The Day Ahead: The Vibe in the Corner Offices

 | Jan 03, 2013 | 8:00 AM EST
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Memo: I am not trading the stock market from an illegal basement in Florida and at the same time writing a dizzying number of minimal value-add notes. Rather, behind the scenes, I am talking with management teams for these three prime reasons: 

  1. Help in making individual stock calls on either the interviewed company or one in its peer matrix.
  2. To gain insight into the true state of business (after five or so interrogations, clear themes begin to emerge).
  3. To get beyond the market's jargon zone, which often clouds judgment on an investment that may be very worthwhile. 

The convos I am presently having are interesting from the standpoint that the tone regarding business conditions has improved from what it was in October and November. In fact, there is a renewed attention on how a business could shape its future earnings and cash flow on its own, as opposed to sitting idle because of the large, black cloud that is a tax-and-spend government.

By no means am I coming at you with the notion that the fallout from the fiscal cliff calamity is no longer a pressing concern in corner offices. It's just that there is a "let's get back to business and winning" attitude among many execs. Here are a few broader thoughts I have gleaned:

  • The implied change in consumer spending patterns (using the two dreadful recent confidence measures) is not yet being completely felt in companies outside of mainstream retailers,
  • Don't underestimate the positive influence of cost deflation (steel and fuel, for example) in helping to alleviate more competitive top lines.
  • Companies are willing to give up price on new product introductions to gain market share in a sluggish demand backdrop, and then extract efficiencies from those product lines (manufacturing, product composition) over future periods.
  • International, and that includes China, has not stabilized to the extent the headlines suggest.

Warming Up to eBay

Clever readers would have detected a touch more optimism in my penmanship on Wednesday. Much like the Federal Reserve, I enjoy dropping hints on potential shifts in strategy.

Keep in mind that I am no perma-bear, preferring to have reasonable clarity on certain factors tracked. This is a direct function of me not being a quick-to-the-draw trader at heart (short-term calls are specifically mentioned as such). The investment horizon for what I do is one to three months, slightly tailored from the equity research days gone by of six to 12 months.

A name that I have continued to do work on is eBay (EBAY), after a suggestion to trade the stock (long) around Black Friday. Now, I fancy that the stock is ripe for the next leg higher as it drives greater profitability from its Marketplace platform because of rising user growth rates and expense leverage (exciting new initiatives to personalize the shopping experience are supporting new-user growth rates), as PayPal expands as a percentage of total sales -- this business is being looked at a trusted friend by retailers, a vastly different story from Amazon (AMZN) and credit card companies, since operating margin expands through scale -- and as the productivity of the business leads to a stronger stance on share repurchases.

Is this stock a cheapie in terms of relative valuation, when considering the start of U.S. austerity? Nope, and that is primarily why the recommendation has been passed in your direction. I want exposure to companies that have accelerating sales and margin trends that are unlikely to reverse (in other words, expansion continues) in 2013, even if U.S. GDP growth slows markedly. My sense is that the Street still has catching up to do with its estimates on eBay.

In becoming constructive on eBay (which is different from wildly bullish; constructive places emphasis on specific company stories), there were two basic assumptions from a macro perspective:

  1. Fiscal-cliff legislation has brought some degree of certainty, and the market is willing to reward that clarity by bumping higher stock valuations. Yes, the debt ceiling is a major looming issue, and so is economic data cliff, but in the here and now, there is enough to recommend a large-cap company with clear operating momentum.
  2. Price is truth, at least for the short term, and price action is a possible tell that an earnings estimate floor has been attained.



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