When the market started percolating again on Thursday, I said, "That's it, I am going to take the euphoria head on. I am going to slap it upside the head and teach it a lesson."
How will I do it?
Why not just defrock the big percentage gainers in the Standard & Poor's. Just assassinate them, exposing how they didn't deserve to go up at all, let alone have gigantic moves and lead the averages.
I've decided to undress the top five stocks.
Moreover, their conference calls are basically primers for what's happening, what makes it so hard to be bearish in this environment.
Accenture, an amazing company run by the brilliant Julie Sweet, crushed the estimates and raised its forecast in dramatic fashion. Their bookings rose an astounding 25% -- no one was looking for anything near that -- and guided up from $7.80 to $8.10 all the way to $8.17 to $8.40. We are in the midst of an extraordinary pandemic with joblessness that's unfathomable, but this company made so much money that it want back 3.3 million shares for $769 million, simply because it made so much money at a time when Wall Street didn't respect its stock and it was a bargain for those who knew. The company boosted its dividend 10%, giving you 88 cents per quarter.
Accenture is not a small company; 514,000 work there. New bookings were 12.9 billion, much larger than almost all of the high-flying companies that are loved on the Nasdaq, and certainly more than any special purpose acquisition company. They have a cash balance of $8.6 billion up from $8.4 billion. You never saw those kinds of numbers at the beginning of 2000, when so many companies were about to go under, even as their stocks roared higher. Margins were superb-Sweet runs a tight ship-and the company benefited from lower spend on travel and leisure -- the pandemic and Zoom (ZM) are enemies of the profligate and wasteful.
So, on the face of it, those are the kinds of numbers you should pay up for. You can't say Accenture is a fly-by-night. If anything it's a hidden gem.
Now, let's get to how Sweet made all of that money. Most companies need to get digitized and digitized fast. They need to bring in outfits like Salesforce.com (CRM) or Workday (WDAY) to get on the cloud. They need cloud security like you would get from Zscaler (ZS) or Okta (OKTA) . Do they go with Amazon (AMZN) Web Services? Which dashboard do they need?
Most CEOs don't know anything about these things. They know their business. Sure, they can call Marc Benioff at Salesforce, or Aneel Bhusri at Workday and say, "swing by."
Do they know Andy Jassy at Amazon Web Services? Or Todd McKinnon at Okta or Jay Chaudhry at Zscaler and say, "Guys, get me a secure cloud, will you" -- after they have been on premises for so long with closed systems. You think they know Rob Bernshteyn well enough to ask him if he can craft a procurement system that can save millions? How about workflow? Sure, maybe they met Bill McDermott when he was running SAP and they know him at ServiceNow for help.
But the fact is most CEOs know their business and just their business. They like their information technology people, but they tend to be wedded to a hodge podge bunch of legacy systems. Not good enough.
So what do you do?
If you are Halliburton (HAL) -- one of the best oil services companies, knows its business cold -- you call Accenture. Sweet helped them digitize everything: cloud, finance, supply chain, you name it. They have no choice. As management said on the call, "Every business is not a technology business and exponential technology change is going to continue and now it's about the speed." Companies, they say, "need to accelerate their digital transformation across their enterprises, move to the cloud, address cost pressures, build resilience and security, address their operations and customer engagement to a remote everything environment and changing their expectations and fine new sources of growth."
If you are Halliburton, a terrific company so challenged by decline in exploration and production by its cash-strapped client base, you need to do all of those things. You need Accenture.
In shore, I wanted to shoot this company's stock price down, show why Accenture's not worth $175 billion. Instead, I realized that Julie Sweet may be the foremost proselytizer of the digital transformation and cloud engagement that nobody's ever heard of.
Accenture's a buy.
OK, how about Lennar, the giant homebuilder. Here's a hugely cyclical business that has to be on the ropes with almost 900,000 people filing for unemployment as Covid cases continue to skyrocket and Washington can't get its act together for a stimulus package. In the old days, a homebuilder, even one the size of Lennar, would be worried about its survival.
Nope. Lennar is a cash machine, generating $2 billion of homebuilding cash flows for the quarter and $3.8 billion for the year. Diane Bissette, the company's CFO, says it all when she said, "Our confidence in our operating platform and ongoing cash flow generation enabled us to increase our annual dividend to $1 per share from 50 cents per share."
Orders, up 16% to 15,214. Order volume, $6.3 billion up 22%. Book value is $57 up from $50.49, which is the worth of the company's land given that it has sold almost all of the houses it has. Nope, the company isn't about to go under. Instead it paid down $1.2 billion in this quarter alone and $2.1 billion during the year. Best of all, despite all that you hear about the increase in raw materials, gross margin was 25% up 350-basis points.
What drove this? Board Chairman Stewart Miller eloquently tells you in the preamble to the call: "Let me say that the housing market is simply very strong and demand for homes, new and existing, is greater than limited supply. It has simply never been this easy to sell as many homes as we would like in every market and every price range across the country."
How is this possible in the midst of a historic job-killing pandemic? "Low mortgage rates and ample deposit money from savings from vacations not taken, movies not seen, restaurants not visited and of course stimulus dollars from the government are driving customers to purchase a home, a larger home, a home with a yard and office, a nicer kitchen and a place to call their own."
So many bears and skeptics will ask, this doesn't this have to be the top? A top is when companies are overbuilding to meet demand when wages are collapsing and rates are skyrocketing. But rates for jumbo loans are almost as low as conforming loans, under 3%, in other words historically great rates and yesterday Fed Chief Jerome Powell said they are going to stay that way until 2023. Covid, Stewart explains, has made the home a refuge, "the hub of everyone's life."
Where's the red flag? Where's the cliched canary in the coal mine? I don't know, because, as Stewart says, "The underproduction of homes for the past 10 years has created a housing shortage," at the same time as the "millennial generation, which postponed family formation over the past 10 years, has pivoted quickly and is making up ground towards traditional family formation trends." Buying a home, he says, isn't some short-term reaction to Covid, but "a hard-wired way of life."
In other words, it's secular, not cyclical and gaining ground. Lennar's stock, at nine-times earnings, is a buy.
So, I went in to tamp the froth, to slay the euphoria, in light of our nation's grim holiday tidings, and what did I come up with? Two stocks that make a ton of sense in anyone's portfolio.