s defence struggled early this season when Simeone tried different formations in an attempt to make the team more attack-minded, but the changes led to more goals being conceded and a loss of valuable points early on in the Spanish league. The coach has found the right balance, keeping the team unbeaten in 11 games and conceding only four goals in its last 12 matches in all competitions. Atletico are virtually out of the title race in the Spanish league. They are fighting Sevilla for third place, but their focus is solely on eliminating Real and getting another shot at the European title that has eluded the club so far. Atletico also lost the final in 1974, to Bayern Munich. MADRID (AP): Atletico Madrid might not be able to rely on their mighty defence when they resume their run at the Champions League title. Atletico’s backline has been depleted by injuries and coach Diego Simeone will have to improvise when his team takes on Real Madrid today in the first leg of their semifinal. Simeone won’t be able to count on key defensive players such as Jose Gimenez and Juanfran Torres for the game at Santiago Bernabeu Stadium, and they may not even recover in time for the second leg at Vicente Calderon Stadium next week. “We will find the solutions,” Simeone said, staying positive. Atletico have lost three straight times to Real in the Champions League, including the 2014 and 2016 finals. The same stout defence which helped to carry Atletico to those finals has earned the team the best record in the Spanish league, with only 25 goals conceded in 35 games.last_img read more

Mbeki receives Athens honour

first_img1 March 2005President Thabo Mbeki has received Athens’ highest honour for his contribution to the struggle against apartheid.Athens Mayor Dora Bakoyannis presented Mbeki with the City of Athens Medal of Honour on Friday, saying that Greece and South Africa shared a brotherhood in cause of freedom.President Mbeki was in Greece for a three-day state visit to the Hellenic Republic.“There is a second reason this ceremony takes on for us an importance deeper than usual”, said Bakoyannis. “It concerns the strong symbolism embodied in your own person. You symbolise, Mr President, the long and tortuous struggle against apartheid.”The mayor said she hoped the strong ties between the two countries, forged in times of misfortune, war and inequality, “culminate this century in the final success of the process of peace, fraternity and prosperity”.Mbeki said the honour bestowed upon him posed a challenge, as he now had to live up to that honour.“The things that you said constitute somewhat of challenge because this means we then have to make sure that in future we do not dishonour this medal of merit”, Mbeki said.He committed to do “everything I can to make sure that this vision you projected of a world of peace, of fraternity, of prosperity” became a reality.Mbeki invited Mayor Bakoyannis to assist in building a new South Africa, as the country responded to the challenge of fast-growing and expanding towns and cities.He also congratulated the Mayor on a “great achievement” for being the first woman mayor of Athens.He added that South Africa had much to learn from Greece’s successful hosting of the Olympic Games last year.“[W]e should draw on that experience … particularly in the context of what we shall have to do in a few years’ time to host the 2010 Soccer World Cup”, Mbeki said.Source: BuaNewslast_img read more

Tendulkar, Sehwag in ICC shortlist for greatest ODI team

first_imgIndian batting icon Sachin Tendulkar, along with Virender Sehwag, on Wednesday found a place in the list of players nominated for an ICC online poll to pick the all-time greatest team as part of one-day cricket’s 40th anniversary celebrations.The retired Sourav Ganguly is also part of the list of openers, from which only two would make the final dream team.”To mark the 40th anniversary of One-Day International cricket, the ICC’s official website is asking supporters from across the globe to select their choice of the greatest ODI match and team of all-time,” the ICC said in a statement.Website is asking supporters to select a dream team from a shortlist of 48 players and pick their favourite game from a choice of 10 memorable matches.Fans can select dream team and favourite game till January 2, with the choices set to be announced on January 5 to coincide with the 40th anniversary of the first-ever ODI match between Australia and England.”With the ICC Cricket World Cup 2011 now less than two months away, excitement and interest in the one-day format of the game will certainly intensify. We know that fans will enjoy having the chance to remember some of the great games and great players that have played in ODI cricket during the past 40 years,” ICC Chief Executive Haroon Lorgat said.The Australian ODI team from 1971 will also be presented to the crowd during the innings break of the first ODI match of the series between Australia and England at the MCG on January 16.advertisementIn the nominees for the Greatest ODI team of all time, Mahendra Singh Dhoni is the lone Indian in the list of wicketkeepers.However, no Indian has found a place in the list of middle-order batsmen and fast bowlers, while the legendary Kapil Dev has found a mention in the all-rounders’ nomination.Anil Kumble and Harbhajan Singh have made the list of spinners shortlisted for the dream team.Two India match (the win over West Indies by 43 runs at Lord’s, 25 June 1983 and the triumph against Pakistan by five runs at Karachi, 13 March 2004) are there in the list of nominees for the greatest ODI match.The shortlist for Dream Team: Opening batsmen (2)  Saeed Anwar, Sourav Ganguly, Gordon Greenidge, Matthew Hayden, Sanath Jayasuriya, Virender Sehwag, Sachin Tendulkar, Glenn Turner.Middle-order batsmen (3): Michael Bevan, Martin Crowe, Aravinda de Silva, Inzamam-ul Haq, Brian Lara, Javed Miandad, Ricky Ponting, Viv Richards.All-rounder (1) Ian Botham, Kapil Dev, Andrew Flintoff, Richard Hadlee, Jacques Kallis, Imran Khan, Lance Klusener, Shaun Pollock.Wicketkeeper (1)  Mark Boucher, MS Dhoni, Andy Flower Adam Gilchrist, Romesh Kaluwitharana, Moin Khan, Alec Stewart, Kumar Sangakkara.Fast bowlers (3) Wasim Akram, Allan Donald, Joel Garner, Michael Holding, Dennis Lillee, Glenn McGrath, Chaminda Vaas, Waqar Younis.Spinners (1) Shahid Afridi, Carl Hooper, Anil Kumble, Muttiah Muralitharan, Saqlain Mushtaq, Harbhajan Singh, Shane Warne, Daniel Vettori.Greatest ODI match of all-time:West Indies beat Australia by 17 runs at Lord’s, 21 June 1975.India beat West Indies by 43 runs at Lord’s, 25 June 1983.Pakistan beat India by one-wicket at Sharjah, 18 April 1986.England won by three wickets against Australia at Sydney, 22 January 1987.Australia won by one-wicket against West Indies at Sydney, 12 January 1996.Australia tied with South Africa at Edgbaston, 17 June 1999.Pakistan tied with Sri Lanka, at Sharjah, 15 October 1999.India beat Pakistan by five runs at Karachi, 13 March 2004.Bangladesh beat Australia by five wickets at Cardiff, 18 June 2005.South Africa beat Australia by one-wicket at Johannesburg, 12 March 2006.With inputs from PTIlast_img read more

On Tuesday the Arizona Cardinals and star safety

center_img Derrick Hall satisfied with D-backs’ buying and selling Man I’m soo happy for my baby brother @Mathieu_Era he deserves ever penny!!!— Patrick Peterson /P2 (@P2) August 2, 2016 [email protected]_Era has a great story! Well earned! Congrats bro! 👊🏿👊🏿👊🏿— Prince Amukamara (@PrinceAmukamara) August 2, 2016 My boy @Mathieu_Era getting what he deserves. 💵💵💵— Justin bethel (@Jbet26) August 2, 2016 Top Stories 0 Comments   Share   “When I say the boy has his own money, I mean the boy has his own MONEY” lol congrats @Mathieu_Era— Calais Campbell (@Campbell93) August 2, 2016 Big money!!!! Congrats to my bro @Mathieu_Era on is his deal. You deserve it bro.— MichaelFloyd (@MichaelMFloyd) August 2, 2016Players from other teams also had their say over the deal.last_img read more

By Jeff Thomas International Man With all the s

first_imgBy Jeff Thomas, International Man With all the study and thought that are required to make sense out of how the Great Unraveling will play out, we seldom take time to think of what it will be like on the other side. Those of us who are, by nature, long-term thinkers and/or optimistic, have a vague picture in mind of a rebirth of libertarian thinking, and a vibrant economy. However, we tend not to think too much more about these hopes than that, because we are caught up in the Great Unraveling itself – a very time-consuming topic. The other day, an associate whom I like to think of as having a decent, if not holistic, view of the present depression, commented to me, “I wish we could just have the crash tomorrow and everything that goes with it, so that, next year, we can get back to normal.” Oops … maybe his expectations are a bit more simplified than I thought. And, if others share his view, possibly the topic needs a bit of fleshing-out. While it may not be ready to be a prime topic of the ongoing conversation, possibly an outline of what may happen after all the fireworks have gone off would be in order. Ten Years Down and Ten Years Up Economic wizard (and favourite ‘Uncle’) Harry Schultz stated back in the early 2000’s that what he anticipated was “ten years down and ten years up.” At the time, many thought that his projection was extremely prolonged. I didn’t think so. People do commonly seem to take the view that, once the various crashes have taken place, we simply walk out into the sun, brush the dirt off the knees of our trousers, and, with a spring in our step, walk into the bright new day. However, a depression is not at all like that. It is more like a town after a hurricane has hit. The storm may have been swift, but the recovery is not. Power lines are down. Roads are blocked. Homes and stores have been destroyed. Having personally been highly involved in the reconstruction of a small country after the devastation wrought by a category five hurricane, I can attest that, even if the population is hardworking and motivated (which they were), the task of rebuilding is monumental, and the time period required to achieve it is prolonged. I see the period after the various crashes very differently from those who anticipate immediate recovery symptoms. This is not because I imagine myself a visionary; my view is based on history. If we look at the economic collapses of the past, (inclusive of their possible knock-on effects, such as hyperinflation and destruction of the currency), from the fall of the Roman Empire to Weimar Germany, to Argentina and Zimbabwe – take your pick – the pattern is extremely similar. So, let’s have a look at that pattern and ask ourselves if the present situation might not play out much the same (except far worse and more prolonged, as the conditions that led to this particular depression have been more extreme). The various stages are likely to be a given, but the various factors within each stage are a bit more uncertain. In every major economic collapse, some combination of these factors takes place. Also, consider that the stages themselves are like dominoes – they almost always fall in order. The reason? Details change in history, but human nature remains the same. The same knee-jerk reactions by people will repeat themselves over and over. (As an example, we are now experiencing a decline in exports from the First World. I believe that a repeat of the disastrous Smoot-Hawley Tariff of the 1930’s will be passed in America, which undoubtedly would trigger increased hardship for Americans.) Stages of The Crash The stages are laid out below. The first three have already occurred. 1 INITIAL CRASHES Crash of the residential property market Crash of the commercial property market Crash of the stock market 2 INITIAL KNOCK-ON EFFECTS OF CRASHES Loss of homes Loss of jobs Inflation 3 IMMEDIATE ACTIONS BY GOVERNMENT Bailouts for select groups Dramatic increase of debt Politicians going in the opposite direction of a real solution The first knee-jerk reaction began immediately, with the Government attempting to “make the problem go away” as quickly as possible. Almost invariably, at this stage, the corrective strategy is hastily prepared and shortsighted, assuring further deterioration of the economy. In this stage, the politicians on both sides fail to focus on a real solution. Instead, their primary focuses are, first, to avoid a painful real solution, and, second, to engage in finger-pointing, each political party blaming the other for the problem. The problem worsens steadily until one of the next series of major dominoes falls. This is usually sudden and triggers the toppling of other dominoes. 4 SECOND WAVE OF CRASHES Major crash in stock market Currency plummets Increased bankruptcies Increased unemployment 5 INTERNATIONAL TRADING PARTNERS REACT Foreign countries refuse to accept more debt Foreign trade slows dramatically At this point, the Government introduces dramatic change, such as ill-conceived protectionism, which backfires almost immediately. 6 GOVERNMENT INSTITUTES DESPERATE SELF-DESTRUCTIVE MEASURES Defaults on debt Restrictive tariffs on imports Currency controls 7 ECONOMY REACTS IN LOCKSTEP TO GOVERNMENT ACTIONS Hyperinflation – dramatic increase in food and fuel costs Massive unemployment Extensive foreclosures Extensive bankruptcies At this point, the dominoes are tumbling quickly, and a rapid unraveling of control is about to take place. 8 SYSTEMIC COLLAPSE Bank closures Extensive homelessness Food and fuel shortages Electric power becomes sporadic, blackouts common As these factors unravel, the public mood turns to a combination of blind fear and anger. 9 SOCIAL COLLAPSE Crime rises dramatically (particularly street crime) Food riots Tax revolts Squatters’ rebellions 10 MARTIAL LAW Creation of special army to address “domestic terrorism” Random killings become commonplace At first, the authorities focus mostly on violent subjugation and arrests; then, as prisons quickly become hopelessly overcrowded, camps become the norm. Soon, these too become unmanageable, particularly as a result of high cost of food and manpower. At that point, the solution turns to the killing of anyone who is suspected of a crime and, more frequently, anyone who is not submissive. (This will not resemble the Gestapo of the late 1930’s. It will be less organized and more chaotic.) 11 REVOLUTION If revolution is to occur, it will happen at this point. Many people will feel that they have nothing to lose, and anger will be at its peak. If revolution does take place, it will not be an organized movement as such. It will be spontaneous, and breakouts will manifest themselves like popcorn popping, largely at random, with ever-increasing frequency. At some point, it may possibly evolve into something more organized. [If you’re going to successfully internationalize – whether assets, income or personally – you’ll need some good resources to do it. Join us at the International Man Network and gain access to our library of useful reports on a wide range of diversification topics from moving gold overseas or finding an international broker to getting set up on the ground in a number of different countries around the world. Click here for more information.]last_img read more

The equity market remains valued at nearly double

first_imgThe equity market remains valued at nearly double its historical norms on reliable measures of valuation (though numerous unreliable alternatives can be sought if one seeks comfort rather than reliability). The same measures that indicated that the S&P 500 was priced in 2009 to achieve 10-14% annual total returns over the next decade presently indicate estimated 10-year nominal total returns of only about 2.7% annually. That’s up from about 2.3% annually last week, which is about the impact that a 4% market decline would be expected to have on 10-year expected returns. I should note that sentiment remains wildly bullish (55% bulls to 19% bears, record margin debt, heavy IPO issuance, record “covenant lite” debt issuance), and fear as measured by option volatilities is still quite contained, but “tail risk” as measured by option skew remains elevated. In all, the recent pullback is nowhere near the scale that should be considered material. What’s material is the extent of present market overvaluation, and the continuing breakdown in market internals we’re observing. Remember—most market tops are not a moment but a process. Plunges and spikes of several percent in either direction are typically forgettable and irrelevant in the context of the fluctuations that occur over the complete cycle. The Iron Law of Valuation is that every security is a claim on an expected stream of future cash flows, and given that expected stream of future cash flows, the current price of the security moves opposite to the expected future return on that security. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history. A corollary to the Iron Law of Valuation is that one can only reliably use a “price/X” multiple to value stocks if “X” is a sufficient statistic for the very long-term stream of cash flows that stocks are likely to deliver into the hands of investors for decades to come. Not just next year, not just 10 years from now, but as long as the security is likely to exist. Now, X doesn’t have to be equal to those long-term cash flows—only proportional to them over time (every constant-growth rate valuation model relies on that quality). A good way to test a valuation measure is to check whether variations in the price/X multiple are closely related to actual subsequent returns in the security over a horizon of 7-10 years. This is very easy to do for bonds, especially those that are default-free. Given the stream of cash flows that the bond will deliver over time, the future return can be calculated by observing the current price (the only variation from actual returns being the interest rate on reinvested coupon payments). Conversely, the current price can be explicitly calculated for every given yield-to-maturity. Because the stream of payments is fixed, par value (or any other arbitrary constant for that matter) is a sufficient statistic for that stream of cash flows. One can closely approximate future returns knowing nothing more than the following “valuation ratio”: price/100. The chart below illustrates this point. [Geek’s Note: Gross value added (essentially revenue of US corporations including domestic and foreign operations) is estimated as domestic financial and nonfinancial gross value added, plus foreign gross value added of US corporations inferred by imputing a 10% profit margin to the difference between total US corporate profits after tax and purely domestic profits. Varying the assumed foreign profit margin has very little impact on the overall results, but this exercise addresses the primary distinction (h/t Jesse Livermore) between normalizing CPATAX by GDP versus normalizing by estimated corporate revenues.] To illustrate these relationships visually, the 3-D scatterplot below shows the TTM profit margin of the S&P 500 along one bottom axis, the TTM price/earnings ratio on the other bottom axis, and the actual subsequent 10-year annual total return of the S&P 500 on the vertical axis. This tornado of points is not distributed all over the map. Instead, you’ll notice that the worst market returns are associated with points having two simultaneous features: not only above-average profit margins, but elevated price/earnings multiples as well. This combination is wicked, because it means that investors are paying a premium price per dollar of earnings, where the earnings themselves are cyclically-elevated and unrepresentative of long-term cash flows. This is the situation we observe at present. It bears repeating that the S&P 500 price/revenue multiple, the ratio of market capitalization to GDP, and margin-adjusted forward P/E and cyclically adjusted P/E ratios remain more than double their pre-bubble historical norms. [Geek’s Note: the estimate above technically uses logarithms (as doubling the bond price and a halving it are “symmetrical” events). Doing so allows other relevant features of the bond such as the maturity and the coupon rate to be largely captured as a linear relationship between log(price/100) and yield-to-maturity]. Put simply, every security is a claim on some future expected stream of cash flows. For any given set of expected future cash flows, a higher price implies a lower future investment return, and vice versa. Given the price, one can estimate the expected future return that is consistent with that price. Given an expected future return, one can calculate the price that is consistent with that return. A valuation “multiple” like Price/X can be used as a shorthand for more careful and tedious valuation work, but only if X is a sufficient statistic for the long-term stream of future cash flows. Margins and Multiples representative measures of future cash flows when investors consider questions about valuation. It’s striking how eager Wall Street analysts become—particularly in already elevated markets—to use current earnings as a sufficient statistic for long-term cash flows. They fall all over themselves to ignore the level of profit margins (which have always reverted in a cyclical fashion over the course of every economic cycle, including the two cycles in the past decade). They fall all over themselves to focus on price/earnings multiples alone, without considering whether those earnings are representative. Yet they seem completely surprised when the market cycle is completed by a bear market that wipes out more than half of the preceding bull market gain (which is the standard, run-of-the-mill outcome). The latest iteration of this effort is the argument that stock market returns are not closely correlated with profit margins, so concerns about margins can be safely ignored. As it happens, it’s true that margins aren’t closely correlated with market returns. But to use this as an argument to ignore profit margins is to demonstrate that one has not thought clearly about the problem of valuation. To see this, suppose that someone tells you that the length of a rectangle is only weakly correlated with the area of a rectangle. A moment’s thought should prompt you to respond, “Of course not—you have to know the height as well.” The fact is that length is not a good sufficient statistic, nor is height, but the product of the two is identical to the area in every case. Similarly, suppose someone tells you that the size of a tire is only weakly correlated with the number of molecules of air inside. A moment’s thought should make it clear that this statement is correct, but incomplete. Once you know both the size of the tire and the pressure, you know that the amount of air inside is proportional to the product of the two (Boyle’s Law, and yes, we need to assume constant temperature and an ideal gas). The same principle holds remarkably well for equities. What matters is both the multiple and the margin. Wall Street—You want the truth? You can’t handle the truth! The truth is that in the valuation of broad equity market indices, and in the estimation of probable future returns from those indices, revenues are a better sufficient statistic than year-to-year earnings (whether trailing, forward, or cyclically adjusted). Don’t misunderstand—what ultimately drives the value of stocks is the stream of cash that is actually delivered into the hands of investors over time, and that requires earnings. It’s just that profit margins are so variable over the economic cycle, and so mean-reverting over time, that year-to-year earnings, however defined, are flawed sufficient statistics of the long-term stream of cash flows that determine the value of the stock market at the index level. As an example of the interesting combinations that capture this truth, it can be shown that the 10-year total return of the S&P 500 can be reliably estimated by the log-values of two variables: the S&P 500 price/book ratio and the equity turnover ratio (revenue/book value). Why should these unpopular measures be reliable? Simple. Those two variables—together—capture the valuation metric that’s actually relevant: price/revenue. If you hate math, just glide over any equation you see in what follows—it’s helpful to show how things are derived, but it’s not required to understand the key points. price/revenue = (price/book)/(revenue/book) Taking logarithms and rearranging a bit: log(price/revenue) = log(price/book) + log(book/revenue) If price/revenue is the relevant explanatory variable, we should find that in an unconstrained regression of S&P 500 returns on log(price/book) and log(book/revenue), the two explanatory variables will be assigned nearly the same regression coefficients, indicating that they can be joined without a loss of information. That, in fact, is exactly what we observe. Similarly, when we look at trailing 12-month (TTM) earnings, the TTM profit margin and P/E ratio of the S&P 500 are all over the map. When profit margins contract, P/E ratios often soar. When profit margins widen, P/E ratios are suppressed. All of this introduces a terrible amount of useless noise in these indicators. As a result, TTM margins and P/E ratios are notoriously unreliable individually in explaining subsequent market returns. But use them together, and the estimated S&P 500 return has a 90% correlation with actual 10-year returns. Moreover, the two variables—again—come in with nearly identical regression coefficients. Why? Because they can be joined without a loss of information; that is, the individual components contain no additional predictive information on their own. Just like the area of a rectangle and Boyle’s Law: price/revenue = (earnings/revenue)*(price/earnings) Again, taking logarithms: log(price/revenue) = log(profit margin) + log(P/E ratio) The chart below shows this general result across a variety of fundamentals. In each case, the fitted regression values have a greater than 90% correlation with actual subsequent 10-year S&P 500 total returns. Let’s be clear here—I’m not a great fan of this sort of regression, strongly preferring models that have structure and explicit calculations (see, for example, the models presented in It Is Informed Optimism to Wait for the Rain). The point is that one can’t cry that “profit margins aren’t correlated with subsequent returns” without thinking about the nature of the problem being addressed. The question is whether P/E multiples, or the Shiller cyclically adjusted P/E, or the forward operating P/E, or price/book value, or market capitalization/corporate earnings, or a host of other possibilities can be used as sufficient statistics for stock market valuation. The answer is no. What we find is that both margins and multiples matter, and they matter with nearly the same regression coefficients—all of which imply that revenue is a better sufficient statistic of the long-term stream of future index-level cash flows than a host of widely followed measures. Emphatically, one should not use unadjusted valuation multiples without examining the relationship between the underlying fundamental and revenues. That is why we care so much about record profit margins here. Note that in each of these regressions, the coefficients could place a low weight on profit margins and other measures that are connected with revenues, if doing so would improve the fit. They could place significantly different coefficients on margins and multiples, if doing so would improve the fit. They just don’t, and like the area of a rectangle and Boyle’s Law, this tells you that it is the product of the two measures that drives the relationship with subsequent market returns.center_img [Geek’s Note: On a 3-D chart where the Z variable is determined by the sum or product of X and Y, a quick way to visually identify the relationship is to view the scatter from either {min(X},max(Y)} or {max(X),min(Y)} as above]. The upshot is that regardless of the metrics used, S&P 500 nominal total returns in the coming decade are likely to be in the very low single digits—from current levels. But remember the Iron Law of Valuation—for a given stream of long-term expected cash flows, as valuations retreat, prospective returns increase. This should be a cause for optimism about future investment opportunities. Unfortunately, not present ones.last_img read more

Every morning at a supermarket called Auchan in ce

first_imgEvery morning at a supermarket called Auchan in central Paris, Magdalena Dos Santos has a rendezvous with Ahmed “Doudou” Djerbrani, a driver from the French food bank.Dos Santos, who runs the deli section of the store, is in charge of supervising the store’s food donations. She sets aside prepared dishes that are nearing their expiration date.Opening a giant fridge, Dos Santos shows what else the store is giving away – yogurt, pizza, fresh fruits and vegetables, and cheese.But giving leftover food to charity is no longer just an act of goodwill. It’s a requirement under a 2016 law that bans grocery stores from throwing away edible food.Stores can be fined $4,500 for each infraction.Food waste is a global problem. In developing countries, food spoils at the production stage. Well-off nations throw it away at the consumption stage. Grocery stores are responsible for a lot of that waste. France is trying to change that with its 2-year-old law.Out back on the store’s loading dock, Djerbrani plunges a thermometer into a yogurt. “I take the temperature of dairy products to make sure they’ve been kept refrigerated,” he says.Djerbrani loads the food into his van and drives it across town to a church, which will distribute it to poor families.Gillaine Demeules is a volunteer with the St. Vincent de Paul charity. She’s getting ready for the weekly food handout.”Tomorrow, we’ll give people soup, sardines, pasta and whatever fresh items they deliver us today,” she says. “We never know what they’re gonna bring.”Across France, 5,000 charities depend on the food bank network, which now gets nearly half of its donations from grocery stores, according to Jacques Bailet, head of the French network of food banks known as Banques Alimentaires. The new law has increased the quantity and quality of donations. There are more fresh foods and products available further from their expiration date.He says the law also helps cut back on food waste by getting rid of certain constraining contracts between supermarkets and food manufacturers.”There was one food manufacturer that was not authorized to donate the sandwiches it made for a particular supermarket brand. But now, we get 30,000 sandwiches a month from them — sandwiches that used to be thrown away,” Bailet says.While the world wastes about one-third of the food it produces, and France wastes as much as 66 pounds per person per year, Americans waste some 200 billion pounds of food a year. That is enough to fill up the 90,000-seat Rose Bowl stadium every day, says Jonathan Bloom, the author of American Wasteland, about food waste in the United States. He says there are different ways of cutting back on food waste. For example, you can start from the end of the chain by banning food in landfills.Bloom says the French law is great, and he would love to see such a policy shift in Washington. But it strikes him as difficult, politically, especially in today’s climate. He knows Americans will be less excited about the government telling businesses what to do.”The French version is quite socialist, but I would say in a great way because you’re providing a way where they [supermarkets] have to do the beneficial things not only for the environment, but from an ethical standpoint of getting healthy food to those who need it and minimizing some of the harmful greenhouse gas emissions that come when food ends up in a landfill,” he says.The French law seem to have encouraged the development of a whole ecosystem of businesses that are helping grocery stores better manage their stocks and reduce food waste, although a formal review is still in the works.Parliamentarian Guillaume Garot wrote the law. He believes the fight against food waste should be as important as other national causes, like wearing seatbelts. Garot says he has been contacted by people from all over the world who want to do the same thing.”It’s changed the supermarkets’ practices,” he says. “They’re more attentive to their environment, and they give more.”But most important, says Garot, is that a supermarket is now seen as more than just a profit center. It’s a place where there has to be humanity. Copyright 2018 NPR. To see more, visit read more