Welcome to the world of total algos all of the time, when none of the actions of the executives of those companies means anything at all and they trade as if they were super-charged bonds that plunge right along with Treasuries.
It makes sense though. When you look at, say, Clorox, with a five-year net EPS growth of 6% and 3% sales growth, with commodity inflation and logistics crimping last quarter's gross margins by 170 basis points -- from 45.75% to 44% -- you have to say, why should this stock's 2.6% yield sustain it ,given the bond selling onslaught? Do we really want to pay 22x next year's earnings for a company with some of the best, but still anemic, growth versus the industrials?
I liked the Pepsico quarter. It had an acceleration in the area that we were most concerned about two quarters ago: carbonated soda. Sure, the company had to spend to get the growth up. But we saw organic revenue growth at 4.9% -- with year to date growing "only" 3.4%, much better than most in the category -- and it was "mission accomplished" with a placid bond market.
But we sure don't have that now, so Pepsico has very few defensives against an "out of staples" rotation that must occur -- because it always occurs. Although, not usually with this magnitude, because we aren't used to rates screaming overnight with no buyers and tons of sellers. Pepsico has a 3.45% yield, but the 10-year gets you 3.2% and, as we always add, is risk free.
Oh and I don't even know what to say about Colgate: 2.55% yield, 4.76% five-year net growth, and global volume up just 1.5%, so maddeningly inconsistent that it would seem to struggle as an investment versus the Italian 10-year.
So why not throw these away if "everyone else" is, if that's all they are going to give you. Honestly, who needs Clorox's measly dividend against that voluptuous 10-year yield?
That's the question everyone is pondering -- and I have an answer, both short and long term.
Short-term machines, as we know, are in charge. There is so much money run literally by rote, that you are going to be mowed down like attacking soldiers on the first day of the Somme. It's withering interstitial fire and I can't ask anyone to go over the top into that.
That's because-On days like today, the only thing that matters is that rates are having their biggest one day move since President Trump came in -- and its shocking to everyone.
However, rates have a way of attracting buyers and diminishing sellers -- and you get to a level pretty quickly where the machines turn off.
Then you have to look at what's been thrown away, and NOT compare the stocks you like to bonds, but to what can be accomplished by management in this environment.
Look at it like this, in 1989 we owned an apartment in Brooklyn and we decided to rent it and moved to the suburbs. We were making about 6% on the investment.
After a while, I said that's going to be a pretty bad return so we booted the place for a little more than we paid for it. Why not, I was able to get about 5% relatively risk free with the money.
What I didn't count on is that 25 years later, the same apartment would sell for seven times what I sold it for because it appreciated in value.
So, right now, stock holders are deciding whether they want the 2.6% return on the Clorox apartment or the 3.25% return from the 10-year. It looks like an easy choice. But 10 years ago, Clorox's stock traded at $59. It's now at $147. And that's WITHOUT that so-called precious dividend.
The algos don't know about that. The didn't know about the apartment either. Oh, and if you really want the compare, when I bought the apartment, Clorox was at $7. Now, that's the real return the bonds can't give you. It's also the return that no one would possibly care about today, or tomorrow or whenever this squall ends. In reality, though, it's all that really matters.