The Irrelevant Investor’s post “Unintended Consequences” is primarily about moral hazard, but it includes an anecdote about buying stocks that I want to discuss in more detail.
The author mentions two stocks – video conferencing provider Zoom Video Communications and remote medical adviser Teladoc Health Inc. – that are ideally positioned for the ongoing quarantine. He writes, “First-level thinking says that Zoom and Teladoc will benefit from the lock down, so we should buy their stock. Second-level thinking says that everyone already knows this, so maybe we shouldn’t.”
I see this all the time. Investors recognize that a company is benefitting from a trend and then blindly buy it as if they were the first ones to have the idea. In the case of Zoom, the stock is trading at 1,925 times trailing earnings (not a typo) after climbing 115 per cent year to date.
A trader might be able to make a profit on Zoom by buying it, staring constantly at the share price, and selling when the momentum fades. But for investors with longer time horizons, it is almost certainly too late – the stock is too expensive.
At the base level, successful investing involves buying the strongest, fastest-growing future stream of earnings and dividends at the lowest possible price (in terms of valuations). Zoom will likely see remarkable profit growth this year – but what about the year after that? Almost 2000 times trailing earnings is almost certainly too high a price to pay in light of that uncertainty.
There is always a balancing act between price and future growth prospects. There is a price where any asset, no matter how poor the quality, is a promising investment. Conversely there is also a price at which any asset, no matter how great, should be sold.
— Scott Barlow, Globe and Mail market strategist
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Three situations where you should totally keep your money out of the stock market
The bull market that ended abruptly in late February has left us with some bad habits. Strong returns from stocks, coupled with low rates on savings vehicles, led some people to put money in the markets when it should have been in something safe, such as guaranteed investment certificates or savings accounts. Rob Carrick provides three examples that come from recent reader contacts. (for subscribers)
Warren Buffett loves this number – here’s why you should, too
Bargain hunters might want to pay attention to an often-overlooked number – retained earnings – among the beaten down rubble in the stock market, says John Reese. He explains why this favourite metric of Warren Buffett is worth paying attention to, and screens for stocks that score highly. (for everyone)
Investors bet giant companies will dominate after crisis
An economic downturn almost always favors giants like Microsoft, Apple and Amazon, the country’s three biggest companies. But the demand for their shares has only been amplified by a crisis that seems almost tailor-made for their future success. Their combined value rose more than three-quarters of a trillion dollars over the past month — more than the cumulative gain of the bottom 300 stocks in the S&P 500. Matt Phillips of The New York Times tells us more. (for subscribers)
Can gold love a coronavirus crisis?
Gold loves a crisis, the old adage goes. And with prices up 13 per cent this year to their highest since 2012 and many predicting further gains as investors search for safe places to put their money, it looks true for the coronavirus crisis so far. But, as individuals and countries alike see a drop in income, traditional gold consumers in India and China are buying less and central banks are cutting purchases. Without them, gold’s run higher may be hard to sustain. Read more in this analysis from Reuters (for subscribers)
Equity valuations rebounding, with bleak earnings a wild card
The sharp rebound in equities has pushed widely used measures of valuing U.S. shares to their highest level in years. Strategists say price-to-earnings ratios could go higher still given monetary stimulus, but huge uncertainty around earnings this year because of the economic fallout from the coronavirus makes for challenges in valuing shares. Read more from Reuters. (for subscribers)
Others (for subscribers)
Number Cruncher: Fifteen Canadian stocks that prioritize cash flow
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Ask Globe Investor
Question: The yields on preferred share exchange-traded funds look very appealing. The BMO Laddered Preferred Share Index ETF (ZPR), for example, yields about 6.7 per cent, and the iShares S&P/TSX Canadian Preferred Shares Index ETF (CPD) yields about 6.1 per cent. Do you think their dividends are sustainable?
Answer: I’m skeptical. The reason preferred yields are so high is that preferred share prices have tumbled (prices and yields move in the opposite direction). And one reason prices have tumbled is that the market is dominated by rate-reset preferreds, whose dividends are adjusted every five years based on a predetermined yield spread over the five-year Government of Canada bond yield.
With the coronavirus flattening the global economy and central banks slashing interest rates, the five-year bond yield has plunged to a near-record low of about 0.44 per cent (as of Friday afternoon). That’s a problem because, if bond yields remain low, companies that reset their preferred dividends over the next few years could reduce their payouts.
We saw this the last time government bond yields went for a skid. ZPR, for example, was paying 5.3 cents a month in dividends at the start of 2014. By September of 2017, ZPR’s monthly payout had dropped to 3.5 cents – a 34-per-cent haircut.
The ugly action in the preferred share market suggests investors are fearing a repeat performance. Through the first three months of 2020, the S&P/TSX Preferred Share Index posted a total return – including dividends – of negative 22.8 per cent. The drop may also reflect general worries about the economy and the financial health of certain companies.
I’m not saying preferred shares are necessarily a bad investment right now or that the dividend reductions will be as severe this time; the shares might turn out to be a good bet if the world gets back to normal and bond yields rebound. Indeed, preferred prices have recovered from their lows in late March, signalling that some investors see opportunity.
But higher yields come with higher risks, and the risk right now is that some rate-reset preferreds will reduce their payouts at some point in the future. So keep that in mind if you’re tempted by the high yields of preferred share ETFs.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
Tim Shufelt will take a closer look at small caps, which were hit harder in the downturn and haven’t recovered as much in the rebound.
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Compiled by Globe Investor Staff
Jeff Bezos' investment into Beacon is 'personal' and not tied to Amazon, UK firm's CEO says – CNBC
Jeff Bezos’ investment in digital freight forwarding and supply chain finance firm Beacon is a personal one, the U.K. start-up’s CEO told CNBC Wednesday after the closing of its $15 million Series A funding round.
“I should be really clear that this investment is from Mr. Bezos directly. It’s a personal investment, not one made by Amazon. Amazon is aware and had to approve of it, but there is no commercial relationship and this has no direct tie with Amazon itself and it’s important to make that distinction,” Beacon CEO Fraser Robinson said.
The backing from Amazon CEO Bezos, who has invested in numerous start-ups, is set to be a major boost for the company in its stated mission to be a global leader in logistics and trade finance. Its investors also include former Google Chairman Eric Schmidt and Uber founders Travis Kalanick and Garrett Camp. Its current executives were previously in senior roles at Uber and Amazon.
Beacon, based in London and founded in 2018, wants to disrupt the global shipping industry by using A.I. to find the cheapest shipping routes while offering customers supply chain financing to help cashflow.
The freight forwarding industry, or how goods move from the manufacturer to market, is worth $1 trillion. Robinson sees Beacon’s role as meeting the need for the industry to become more digitized.
“We were surprised by how analogue the existing logistics industry is,” he said. “By automating and streaming and creating huge efficiencies within our own operating platform, that means we can provide a vastly superior service to our customers — with automated updates, superior route optimization, and the working capital to fulfil what we see as one of the greatest problems created by logistics, which is cashflow.”
Asked about the potential for established shipping giants like DHL and Maersk to use the same technology and sharpen the competition, Robinson said he expects the industry to digitize itself.
“It’s a trend that is already happening and has been going on for a couple years,” he said, but noted that “it’s much more difficult than people realize for large companies to retrofit technology and make themselves more efficient overnight. Typically they’re either buying technology or buying businesses to help them get there.”
“By starting with a technology focus first and foremost and being data centric, I think you have a better shot at a more holistic solution that’s more scalable and more effective,” Robinson said.
He also sees Uber Freight, Uber’s trucking arm for the shipping industry, as potentially a useful complement to Beacon’s wider business, rather than competition. That’s because the trucking operation is just one piece of the longer and more complex process of getting goods across land, sea and air to their final destinations. Uber last year announced it would invest $200 million and hire thousands of engineers to boost its freight platform.
“The truckload piece, the Uber Freight piece, is a component of what we do, and they can and will be a great partner for us as part of the solution we provide, but it’s fundamentally a very different business,” Robinson said.
SoftBank launches $100 million fund investing in 'people of color' – TheChronicleHerald.ca
By Sam Nussey
TOKYO (Reuters) – SoftBank Group Corp 9984.T> is launching a $100 million fund to invest in “companies led by founders and entrepreneurs of color”, in the latest corporate action as protests roil the United States.
Described as SoftBank’s bid to improve diversity, “we have to put money behind it, set plans, and hold ourselves accountable,” SoftBank’s Chief Operating Officer Marcelo Claure, who will head the fund, wrote in a letter to employees on Wednesday.
Named the “Opportunity Growth Fund”, its total initial size is less than a typical single investment by the $100 billion Vision Fund, which is headed by Claure’s rival Rajeev Misra, and will focus on African Americans and Latinos in the U.S..
In addition to leading restructuring at floundering office space startup WeWork, Claure runs a fund investing in Latin America. He and Misra are seen as potential successors to Chief Executive Masayoshi Son.
Claure wrote that Tokyo-headquartered SoftBank was also establishing a “dedicated diversity and inclusion program”.
SoftBank’s management is overwhelmingly male, with the company planning to nominate its first female board director at a shareholder meeting later this month.
While spanning a wide range of nationalities, only four of 30 investors listed on Vision Fund’s website are female.
Companies including foreign firms like SoftBank have made public statements following the worst U.S. civil unrest in decades as the death of an unarmed black man reignites the issue of police brutality against African Americans.
Sony Corp 6758.T> this week pushed back an event for its upcoming PlayStation 5 console, saying “we want to stand back and allow more important voices to be heard.”
(Reporting by Sam Nussey; Editing by Kirsten Donovan)
WhatsApp, PayPal invest in Indonesian super app Gojek – Reuters Canada
SINGAPORE (Reuters) – Facebook Inc (FB.O) messaging platform WhatsApp and Paypal Holdings Inc (PYPL.O) on Wednesday said they have invested in payment and ride-hailing firm Gojek as part of the Indonesian firm’s ongoing fundraising round.
WhatsApp and Paypal did not disclose the size of the investment or the stakes they would receive.
WhatsApp Chief Operations Officer Matt Idema in a blog post said the messaging platform would work with Gojek “to support the growth of millions of small businesses”.
Paypal said in a statement that its payment capabilities would be integrated into Gojek’s services.
Reuters reported in April that Facebook was in talks with Gojek about an investment and was working with three e-wallet operators in Indonesia, including Gojek’s GoPay, to launch mobile payment services in Southeast Asia’s largest economy.
The same month, WhatsApp invested $5.7 billion in the digital arm of India’s Reliance Industries Ltd (RELI.NS).
Gojek was founded in 2010 as a ride-hailing firm and has since evolved into a one-stop app through which users can make online payments and order food and services. It is active in four markets and owns an e-wallet startup in the Philippines.
The firm is valued at $10 billion, sources have said. It closed a $1.2 billion funding round in March, showed to an internal memo reviewed by Reuters.
“With Facebook and WhatsApp being the dominant social and messaging platforms in Indonesia, this investment cements Gojek’s position as the leading super app for more than 300 million people,” said Hian Goh, partner at Openspace Ventures, which lead Gojek’s series A funding round in 2014.
Indonesia is one of WhatsApp’s five biggest markets, with over 100 million users.
Reporting by Fanny Potkin; Editing by Himani Sarkar and Christopher Cushing
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