Your Weekly (CSA) Common Sense Advisor Newlsetter with Jeff Voudrie.
US Stock Market Trending Down
Canadian Stk Mkt Trending Up
US Bond Yields Yields Trending Down
Well the U.S. Stock market (SPY, DIA) are back to their all-time highs while Europe struggles.
Interestingly, consensus investor logic seems to be that if the economy does well the stock market will go up (because earnings at companies should go up) AND if the economy does poorly that the stock market will go up (because the Federal Reserve will lower interest rates and/or continue the easy-money policies). Maybe I just don’t get it, but how can both of those be true?
I was talking to a close friend over the weekend that works for a large chemical company here in northeast Tennessee.
It is a specialty chemical company that is about ¼ the size of Dupont. Our discussion was about how difficult it is for a company to grow earnings nowadays since the underlying economy isn’t really growing.
He pointed out that with the China middle-class coming of age over the last decade there was a significant growth catalyst for many large corporations worldwide. As China’s middle class exploded it was like a huge wave coming in.
The wave is now in, though, and the water level is higher as a result. In other words, growth occurs from rising water levels.
Nowadays, there aren’t any big tides coming in to raise the water levels, so growth rates at companies might moderate. So if companies can’t grow their top and bottom line through organic growth, they instead have to resort to growing thru mergers and acquisitions (M&A). And that is what is happening across all industries.
The problem is that the bigger a company gets, the tougher it gets to get the growth you need through M&A. For instance, a $10 Billion company can grow 25% by purchasing/merging with another $2.5 Billion company, whereas a $40 Billion company has to do $10 Billion.
At some point, there are only so many companies in your industry that are available!
The bottom line is that companies are trying to sustain growth rates in the absence of true organic growth.
Personally, I don’t believe that growth through acquisitions should receive the same multiple as organic growth because it isn’t a sign of consumers choosing one company’s product over a competitor.
Regarding positioning, the major themes for the year have not changed….
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|*does not take into account dividends/interest|
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Have a wonderful and Blessed week!.