If we really are in a long period of low to no growth, as many think may be the case -- including many of the bankers I spoke with earlier this week -- it is going to be a lot tougher for investors to earn those double-digit returns than Wall Street has assured us are our birthright.
Investors of a certain age and older have had the long-term 10% returns from stocks beaten into our heads for decades, but we have had incredible tailwinds pretty much since the end of World War II. Charlie Munger touched on this at last year's Daily Journal (DJCO) meeting when he told the assembled groupies, "If you're unhappy with what you've had over the last 50 years, you have an unfortunate misappraisal of life. It's as good as it gets, and it's very likely to get worse. It's always wise to be prepared for it getting worse. Favorable surprises are easy to handle. It's the unfavorable surprises that cause the trouble."
Finding growth going forward is already difficult. When you compare earnings growth to revenue growth for the S&P 500 the past several years, you find a wide gap between the two. Revenue growth has been fairly anemic while earnings have been improved by massive cost-cutting programs and stock buybacks. While this may please shareholders in the short term, it is hard to classify that as real corporate growth.
If you look at the best-performing stocks in the S&P 500 for the past year, you can clearly see the economy is not in a real productive growth mode. The top 20 are dominated by entertainment, processed food, coffee, cigarettes, booze and rental space to store our extra stuff. This is not exactly a list of productive companies that are making a lot of stuff that is going to drive our economy forward. I just do not think an economy based on Netflix (NFLX) and chill with some wine followed by expensive coffee in the morning to kick the hangover away is one positioned for dynamic growth going forward.
Where do we look for growth as investors? I touched on some of this when I discussed looking for 100-to-1 stocks. I think that, inevitably, alternative energy is going to see a lot of money thrown in its direction. I think this is premature and we should have used natural gas as bridge fuel while we put forth a Manhattan Project-type effort to improve the grid and solve storage and transmission problems before moving aggressively into this space, but nobody asked me before setting the so-called green revolution in play. In the early stages I think you avoid the producers of solar and wind energy in favor of the consultants and infrastructure companies, like Ameresco (AMRC) and TRC Companies (TRR), as they will likely see the first wave of government and utility cash. There can be no question that alternative energy will be a great growth industry, but caution is called for at this very early stage of the game.
One industry that I think is going to see huge earnings growth for the next several decades is private equity and alternative investing in general. A slow-growth economy creatures tremendous opportunities for them to acquire assets at bargain prices, cut excess spending, create operational efficiencies and resell to the always-hungry public equity markets at a huge profit five years later. They can buy a core company and then do a series of complementary add-on deals to create a larger, more efficient, more profitable enterprise that can then be sold at several times the cost of the parts. The de-risking of banks creates enormous opportunities in credit markets for buyouts, real estate projects and new venture financing. They are going to be one of the few available sources of funds for infrastructure upgrades and they will end up owning a significant percentage of critical infrastructure projects around the world.
Private equity companies have seen some pretty steep price declines in the past year. The great unload cycle is just about done as they have resold assets they purchased five to six years ago when prices were depressed. Thanks to richly valued public markets, it has been difficult to put capital to work. The capital they have put to work, particularly in the currently depressed energy sector, has fallen further, causing them to take negative marks. This is all going to change as the private equity firms and alternative asset managers will be able to get money to work on very advantageous terms.
The big four private equity firms -- Apollo (APO), Blackstone (BX), Carlyle (CG) and KKR (KKR) -- are all down big in the past year. Blackstone is the best performer with the stock down just 24%, while the other three are all down more than 40%. They all have generous payout policies and high current yields. If you are willing to take a five- to seven-year private equity mindset, then owning the big four PE firms could lead to very attractive returns for aggressive, patient investors.
