by Adam Hartung | Jan 17, 2016 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Stocks are starting 2016 horribly. To put it mildly. From a Dow (DJIA or Dow Jones Industrial Average) at 18,000 in early November values of leading companies have fallen to under 16,000 – a decline of over 11%. Worse, in many regards, has been the free-fall of 2016, with the Dow falling from end-of-year close 17,425 to Friday’s 15,988 – almost 8.5% – in just 10 trading days!
With the bottom apparently disappearing, it is easy to be fearful and not buy stocks. After all, we’re clearly seeing that one can easily lose value in a short time owning equities.
But if you are a long-term investor, then none of this should really make any difference. Because if you are a long-term investor you do not need to turn those equities into cash today – and thus their value today really isn’t important. Instead, what care about is the value in the future when you do plan to sell those equities.
Investors, as opposed to traders, buy only equities of companies they think will go up in value, and thus don’t need to worry about short-term volatility created by headline news, short-term politics or rumors. For investors the most important issue is the major trends which drive the revenues of those companies in which they invest. If those trends have not changed, then there is no reason to sell, and every reason to keep buying.
(1) Buy Amazon
Take for example Amazon. Amazon has fallen from its high of about $700/share to Friday’s close of $570/share in just a few weeks – an astonishing drop of over 18.5%. Yet, there is really no change in the fundamental market situation facing Amazon. Either (a) something dramatic has changed in the world of retail, or (b) investors are over-reacting to some largely irrelevant news and dumping Amazon shares.
Everyone knows that the #1 retail trend is sales moving from brick-and-mortar stores to on-line. And that trend is still clearly in place. Black Friday sales in traditional retail stores declined in 2013, 2014 and 2015 – down 10.4% over the Thanksgiving Holiday weekend. For all December, 2015 retail sales actually declined from 2014. Due to this trend, mega-retailer Wal-Mart announced last week it is closing 269 stores. Beleaguered KMart also announced more store closings as it, and parent Sears, continues the march to non-existence. Nothing in traditional retail is on a growth trend.
However, on-line sales are on a serious growth trend. In what might well be the retail inflection point, the National Retail Federation reported that more people shopped on line Black Friday weekend than those who went to physical stores (and that counts shoppers in categories like autos and groceries which are almost entirely physical store based.) In direct opposition to physical stores, on-line sales jumped 10.4% Black Friday.
And Amazon thoroughly dominated on-line retail sales this holiday season. On Black Friday Amazon sales tripled versus 2014. Amazon scored an amazing 35% market share in e-commerce, wildly outperforming number 2 Best Buy (8%) and ten-fold numbers 3 and 4 Macy’s and WalMart that accomplished just over 3% market share each.
Clearly the market trend toward on-line sales is intact. Perhaps accelerating. And Amazon is the huge leader. Despite the recent route in value, had you bought Amazon one year ago you would still be up 97% (almost double your money.) Reflecting market trends, Wal-Mart has declined 28.5% over the last year, while the Dow dropped 8.7%.
Amazon may not have bottomed in this recent swoon. But, if you are a long-term investor, this drop is not important. And, as a long-term investor you should be gratified that these prices offer an opportunity to buy Amazon at a valuation not available since October – before all that holiday good news happened. If you have money to invest, the case is still quite clear to keep buying Amazon.
(2) Buy Facebook
The trend toward using social media has not abated, and Facebook continues to be the gorilla in the room. Nobody comes close to matching the user base size, or marketing/advertising opportunities Facebook offers. Facebook is down 13.5% from November highs, but is up 24.5% from where it was one year ago. With the trend toward internet usage, and social media usage, growing at a phenomenal clip, the case to hold what you have – and add to your position – remains strong. There is ample opportunity for Facebook to go up dramatically over the next few years for patient investors.
(3) Buy Netflix
When was the last time you bought a DVD? Rented a DVD? Streamed a movie? How many movies or TV programs did you stream in 2015? In 2013? Do you see any signs that the trend to streaming will revert? Or even decelerate as more people in more countries have access to devices and high bandwidth?
Last week Netflix announced it is adding 130 new countries to its network in 2016, taking the total to 190 overall. By 2017, about the only place in the world you won’t be able to access Netflix is China. Go anywhere else, and you’ve got it. Additionally, in 2016 Netflix will double the number of its original programs, to 31 from 16. Simultaneously keeping current customers in its network, while luring ever more demographics to the Netflix platform.
Netflix stock is known for its wild volatility, and that remains in force with the value down a whopping 21.8% from its November high. Yet, had you bought 1 year ago even Friday’s close provided you a 109% gain, more than doubling your investment. With all the trends continuing to go its way, and as Netflix holds onto its dominant position, investors should sleep well, and add to their position if funds are available.
(4) Buy Google
Ever since Google/Alphabet overwhelmed Yahoo, taking the lead in search and on-line advertising the company has never looked back. Despite all attempts by competitors to catch up, Google continues to keep 2/3 of the search market. Until the market for search starts declining, trends continue to support owning Google – which has amassed an enormous cash hoard it can use for dividends, share buybacks or growing new markets such as smart home electronics, expanded fiber-optic internet availability, sensing devices and analytics for public health, or autonomous cars (to name just a few.)
The Dow decline of 8.7% would be meaningless to a shareholder who bought one year ago, as GOOG is up 37% year-over year. Given its knowledge of trends and its investment in new products, that Google is down 12% from its recent highs only presents the opportunity to buy more cheaply than one could 2 months ago. There is no trend information that would warrant selling Google now.
(5) Buy Apple
Despite spending most of the last year outperforming the Dow, a one-year investor would today be down 10.7% in Apple vs. 8.7% for the Dow. Apple is off 27.6% from its 52 week high. With a P/E (price divided by earnings) ratio of 10.6 on historical earnings, and 9.3 based on forecasted earnings, Apple is selling at a lower valuation than WalMart (P/E – 13). That is simply astounding given the discussion above about Wal-mart’s operations related to trends, and a difference in business model that has Apple producing revenues of over $2.1M/employee/year while Walmart only achieve $220K/employee/year. Apple has a dividend yield of 2.3%, higher than Dow companies Home Depot, Goldman Sachs, American Express and Disney!
Apple has over $200B cash. That is $34.50/share. Meaning the whole of Apple as an operating company is valued at only $62.50/share – for a remarkable 6 times earnings. These are the kind of multiples historically reserved for “value companies” not expected to grow – like autos! Even though Apple grew revenues by 26% in fyscal 2015, and at the compounded rate of 22%/year from 2011- 2015.
Apple has a very strong base market, as the world leader today in smartphones, tablets and wearables. Additionally, while the PC market declined by over 10% in 2015, Apple’s Mac sales rose 3% – making Apple the only company to grow PC sales. And Apple continues to move forward with new enterprise products for retail such as iBeacon and ApplePay. Meanwhile, in 2016 there will be ongoing demand growth via new development partnerships with large companies such as IBM.
Unfortunately, Apple is now valued as if all bad news imaginable could occur, causing the company to dramatically lose revenues, sustain an enormous downfall in earnings and have its cash dissipated. Yet, Apple rose to become America’s most valuable publicly traded company by not only understanding trends, but creating them, along with entirely new markets. Apple’s ability to understand trends and generate profitable revenues from that ability seems to be completely discounted, making it a good long-term investment.
In August, 2015 I recommended FANG investing. This remains the best opportunity for investors in 2016 – with the addition of Apple. These companies are well positioned on long-term trends to grow revenues and create value for several additional years, thereby creating above-market returns for investors that overlook short-term market turbulence and invest for long-term gains.
by Adam Hartung | Dec 19, 2015 | Books, Current Affairs, Ethics, Lifecycle
America’s middle class has been decimated. Ever since Ronald Reagan rewrote the tax code, dramatically lowering marginal rates on wealthy people and slashing capital gains taxes, America’s wealthy have been amassing even greater wealth, while the middle class has gone backward and the poor have remained poor. Losing 30% of their wealth, and for many most of their home equity, has left what were once middle class families actually closer to definitions of working poor than a 1950s-1960s middle class.
When Charles Dickens wrote “A Christmas Carole” he brought to life for readers the striking difference between those who “have” from those who “have not” in early England. If you had money England was a great place to be. If you relied on your labors then you were struggling to make ends meet, and regularly disappointing yourself and your family.
For a great many American’s that is the situation in 2015 USA.
At the book’s outset, Mr. Ebenezer Scrooge felt that his wealth was all due to his own great skill. He gave himself 100% of the credit for amassing a fortune, and he felt that it was wrong of laborers, such as his bookkeeper Mr. Cratchit, to expect to pay when seeking a day off for Christmas.
Unfortunately, this sounds far too often like the wealthy and 1%ers. They feel as if their wealth is 100% due to their great intelligence, skill, hard work or conniving. And they don’t think they owe anyone anything as they work to keep unions at bay as they campaign to derail all employee bargaining. Nor do they think they should pay taxes on their wealth as many actively seek to destroy the role of government.
Meanwhile, there are employers today who have taken a page right out of Mr. Scrooge’s book of worklife desolation. Ever since President Reagan fired the Air Traffic Controllers Union employee rights have been on the downhill. Employers increasingly do not allow employees to have any say in their work hours or workplace conditions – such as Marissa Mayer eliminating work from home at Yahoo, yet expecting 3 year commitments from all managers.
Just as Mr. Scrooge refused to put more coal in the office stove as Mr. Cratchit’s fingers froze, employers like WalMart rigidly control the workplace environment – right down to the temperature in every single building and office – in order to save cost regardless of employee satisfaction. Workplace comfort has little voice when implementing the CEOs latest cost-saving regimen.
Just as Mr. Scrooge objected to giving the 25th December as a paid holiday (picking his pocket once a year was his viewpoint,) many employers keep cutting sick leave and holidays – or, worse, they allow days off but expect employees to respond to texts, voice mails, emails and social media 24x7x365. “Take all the holiday you want, just respond within minutes to the company’s every need, regardless of day or time.”
Increasingly, those who “go to work” have less and less voice about their work. How many of you readers will check your work voice mail and/or email on Christmas Day? Is this not the modern equivalent of your employer, like Scrooge, treating you like a filcher if you don’t work on the 25th December? But, do you dare leave the smartphone, tablet or laptop alone on this day? Do you risk falling behind on your job, or angering your boss on the 26th if something happened and you failed to respond?
Like many with struggling economic uncertainty, Bob Cratchit had a very ill son. But Mr. Scrooge could not be bothered by such concerns. Mr. Scrooge had a business to run, and if an employee’s family was suffering then it was up to social services to take care of such things. If those social services weren’t up to standards, well it simply was not his problem. He wasn’t the government – although he did object to any and all taxes. And he had no value for the government offering decent prisons, or medical care to everyone.
Today, employers right and left have dropped employee health insurance, recommending employees go on the exchanges; even though these same employers do not offer any incremental income to cover the cost of exchange-based employee insurance. And many employers are cutting employee hours to make sure they are not able to demand health care coverage. And the majority of employers, and employer associations such as the Chamber of Commerce, want to eliminate the Affordable Care Act entirely, leaving their employees with no health care at all – as was the case for many prior to ACA passage.
Even worse, there are employers (especially in retail, fast food and other minimum wage environments) with employees earning so little pay that as employers they recommend their employees file for government based Medicaid in order to receive the bottom basics of healthcare. Employees are a necessity, but not if they are sick or if the employer has to help their families maintain good health.
But things changed for Mr. Scrooge, and we can hope they do for a lot more of America’s employers and wealthy elite.
Mr. Scrooge’s former partner, Mr. Jakob Marley, visits Mr. Scrooge in a dream and reminds him that, in fact, there was a lot more to his life, and wealth creation, than just Ebenezer’s toils. Those around him helped him become successful, and others in his life were actually very important to his happiness. He reminds Mr Scrooge that as he isolated himself in the search for ever greater wealth he gained money, but lost a lot of happiness.
Today we have some business leaders taking the cue from Mr. Marley, and speaking out to the Scrooges. In particular, we can be thankful for folks like Warren Buffet who consistently points out the great luck he had to be born with certain skills at this specific point in time. Mr. Buffett regularly credits his wealth creation with the luck to receive a good education, learning from academics such as Ben Graham, and having a great network of colleagues to help him invest.
Further, amplifying his role as a modern day Jacob Marley, Mr. Buffett recognizes the vast difference between his situation and those around him. He has pointed out that his secretary pays a higher percent of her income in taxes than himself, and he points out this is a remarkably unfair situation. Additionally, he makes it clear that for many wealth is a gift of birth – and “winning the ovarian lottery” does not make that wealthy person smarter, harder working or more valuable to society. Rather, just lucky.
What we need is for more wealthy Americans to have a vision of Christmas future – as it appeared to Mr. Scrooge. He saw how wealth inequality would worsen young Tiny Tim’s health, leaving him crippled and dying. He saw his employee Mr. Cratchet struggle and become ill. These visions scared him. Scared him so much, he offered a bounty upon his community, sharing his wealth.
Mr. Scrooge realized that great wealth, preserved just for him, was without merit. He was doomed to a future of being rich, but without friends, without a great world of colleagues and without the sharing of riches among everyone in order that all in society could be healthy and grow. Many would suffer, and die, if society overall did not take actions to share success.
These days we do have a few of these visionary 1%ers, such as Bill Gates, Warren Buffett and recently Mark Zuckerberg, who are either currently, or in the future, planning to disseminate their vast wealth for the good of mankind.
Yet, middle class Americans have been watching their dreams evaporate. Over the last 50 years America has changed, and they have been left behind. Hard work, well…….. it just doesn’t give people what it once did. Policy changes that favored the wealthy with Ayn Rand style tax programs have made the rich ever richer, supported the legal rights of big corporations and left the middle class with a lot less money and power. Incomes that did not come close to matching inflation, and home values that too often are more anchors than balloons have beset 2015’s strivers.
It will take more than philanthropic foundations and a few standout generous donors to rebuild America’s middle class. It will take policies that provide more (more safety nets, more health care, more education, more pension protection, more job protections and more political power) for those in the middle, and give them economic advantages today offered only wealthier Americans.
Let us hope that in 2016 we see a re-awakening of the need to undertake such rebuilding by policymakers, corporate leaders and the 1%. Let us hope this Christmas for a stronger, more robust, healthier and disparate, shared economy “for each and every one.”
by Adam Hartung | May 30, 2014 | Current Affairs, In the Swamp, In the Whirlpool, Leadership, Sports, Web/Tech
Anyone who reads my column knows I’ve been no fan of Steve Ballmer as CEO of Microsoft. On multiple occasions I chastised him for bad decisions around investing corporate funds in products that are unlikely to succeed. I even called him the worst CEO in America. The Washington Post even had difficulty finding reputable folks to disagree with my argument.
Unfortunately, Microsoft suffered under Mr. Ballmer. And Windows 8, as well as the Surface tablet, have come nowhere close to what was expected for their sales – and their ability to keep Microsoft relevant in a fast changing personal technology marketplace. In almost all regards, Mr. Ballmer was simply a terrible leader, largely because he had no understanding of business/product lifecycles.
Microsoft was founded by Bill Gates, who did a remarkable job of taking a start-up company from the Wellspring of an idea into one of the fastest growing adolescents of any American company.
Under Mr. Gates leadership Microsoft single-handedly overtook the original PC innovator – Apple – and left it a niche company on the edge of bankruptcy in little over a decade.
Mr. Gates kept Microsoft’s growth constantly in the double digits by not only making superior operating system software, but by pushing the company into application software which dominated the desktop (MS Office.) And when the internet came along he had the vision to be out front with Internet Explorer which crushed early innovator, and market maker, Netscape.
But then Mr. Gates turned the company over to Mr. Ballmer. And Mr. Ballmer was a leader lacking vision, or innovation. Instead of pushing Microsoft into new markets, as had Mr. Gates, he allowed the company to fixate on constant upgrades to the products which made it dominant – Windows and Office. Instead of keeping Microsoft in the Rapids of growth, he offered up a leadership designed to simply keep the company from going backward. He felt that Microsoft was a company that was “mature” and thus in need of ongoing enhancement, but not much in the way of real innovation. He trusted the market to keep growing, indefinitely, if he merely kept improving the products handed him.
As a result Microsoft stagnated. A “Reinvention Gap” developed as Vista, Windows 7, then Windows 8 and one after another Office updates did nothing to develop new customers, or new markets. Microsoft was resting on its old laurels – monopolistic control over desktop/laptop markets – without doing anything to create new markets which would keep it on the old growth trajectory of the Gates era.
Things didn’t look too bad for several years because people kept buying traditional PCs. And Ballmer famously laughed at products like Linux or Unix – and then later at entertainment devices, smart phones and tablets – as Microsoft launched, but then abandoned products like Zune, Windows CE phones and its own tablet. Ballmer kept thinking that all the market wanted was a faster, cheaper PC. Not anything really new.
And he was dead wrong. The Reinvention Gap emerged to the public when Apple came along with the iPod, iTunes, iPhone and iPad. These changed the game on Microsoft, and no longer was it good enough to simply have a better edition of an outdated technology. As PC sales began declining it was clear that Ballmer’s leadership had left the company in the Swamp, fighting off alligators and swatting at mosquitos with no strategy for how it would regain relevance against all these new competitors.
So the Board pushed him out, and demoted Gates off the Chairman’s throne. A big move, but likely too late. Fewer than 7% of companies that wander into the Swamp avoid the Whirlpool of demise. Think Univac, Wang, Lanier, DEC, Cray, Sun Microsystems (or Circuit City, Montgomery Wards, Sears.) The new CEO, Satya Nadella, has a much, much more difficult job than almost anyone thinks. Changing the trajectory of Microsoft now, after more than a decade creating the Reinvention Gap, is a task rarely accomplished. So rare we make heros of leaders who do it (Steve Jobs, Lou Gerstner, Lee Iacocca.)
So what will happen at the Clippers?
Critically, owning an NBA team is nothing like competing in the real business world. It is a closed marketplace. New competitors are not allowed, unless the current owners decide to bring in a new team. Your revenues are not just dependent upon you, but are even shared amongst the other teams. In fact your revenues aren’t even that closely tied to winning and losing. Season tickets are bought in advance, and with so many games away from home a team can do quite poorly and still generate revenue – and profit – for the owner. And this season the Indiana Pacers demonstrated that even while losing, fans will come to games. And the Philadelphia 76ers drew crowds to see if they would set a new record for the most consecutive games lost.
In America the major sports only modestly overlap, so you have a clear season to appeal to fans. And even if you don’t make it into the playoffs, you still share in the profits from games played by other teams. As a business, a team doesn’t need to win a championship to generate revenue – or make a profit. In fact, the opposite can be true as Wayne Huizenga learned owning the Championship winning Florida Marlins baseball team. He payed so much for the top players that he lost money, and ended up busting up the team and selling the franchise!
In short, owning a sports franchise doesn’t require the owner to understand lifecycles. You don’t have to understand much about business, or about business competition. You are protected from competitors, and as one of a select few in the club everyone actually works together – in a wholly uncompetitive way – to insure that everyone makes as much money as possible. You don’t even have to know anything about managing people, because you hire coaches to deal with players, and PR folks to deal with fans and media. And as said before whether or not you win games really doesn’t have much to do with how much money you make.
Most sports franchise owners are known more for their idiosyncrasies than their business acumen. They can be loud and obnoxious all they want (with very few limits.) And now that Mr. Ballmer has no investors to deal with – or for that matter vendors or cooperative parties in a complex ecosystem like personal technology – he doesn’t have to fret about understanding where markets are headed or how to compete in the future.
When it comes to acting like a person who knows little about business, but has a huge ego, fiery temper and loves to be obnoxious there is no better job than being a sports franchise owner. Mr. Ballmer should fit right in.
