Eq: Large Cap
(New York)
One of the pioneers of smart beta investing has just gone on the record tearing down the concept. A long time quant strategist, Vincent Deluard, who helped build early smart beta funds, has lost faith in the strategy as he has seen fund providers use statistics to disingenuously prove all manner of strategies using selective back-testing. Deluard even built model portfolios to show how “dumb” constructions could lead to good results, and “smart” constructions could lead to poor results.
FINSUM: We don’t think smart beta is necessarily “smart” or “dumb”. In the end, these are really just strategies that are only as “good” as the market circumstances they are applied to. Smart and dumb is ultimately about the buyer of the funds.
(New York)
Morgan Stanley has just put out a very bold prediction. The investment bank has picked a stock which it says will have a $1 tn market cap within a year. That stock is Microsoft. The stock current has a cap of around $740 bn and has risen more than 40% in the last year. But the big catalyst for a move higher is the success of its cloud computing division, Azure. Morgan Stanley summarizes its view this way, saying “Revenue drivers including Azure (Microsoft emerging as a public cloud winner), data center (share gains and positive pricing trends), Office 365 (base growth and per user pricing lift) and the integration of LinkedIn should drive durable double-digit revenue growth over the next three years”.
FINSUM: While bullish, this does not seem at all unlikely.
(New York)
Equity investors need to accept a new truth, says the Wall Street Journal—that earnings and fundamentals have given way to a new “boss” of the markets. Instead of stocks trading based on the performance of companies, they are now trading almost squarely on movements in rates. Recent equity performance could not have made the new reality more clear—companies saw outstanding earnings performance, yet stocks have simply muddled through. The reason why—yields have been moving higher on Treasury bonds.
FINSUM: The current obsession with yields reminds us of the 2014-2015 mode for stocks, when everyone was tied up on whether the Fed would start hiking or not.
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(New York)
If there was ever a counterintuitive sentence about stocks, it is the title to this article. However, that is what has proven to be true in the past. According to research produced by the Wall Street Journal, stock markets tend to perform poorly after great earnings seasons. The study found that over the last seven years, both US and European stocks tend to perform poorly following great earnings. Perhaps even more interestingly, when earnings undershot estimates, stocks tended to perform better than average.
FINSUM: This is a tough one to explain except by taking account of markets’ pre-pricing of earnings. Nonetheless, something of which to be mindful.
(New York)
Morgan Stanley has put out a unique list of stocks. The bank has published a piece outlining what it sees as the thirty best stocks for the medium term. The picks are based on having a sustainable competitive advantage and were viewed as having the best chance in this sideways-moving market. Some of the picks include: Accenture, Alphabet, BlackRock, BNY Mellon, Charles Schwab, Dollar General, JP Morgan, Microsoft, Salesforce.com.
FINSUM: This is a very interesting list, especially because it is cross-sector (which does not happen as much given the sector-first structure of equity research). It was also particularly useful that many of these names are in wealth or asset management, allowing advisors special insight.
(Seattle)
How Amazon plans to use Whole Foods as part of its broader strategy is becoming clearer today. The company has announced that it will begin to offer significant discounts on hundreds of products, in addition to special offers, for Amazon Prime members who shop at Whole Foods. The company already has great Prime penetration of Whole Foods shoppers (75%), but less than 20% of Amazon Prime members shop at Whole Foods. The perks are a way to lure more Prime members into Whole Foods. The company seems likely to use the increased sales to offset any cost rises to its Prime service.
FINSUM: This seems like a good idea as the move will feed both its Prime business and Whole Foods.