By Steve Goldstein
Critical information for the US trading day
Earnings season kicks up a notch this week with results from companies including Bank of America, Goldman Sachs, Netflix and Tesla, before third-quarter results are dumped en masse next week.
Jensen Investment Management is an employee-owned investment management firm that operates only three strategies: quality growth, quality value and global quality growth. Given a “high” parent rating at Morningstar, the firm just offered its advice on three mistakes to avoid as a long-term investor.
The first one comes into play right now — don’t focus too much on earnings. Earnings per stock, they say, gives too short a view of economic health. Instead, they prefer to focus on return on invested capital and return on equity (ROE).
Jensen says it will only invest in companies that have achieved a return on equity of 15% each year for at least 10 consecutive years. “The number can be inflated when companies carry a lot of debt in their capital structure and can rise and fall over the sales cycle, even if the wealth of the company itself is constant. However, over a 10-year period, we believe that ROE paints a more complete picture, providing a more complete assessment of a company’s long-term financial outlook over at least one market cycle,” they say.
Netflix (NFLX), which reports results Wednesday, doesn’t cut the mustard. “It was relatively easy for media companies with huge libraries of content to copy its business model, calling into question its long-term competitive advantage. For us, until it achieves 10 consecutive years of 15% ROE, the jury will be out on its ability to compete with rivals,” they say.
Another company the Jensen team crossed paths with is Zoom Video Communications (ZM). “A company with the right technology at the right time, its share price reflected its fortunes during the COVID-19 pandemic, establishing itself as a leading provider of digital meeting rooms. But with companies like Microsoft and Google offering similar products, it is not clear what lasting competitive advantage Zoom possesses,” they say.
Which companies do? The Jensen team highlights Broadridge ( BR ), an investor communications and trade processing company that it owns. “Broadridge has unparalleled access to investors and processes approximately 80% of proxy votes in North America. This competitive advantage would be difficult for a challenger to overcome. The company is also relatively unaffected by market cycles, as its 98% customer retention rate generates strong recurring revenue,” says the. Another featured company is Marsh McLennan (MMC), the insurance broker and risk management company.
MarketWatch ran a screen of S&P 500 and Nasdaq 100 members in FactSet that cleared returns on common equity of at least 15% for the last ten years. Including Broadridge and Marsh McLennan, there were 79 companies that met those criteria, led in sales by Apple ( AAPL ), which Jensen says it owns. Interestingly, Jensen owns Microsoft, which did not meet this screen, although it should be noted that Jensen’s 15% ROE number does not exclude one-time items.
Ticker Company Annual sales, in millions of dollars ROCE in 2022 (%) ROCE in 2021 (%) AAPL Apple Inc. 383,933.0 175.5 147.4 UNH UnitedHealth Group Incorporated 359,982.0 26.9 25.2 COST Costco Wholesale Corporation 242,290.0 30.6 27.9 KR Kroger Co. 148,038.0 22.8 17.2 VZ Verizon Communications Inc. 135,000.0 24.6 29.5 TGT Target Corporation 108,008.0 23.1 50.9 UPS United Parcel Service, Inc. Class B 95,859.0 67.9 172.9 PEP PepsiCo, Inc. 91,616.0 53.7 51.7 LMT Lockheed Martin Corporation 67,393.0 56.7 74.4 ACN Accenture Plc Class A 64,111.8 33.0 32.3 DE Deere & Company 61,353.0 36.9 38.0 NKE NIKE, Inc. Class B 51,433.0 34.6 43.1 BBY Best Buy Co., Inc. 44,372.0 48.8 64.5 LYB LyondellBasell Industries NV 43,053.0 31.7 56.5 GD General Dynamics Corporation 40,859.0 18.7 19.6 Source: FactSet
The company discussed the Magnificent Seven. “All seven of these stocks had declined during 2022, but instead of panic selling, we held Microsoft (MSFT) and Apple (AAPL) because we believed in their long-term prospects. By the end of June 2023, both were share shares traded above their price at the beginning of 2022. All the other shares of the group, except Nvidia, remained below where they were at the beginning of 2022. We believe that this confirms our belief in the resilience of companies , that meet our investment criteria,” they say.
Granted, that means it missed out on Nvidia’s (NVDA) stellar returns. “Nvidia has benefited from significant AI hype this year, and an investor astute or lucky enough to buy that stock in early 2023 will have seen the position deliver a 194% return through the end of May. Some investors will certainly have made a lot of money from it, but it is difficult to build a strategy out of such trades,” they add.
The market
After a solid 0.5% gain last week for the S&P 500 SPX , U.S. stock futures ( ES00 ) ( NQ00 ) edged higher as the 10-year Treasury BX:TMUBMUSD10Y yield rose another 6 basis points. Polish assets rose after pro-EU parties appeared to have won Sunday’s election.
The sum
Israel and Hamas both denied agreeing to a humanitarian ceasefire, showing that diplomatic efforts are underway but also pointing to their limited effectiveness.
The economic calendar for Monday shows the Empire State Manufacturing Index at 8:30 a.m. Eastern, which fell to -4.6 in October, ahead of Thursday’s much-anticipated speech from Fed Chairman Jerome Powell.
Pfizer ( PFE ) shares fell after the drug giant cut its sales outlook, citing declining adoption of the COVID vaccine it makes with BioNTech ( BNTX ). Rival Moderna ( MRNA ) saw its stock fall 4%.
Charles Schwab & Co. (SCHW), whose shares have fallen 38% this year on concerns about deposit outflows, missed earnings estimates in a week that will include more bank earnings as well as Netflix and Tesla results.
Debt-ridden drugstore chain Rite Aid ( RAD ) filed for bankruptcy.
Manchester United ( MANU ) shares fell earlier after Qatari banker Sheikh Jassim withdrew his bid, paving the way for a partial share buyout by British billionaire Jim Ratcliffe.
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Top tickers
Here were the most active stock exchange tickers on MarketWatch from 6 a.m. Eastern.
Ticker Company name TSLA Tesla AMC AMC Entertainment NVDA Nvidia MANU Manchester United NIO Nio AAPL Apple GME GameStop JAGX Jaguar Health TTOO T2 Biosystems TPST Tempest Therapeutics
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-Steve Goldstein
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10-16-23 0839ET
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