Stocks limped across the finish line in the green yesterday as traders await the last major economic series before having that holiday nap on the couch. Home builders’ sentiment ticked up slightly for the first time in 5 months, but spirits remain near multi-year lows.
What really matters. Yesterday, Chicago Fed boss Austin Goolsbee said in an interview that he was “confused a bit” about the market’s reaction to last week’s Fed release. All I have to say to that is really… Austin… confused? Confused about what?
Let’s look back at 2022 for a minute. The Fed aggressively raised rates to throw water on out-of-control inflation, pumping the brakes on the economy. Apple, a respected, well-run, broadly held, really big, company lost -26.8% for the year. Do you own Apple stock? You probably do, and you have most likely owned it for a long time, and you plan on holding it for a long time yet. If not Apple, then one of the many other outstanding growth companies that play in the same sandbox as Apple, you name it. The idea is that these companies continue to perform and innovate year after year. They have a knack for not only exploiting their target markets but also finding new and interesting opportunities through innovation and savvy marketing. It is clear that management has a good handle on the company’s comings and goings. I repeat, I am not singling out Apple or recommending it, just that most folks know it… even if they use the competitors’ products. So, it should be clear why people would buy the stock or others similar to it. It should also be clear why people would enter into a long-term relationship with the company. So, what changed in 2022?
Ok, earnings growth of tech did decline somewhat, but only in the wake of explosive growth in the pandemic era. Sales and profitability for most of THAT group was still astounding. Sales struggled back in 2018 for most stocks as they underwent what we call an earnings recession. In 2018, Apple fell by -6.8% in that year, a lot more tolerable than -26.8%. SO, I ask you again, what really changed in 2022? The answer is that the Fed Funds went up by +4.25%. You might ask, “is there some sort of mathematical connection between the two?” The answer to that question is yes… theoretically. This is where things get murky.
I have been in Finance for over 30 years, so I well understand the math behind valuation. A discount rate tied to interest rates goes in the denominator of the present value equation, so when it goes up, the present value, or in this case, the intrinsic value of a stock goes down. I classify this under “it’s just math, stupid.” But I ask you this, did you buy the stock in the first place because you thought that the discount rate was going to go down? I hope the answer is “no way, Mark, I bought it because I expect the company to continue to grow for a long, long time.” Quite right.
So, did anything happen last year that changed your view about the long-term growth prospects of any of those well-loved companies. Well, some of them, yes, but most of them… er, no. That said, it seemed that everyone suddenly became quantitative finance experts last year. If that, then, is the reason why growth stocks were so badly assailed last year, then it would be reasonable for those newly minted financial wizards to be quite happy right now knowing that the Fed Funds rate is going to go down next year… BY THE FED’S OWN ADMISSION. Does it matter if it is -75 basis points or -125 basis points? Well, yes if you actually know the DCF formula and calculate it every month on every stock you own, but I am guessing that you don’t. Here is a little pro tip: the DCF formula can also include a growth component, which happens to be in the numerator, so if you continue to believe that growth in the long-term is solid, and that interest rates will be lower next year, the same math used to justify the stock’s -26.8% decline in 2022, would suggest that the stock may… have some upside. I am now confused why Austin Goolsbee is so confused. Stay focused on what is important!
WHAT SHOULD NOT BE CONFUSING THIS MORNING
Kenvue Inc (KVUE) shares are higher by +5.19% in the premarket after winning a lawsuit against its iconic Tylenol brand. Kenvue, the consumer healthcare spinoff of J&J has a forward PE of 16.61x, which is less than the 23.54x median of its peers. Dividend yield: 3.80%. Potential average analyst target upside: +14.6%.
Accenture PLC (ACN) shares are lower by -1.56% in the premarket after it announced that it beat EPS and Revenue estimates by +4.02% and +0.19% respectively. The company also provided current quarter guidance that was lower than analysts’ expectations, which is why the stock is trading lower in the premarket. In recent weeks, 8 analysts have increased their price targets while none have lowered them. Dividend yield: 1.51%. Potential average analyst target upside: +0.9%.
YESTERDAY’S MARKETS
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