Do the performances of individual chief executive officers matter again? Can we go back to a world where 50% of a stock's direction can be traced to the hard work of a management team and 50% to a sector and its relation to the overall market? Is stock picking making a comeback?
For most of my 36 years of investing we accepted that half of a stock's performance was related to the fortunes of the individual company and half was heavily influenced by the sector the company happened to be a part of.
But with the ascension of index funds and the promotion of sector ETFs, you could easily argue that only a handful of managements are strong enough - you can distill it to FANG and friends - to buck the secular trends, especially because I have seen figures that show that up to 75% of trading is automated or related to ETFs, not companies.
But something is happening this quarter that says, wait, stock picking may be coming back into vogue and that something is the widely disparate stock price performance even within the same sector.
Case in point: oil service. Last Friday Schlumberger (SLB) reported an excellent quarter where it predicted positive momentum both for the second half and all of next year. The company has been buying back shares and preparing for the upturn in international drilling, one that is starting to happen.
Competitor Halliburton (HAL) , on the other hand, turned out to be way too levered to the Permian Basin where the take rate is severely limited by a lack of pipe to take oil and natural gas to market. Schlumberger saw this coming and didn't make as big a deal about the Permian because of the take rate. The result? The stock of Schlumberger hangs in even as Halliburton's shares get slaughtered.
Or how about toys? We have Hasbro (HAS) on tonight. Its management navigated the collapse of Toys R Us in fine fettle. I think it was impossible to see the total collapse of Toys R Us coming but Hasbro's quick reaction to the loss of its chief outlet was swift and decisive. Mattel (MAT) , on the other hand, while equally blindsided has yet to lay out a plan or a vision. It just wallows in disappointment. The stock price reaction is stark and shocking.
Or there's industrial. Last week General Electric (GE) reported a widely-panned quarter with analysts simply not able to get their arms around the continued weakness in power and what seemed to be a degradation in the margins of many of its divisions. This morning Illinois Tool Works (ITW) reported its second quarter in a row of disappointment. I like GE's restructuring but no one ever promised you a rose garden in that thicket. Illinois Tool Works? I am dumbfounded by the company's inability to chart a path different from the previous quarter's fiasco.
Meanwhile Honeywell (HON) , with roughly similar business lines to both ITW and GE, totally shined with both rising margins and a pending restructuring that will bring out even more value.
We have seen tremendous variance in the performance of biotechs and in retailers in the last few months, too, and I believe when both groups report in the coming weeks I expect very different paths. The only stocks that have traded pretty much in lockstep are the banks. When interest rates go higher, as they are right now, all of them move higher. When interest rates are calm or declining, they all go down. There's been no differentiation in the group whatsoever.
But that's been the oddity, not the norm. For those of us interested in the "fundamentals" this disparity, this recognition of management's execution is a godsend. While there is still a huge amount of money going into ETFs of all kinds, stock selection's back in vogue. The only difference from the old days? There are far fewer stock pickers than there used to be, courtesy the index/ETF triumph. No matter, though, there may not be the quantity of stock pickers around, but the quality of stock performance is once again important, a welcome change of pace.
(Schlumberger and Honeywell are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells SLB or HON? Learn more now.)
