As Morgan Stanley (MS) shares plummet today - MS is the worst performer in the S&P 500 in early trading - it brings to mind Ford's (F) performance from yesterday. F shares underperformed every one of the 504 other stocks in the S&P 500 with a 5.2% decline Wednesday. Both stocks are being sold off on poor earnings. In a world where geopolitics, domestic politics and international trade are cited by so-called experts (who are not expert in any of those fields) as reasons for stock market declines, the performance of Ford and Morgan Stanley shares this week is actually reassuring. Poor earnings are supposed to drive poor stock performance. I'm glad somebody is paying attention.
During earnings season, though, analysts' brains are tested by one of the most overused, overrated strategies for superficial analysis of market sectors - the read-through. We'll analyze results from one company and use that as a gauge for the other companies in the industry.
When GM (GM) pre-reported a terrific fourth quarter and a strong 2019 outlook at its Capital Markets Day last Friday (as I noted in my RM column that day), F shares popped in sympathy, rising 1.7%. Similarly, when Goldman Sachs (GS) reported much stronger than expected earnings Tuesday, Morgan Stanley shares moved in sympathy, rising 1% that day.
Well, if you bought MS or F on the basis of great news from their direct competitors, you are much poorer today. That is the key takeaway here: read-throughs are useless.
Last night's sad news of the passing of Vanguard founder Jack Bogle was a chance to remember him a true innovator and one of the few in the over-hyped world of finance whose impact actually outshone his public persona. Mr. Bogle was more responsible than any other individual for the boom in ETFs, and that type of top-down investing clearly has its place.
But if you are investing in individual stocks you have to do individual research. It's that simple. So, forget the read-throughs and don't trade earnings plays based on what has happened to other stocks.
How can the fortunes of Ford and GM and Goldman Sachs and Morgan Stanley diverge so wildly? Two main reasons:
Management competence. Ford's press release yesterday reminded me of the first Ford press releases I read when I started following the autos for Lehman in 1992. Ford's bullet point on Europe included "Redesign to strengthen competitive position, improve profitability and returns." Seriously? They have been saying that for 26 years. Mary Barra had the intestinal fortitude to pull GM out of Europe by selling Opel/Vauxhall to PSA Peugeot Citroen (PUGOY) in 2017. The next original idea Ford's CEO Jim Hackett hatches may just be his first.
GM walks the walk when it comes to the transition from an automaker to a mobility services provider with multi-billion dollar investments from Honda (HMC) and SoftBank (SFTBY) in its Cruise autonomous vehicles version. Ford bought shared ride company Chariot in 2016 and closed it down last week, and spent $100 million on an e-scooter company, Spin, that seems to be a distant third to market leaders Lime and Bird. I will refrain from saying "GM good; Ford bad" or something that simple, but I am not even considering buying F stock for its massive 7.3% yield, so that tells you what I think about the company's leadership team.
Business makeup. While it is true that Ford and GM both make bundles of cash on full-size pickups and SUVs, Goldman and Morgan Stanley have very different business compositions.
Goldman is a bond trading powerhouse. Is, was and always will be. Even in a horrible market for fixed income trading, Goldman generated $822 million in revenues in the fourth quarter in its FICC division, well above Morgan Stanley's disappointing $563 million output. MS is a third-tier player, at best, in fixed income.
Conversely, Morgan Stanley has the old Smith Barney business, and thus its powerful wealth management business - which generated $17.2 billion in revenues in 2018 - dwarves Goldman's investment management business, which recorded only $7.0 billion revenues in 2018. In a time of market turmoil you want to bet on a firm of traders not on a firm of asset managers.
Understanding these nuances could have saved you tons of money in your early-2019 trading, and hopefully you will apply that discipline going forward. Your average Walmart (WMT) is never going to look like a Target (TGT) , Snap's (SNAP) Snapchat is never going to be able to generate the buzz of Facebook's (FB) Instagram--as evidenced by the fact that a single picture of a brown egg now has more than 47.3 million likes - and walking into an Amazon-owned (AMZN) Whole Foods Market is never going to feel like walking into a Kroger (KR) . Embrace the differences.
Knowledge is power. Do your homework and you won't be surprised during earnings season.
(Goldman Sachs, Facebook and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GS, FB or AMZN? Learn more now.)
