Average Performance of S&P 500 on the Last Day of the Quarter

It’s the last day of the first quarter and it looks like the S&P 500 will close out Q1 on a high note.  The index is currently up 0.80% with a little under an hour left to trade.  Including today, the S&P 500 is only up 1.34% for the year, so today’s gain accounts for roughly 60% of the S&P 500’s year to date performance.

Most investment managers calculate their fee base off of the value of assets at the end of each quarter, so theoretically there is some incentive for managers to massage prices higher into the close.  Crunching the numbers though, I couldn’t find any evidence that the last day of the quarter is much different than any other.

Going back to 1957, the performance of the S&P 500 on the last day of any quarter is just marginally better than its performance on any other day.  Actually the final day of the quarter has been negative slightly more often than it’s been positive.  In 228 attempts, the last day of the quarter was positive 49.1% of the time.

Change on last day of quarter

Company Notes Digest 3.28.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Accenture seeing strong demand for consulting work, but pricing is weak

“from a volume standpoint we’re actually seeing very strong growth, and in fact, I would say that our volume growth is where we expected, if not better…the level of client discussions that are taking place and clients’ willingness to contract work is actually quite strong.” ($ACN)

Clients are still focused on cost optimization projects

“Having said that, if there is a common theme and we’ve talked about this for several quarters now, clients are by and large focused on cost optimization. I think that is a trend that we see almost in every industry and every market around the world.And so clients are moving forward, driving the business forward, looking at investments that they need to make, but they’re doing it with an eye towards being very cost conscious in the contracting investments they’re making in their business.” ($ACN)

At least someone is investing in capacity growth though

“you’ll see that our headcount growth over the last couple of quarters has been meaningful and so we have more heads, more payroll, base pay comp. We also have slightly lower utilization on the margin as we’ve been building bench in certain areas in anticipation of revenue ramping” ($ACN)

Carnival Cruise seeing strength in Europe

“And I will say in general, in Europe, we do as I mentioned earlier on the call, with the booking curves being moved out we see strength in Europe. And again, it’s reflected in our guidance, but we actually see a strong performance collectively in Europe this year.” ($CCL)

Avian Flu worries that hit QSR business in China may have passed (good for YUM)

“The improvement in industrial sales in China continued this quarter with a 20% increase in local currencies. This growth rate compares to weak demand from quick service restaurants in the first quarter of 2013 that related to concerns about avian flu and poultry menu items.” ($MKC)

Brazil may have turned the corner

“I’m pleased to report that indeed in Q2 we feel that we are turning the corner with Brazil coming back flattened, hopefully positive for the reminder of the year.” ($ACN)

Consumer

Brand advertising most effective in bursts

“And so we’ll examine it. I’m a personal believer and pulsing that you advertise for a period of time, then you take a little break and you advertise.” ($CCL)

It’s hard to keep a monopoly in stretchy pants (or any strong market)

“We’re certainly not the only game in town anymore. But as we get back to our roots, we’re really focusing on innovation. I don’t want to spend too much time worrying about our competitors. I certainly want to know what they’re doing. It’s validation of the strength of our market and its global relevance and its growth in every single global market.” ($LULU)

Millenials like to cook

“the majority of Millennials say they love to cook, and the percentage of all consumers that prefer hot or spicy sauces, dips, and condiments is up 8 points in the last two years.” ($MKC)

Restoration Hardware’s customers are not your average consumer

“And if all of a sudden during the period you get a customer that delays that purchase intent and then decides, hey, honey, let’s go to Italy, and they go spend $20,000 on a vacation, I think we’re competing against those kind of decisions sometimes.” ($RH)

Healthcare

Walgreens/AmerisourceBergen partnership will be the world’s largest purchaser of pharmaceuticals

“We are pleased with the performance of our global procurement organization. With the introduction of AmerisourceBergen, we believe we will be the largest purchaser of pharmaceuticals worldwide.” ($WAG)

Miscellaneous Nuggets of Wisdom

Destroy today’s reality

“Real value has always been created by those who have the courage to lead rather than follow, who are willing to destroy today’s reality to create tomorrow’s future.” ($RH)

Have debates

“As new data comes in, as new information comes in, new thoughts and new debates happen inside the company, it brings forth a new and better view. And one of the things that I think is one of the strengths of the company is we have those debates and we continue to evolve and we are quick to make a decision.” ($RH)

Constantly iterate

“we’re not the kind of company that gets better information in the first quarter, second quarter ago, well, that’s the plan in the year, I’m sorry, you know, that’s what we’re doing. We are constantly iterating. We are constantly improvising, adapting and overcoming and trying to get better every single day.” ($RH)

Restoration Hardware 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Monster growth numbers

“Net revenues increased 33% and comparable brand revenues increased 31% on top of the 28% increase last year, representing our fourth consecutive year of comparable brand growth in excess of 25%. This is even more impressive considering the elimination of our fall source book and the consolidation of our store base. In 2013 we expanded operating margins by 200 basis points and grew adjusted net income by 92%”

A disruptive platform

“the disruptive power of our product platform. Our demonstrated ability to innovate, curate and integrate new products, categories and businesses, and then scale them across a fully integrated multichannel platform is, we believe, unique in the industry and a powerful competitive advantage.”

Defy the conventional wisdom that everyone is moving to the web

“we’ve continued to innovate, test and prove that we can build a retail experience that defies the current conventional wisdom that everyone is moving to the web and retail stores are dead. We have proven just the opposite and continue to develop new and more exciting concepts that will create an even more compelling and highly experiential environment for our customers.”

A next generation anchor tenant

“Last year we learned that we could partner with developers and create a win-win by moving from a tenant who occupies high cost interior mall space or street space to adding value by positioning ourselves as a next-generation anchor tenant who can help transform the mall or a neighborhood.”

A $4 B company trapped in secondary real estate

“we believe we are a $4 billion to $5 billion company trapped in billion-dollar of legacy real estate.”

Strong real estate pipeline

“As we look to 2015 and beyond, our real estate pipeline is strong and includes opportunities to serve as an anchor tenant in some of the best centers and streets in the country, with significantly larger stores and lower occupancy rate. We have signed leases for five next-generation full-line design galleries and are in negotiations for an additional 25 locations.”

No one has ever made furniture of this quality in this quantity

“No one has made furniture of this quality in these quantities before. And we believe our proprietary network of artists and partners creates a long-term competitive advantage.”

Destroy today’s reality

“Real value has always been created by those who have the courage to lead rather than follow, who are willing to destroy today’s reality to create tomorrow’s future. We have created a unique and winning brand, one that you should expect will continue to destroy its own reality to create tomorrow’s future. And we look forward to sharing in the value-creation with all of our stakeholders.”

Weather had some effect

“I think if you’re a retail customer and you want to go to the store and interact with the goods before you, like say, like test-drive a car, you may not make that sale. And if someone’s delaying their visit to the store and that was the day that the husband and wife could have gone, and now they’re kind of snowed out, could it delay sales purchases for a month or two, I think so. Because unless you’ve moved into a new home and you don’t have furniture, the urgency is not as great, right? It is a purchase that you can put off.”

Be better stewards of capital

“be better investors and better stewards of our capital, and getting to every level of detail. And that’s just kind of our DNA by the way, and that’s why everything here always evolves and always changes, right? As new data comes in, as new information comes in, new thoughts and new debates happen inside the company, it brings forth a new and better view.”

have debates, improvise

“And one of the things that I think is one of the strengths of the company is we have those debates and we continue to evolve and we are quick to make a decision. You know, we’re not the kind of company that gets better information in the first quarter, second quarter ago, well, that’s the plan in the year, I’m sorry, you know, that’s what we’re doing. We are constantly iterating. We are constantly improvising, adapting and overcoming and trying to get better every single day.”

This is not cookie cutter

“this is a not cookie cutter, 3,000 square-foot retail rollout that has the same assortment in every market, that you slap up a storefront and just go. This is a much more intricate and complex investment strategy.”

Very complex for a home goods retailer to expand internationally

“ost of the other international moves I’d say are much riskier than domestic growth. And what’s very different about a company like ours than, you know, if we were apparel or anything else, is the backend. You could say like, okay, am I going to build a big DC over there, am I going to put all that inventory over there? Am I going over there with all of the assortment, part of the assortment? Why and how and where? And where do we think the business is going to come from by market?

I mean it’s — international, for our business, very, very complex.”

Gamestop 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Must sustain a greater pace of change than the environment

“we believe that GameStop has to maintain a higher rate of internal change than the environment that surrounds us. And we believe that philosophy has served us well during the last few years of declines in our category.”

Big comp growth driven by new consoles

“In the fourth quarter, total sales increased 3.4% from the fourth quarter of 2012 to $3.68 billion driven by the successful launch of the PlayStation 4 and the Xbox One. Comparable store sales for the quarter increased 7.8%.”

Expecting continued growth in 2014

“For the full year, we expect revenue to increase between 8% and 14% and comps to increase 6% to 12%. Sales and comp growth will again be driven by hardware sales. However we also expect sales growth in each of our categories. Given the growth we expect during the year, we expect full year net income to grow between 12% and 22%.”

Seeing new investment in consoles with refresh

“as consoles return to the category, we’re seeing a lot of new investment. That’s very important because for years, we watched investment flow out of consoles into other forms of gaming and electronics. And now you’re seeing, right Tony, a tremendous amount of projects there”

Plan has been to close 2% of stores per year

“we would begin to consolidate our store footprint in United States by 2% a year. And so this is consistent if you go back and look at our scripts from last year and the year before.”

Value buyers come in in the first 2-3 years of a console cycle

“historically the pre-owned business will have very strong growth in the first two to three years of a console cycle. There is going to be a lot of demand from the value people. So, the new game buyer will be buying all the new consoles and software. There is a value buyer that comes back into GameStop and that value buyer we want to serve them more broadly than we ever have.”

Power up rewards program

“for years we’ve been only in this video game business and we’ve done incredible job, but we look around and say as PowerUp Rewards becomes as dominant CRM program people are coming to our door going, hey, can you distribute some of our other technology products and it’s working pretty well”

Seeing adoption of consoles among more than just core gamers

“We still see really strong demand and it’s a very, very broad group. So, it’s not just a core gamer here, it’s definitely broadened across all of our segments.”

Full game download still a very small percent of our business

“here is no doubt that there is a lot more going on from a digital sharing perspective as I’ve referenced by our PS4 sales. We are seeing an uptick in the sale of digital games at GameStop. The most, the highest growth item now that we’re seeing is the content that is now pretty well fold with every significant launch that takes place. So we are seeing an ever increasing amount of DLC sold. Our penetration of DLC sold on every launch is increasing. So, we see a lot of that. Obviously we’re doing a lot to drive the identification of that over. But in terms of full game download that still remains a very, very small percent of our business. And so, we see it more on the downloadable content side.”

We welcome full game downloads

“we like the idea, right, of selling full game digital content, we’re pretty good at it at this point. But I would say it’s still like technology versus chronology. And don’t forget, the games are getting bigger.”

Lululemon 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Even LULU saw comp decline at its brick and mortar

“Direct to consumer sales, which increased by 24.9%, or $19.5 million, offset by comparable store sales decline of 2% on a constant dollar basis. And on a combined basis, including both physical stores and ecommerce, our total cost increased 4% on a constant dollar basis.”

20% unit growth, 7% sales growth

“We ended the year with 254 total stores versus 211 a year ago. There are 199 stores in our comp base, 39 of those in Canada, 129 in the United States, 23 in Australia”

“For the fourth quarter, total net revenue rose 7.3% to $521 million, from $485.5 million in the fourth quarter of 2012.”

Gross profit basically flat

“Gross profit for the fourth quarter was $278.8 million or 53.5% of net revenue, compared to $274.5 million or 56.5% of net revenue in Q4 2012.”

Guiding full year revenue growth of 11%

“For the full fiscal year 2014, we’re targeting to open up 42 corporate owned stores, including Australia and the U.K. and up to 10 new ivivva stores. We expect our annualized combined comp to be in the low to mid-single digits and therefore project net revenue to be in the range of $1.77 billion to $1.82 billion.”

Investing in understanding guests at a personal level

“I think most of these investments right now are centered around CRM and really sort of creating a seamless experience between online and brick and mortar, and also sort of understanding our guests at a more micro level so that we can have a more personalized experience with them.”

Not the only game in town anymore

“We’re certainly not the only game in town anymore. But as we get back to our roots, we’re really focusing on innovation. I don’t want to spend too much time worrying about our competitors. I certainly want to know what they’re doing. It’s validation of the strength of our market and its global relevance and its growth in every single global market.

But we’re going to get back to what we do best, which is inventing the future, and really focusing on the magic that is very unique to lululemon, which is combining beautiful as well as technical innovation. So certainly something that we are aware of, but something that we’re going to look forward rather than over our shoulder.”

Sticker shock on rent in Hong Kong

“When we look at Hong Kong, I think the reason that we’ve moved more slowly than we’d like is not simply sticker shock on the rent. I think as we move into different regions, we have to be a little bit flexible in terms of what our store looks like in those regions”

Have to create deep local expertise

“value comes with having the local deep expertise that we mentioned earlier. It’s not how is Hong Kong going to adapt to lululemon, but how is lululemon going to adapt to Hong Kong. And that’s going to open a lot of doors to accelerate our international growth”

Accenture 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

3% local currency revenue growth

“We generated revenues of $7.1 billion, a 3% increase in local currency and above the midpoint of our guided range.”

Energy business a bright spot but rest of natural resources cyclically bad

” The energy business continues to be the real bright spot globally with double-digit growth. But cyclical challenges in natural resources continue to negatively impact the overall growth rate of our Resources business. Having said that, we do still expect to have positive growth for the year.”

Starting to see pickup in some important European economies

“We’re starting to see good pickup in growth in important countries such as Switzerland, the U.K., Italy, Germany and France. And in Asia-Pacific, we grew revenues 4% in local currency, driven by continued strong growth in Japan.”

Global economic environment remains challenging especially EM

“I want to comment on the global economic environment which, frankly, continues to be challenging especially in the emerging markets.”

Guiding to 3-6% revenue growth. 7-10% EPS growth.

“we now expect net revenue for the full fiscal 2014 to be in the range of 3% to 6% growth in local currency.”

“For earnings per share, we now expect full year diluted EPS for fiscal 2014 to be in the range of $4.50 to $4.62 or 7% to 10% growth”

Volume of work strong, but pricing is a headwind

“We do see a situation in consulting in particular where from a volume standpoint we’re actually seeing very strong growth, and in fact, I would say that our volume growth is where we expected, if not better. The pricing environment is impacting that such that we’re getting the net result in our revenue growth in consulting in particular.”

There is demand in the marketplace, but focused on cost control

“the level of client discussions that are taking place and clients’ willingness to contract work is actually quite strong.

Having said that, if there is a common theme and we’ve talked about this for several quarters now, clients are by and large focused on cost optimization. I think that is a trend that we see almost in every industry and every market around the world.

And so clients are moving forward, driving the business forward, looking at investments that they need to make, but they’re doing it with an eye towards being very cost conscious in the contracting investments they’re making in their business.”

Accenture is investing in growth though

“you’ll see that our headcount growth over the last couple of quarters has been meaningful and so we have more heads, more payroll, base pay comp. We also have slightly lower utilization on the margin as we’ve been building bench in certain areas in anticipation of revenue ramping”

Accenture digital growing double digits

“We are more end-to-end than anyone else in digital marketing. Our Mobility organization is just on fire. And, as you know, there is great demand for analytics. And, of course, through the creation of Accenture Digital, we have the unique ability now to create synergies among these three capabilities and be even more end-to-end. So we’re extremely pleased with Digital.”

Brazil turning the corner?

“I’m pleased to report that indeed in Q2 we feel that we are turning the corner with Brazil coming back flattened, hopefully positive for the reminder of the year.”

Checking in on the Cash on the Sidelines

The market is still basically flat since the start of the year, and especially in recent days, stocks have drifted lower. The trading pattern looks more like a lack of buying support than an influx of selling pressure and could be a sign that buyers are running out of dry powder.  Bulls have long argued that there is a lot of cash “on the sidelines” that could be reallocated to equities and push markets higher.  Below is some data to try to quantify if maybe there aren’t as many buyers left on the sidelines as there used to be.  The chart shows how much cash US households are holding as a percent of their total financial holdings.

You can interpret the ratio in two ways. 1) a reflection of how much cash households have chosen to hold relative to other investments  2) a reflection of the buying power of the cash relative to the current price of stocks.  The chart below captures both an asset allocation decision and a valuation component because cash-percent falls when other securities prices rise.

From an asset allocation standpoint, households now hold 14% of their financial assets in cash.  This is a level that was first reached in mid 1997 and once again in mid 2004.  The lowest level ever reached was 12.1% in 1999.  This implies that households are relatively fully invested, but could put about 2% more of their assets into the market.  This metric captures what people are talking about when they say that sentiment is nothing like what it was in the late 90s.  That extra 2% cash is the difference between your cab driver giving you hot stock tips and the general population being relatively indifferent to what the stock market is doing.

From a valuation perspective, the chart does seem to echo the conclusions drawn by other metrics.  Households’ current cash holdings buy a smaller amount of financial assets than at any other time outside of the dot com bubble and parts of the 2003-2007 rally.  In order to be bullish on equities from here, you really have to believe that stock prices are headed back to bubble levels not seen since the dot com days.  This would coincide with all time low levels of asset allocation to cash.  Interestingly, if you invert the chart, you may notice that it looks somewhat similar to Shiller’s CAPE.

Cash on Sidelines

 

Source: Federal Reserve Flow of Funds.  Cash = deposits + money market fund holdings.

When Do Momentum Stocks Become Value?

Momentum continued to get beaten up today.  $FB finished down 7% after buying the Oculus Rift for $2 Billion.  $TWTR fell 7% in sympathy, $TSLA is down 3%.  Many high flying momentum names are now below their 52 week highs by more than 10%, but it’s impossible to say whether that’s the end or just the beginning of these declines.

These steep declines are part of the natural life cycle of a momentum stock.  Momentum stocks first get pushed to unrealistic heights and then eventually they drop quickly back to earth.  There’s not a lot of fundamental logic applied to momentum stocks, so it’s just as hard to determine where the decline will stop as it is to know how high the positive momentum can reach.  The same things that make momentum so exciting on the way up are what make it so dangerous on the way down.

Normally earnings power would provide support for a falling stock.  However, in the case of momentum names, price gets disjointed from earnings as investors focus completely on growth potential.  Even at today’s prices the disconnect between price and earnings is still extreme for many momentum names.  For some of these stocks, prices would still have to decline by a significant amount before they fall back into the same orbit as earnings power.

Below is a chart of how much ten momentum names would need to decline from today’s prices in order to trade at 30x 2015 earnings.  That would still be an expensive multiple on profits that wont be earned for another two years.  Still, since many of these companies haven’t focused on attaining profitability, 30x earnings is a significant drop from here.

It may seem overly bearish to suggest that prices will fall to reflect real current earnings power, because up until now these companies have been given the benefit of the doubt that they will eventually produce profits to justify their prices.  On the way up investors give that luxury, but on the way down people tend to become a little more stingy.

30x 2015

 

Carnival 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Brand recovery pretty much complete

“brand perception is most of the way back, consideration among brand loyalist have previously recovered and now the new to cruise is back, and we are working to complete perception recovery among switchers.”

Continue to drive brand through promotion including social media

” And so obviously, we want to drive demand, and we will do that through promotion period. So that’s advertising through social media, or whatever, and we will continue to invest in that.”

Opportunities to cut costs and grow revenue, revenue is the real opportunity though

“our opportunity is scale. We have 78 million passenger cruise days a year. We have 10 million guests a year. And on the revenue side, small moves on the revenue side produce substantial cash flow and operating earnings opportunity for us. And so we are going to do both, we are going to walk and chew gum, but the big opportunity is clearly on the revenue side.”

Wont see big industry capacity increases this year

“I won’t say, ships are moving out, but it’s highly unlikely we’ll see the level of capacity increase next year that we see in this year.”

Pulse advertising

“And so we’ll examine it. I’m a personal believer and pulsing that you advertise for a period of time, then you take a little break and you advertise. We have 10 brands. We can manage that over but we’ll see how it works out and I don’t have any preconceived notions. I want to hear from the brands in terms of what they think is having the greatest impact and evidence they can provide to that.”

Seeing strength in Europe

“And I will say in general, in Europe, we do as I mentioned earlier on the call, with the booking curves being moved out we see strength in Europe. And again, it’s reflected in our guidance, but we actually see a strong performance collectively in Europe this year.”

Walgreen 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Sales up slightly earnings down

“For the quarter, sales were $19.6 billion, up 5.1% from $18.6 billion a year ago, driven in part by 4.3% increase in comp store sales. GAAP operating income for the quarter was $1.3 billion, up 4.9% from $1.2 billion last year. Adjusted operating income for the quarter was $1.3 billion, down 4.3% from $1.4 billion in second-quarter 2013. GAAP earnings per diluted share were $0.78 in the second quarter compared to $0.79 last year, down 1.3%.”

Largest purchasers of pharmaceuticals worldwide

“We continue to make good progress on our global initiatives. We are pleased with the performance of our global procurement organization. With the introduction of AmerisourceBergen, we believe we will be the largest purchaser of pharmaceuticals worldwide.”

Manufacturers like that

“Manufacturers have told us they appreciate our approach. We think this sets us apart from others in the market, benefits our organizations over the long haul and positions us and our pharmaceutical manufacturer partners extremely well for both short term and long term sustainable value creation.”

Closing some stores, but increasing net number

“between now and August, we intent to close 76 stores spread across the country importantly, overall this year including store closings, we expect to expand our store base by approximately 55 to 75 locations in fiscal 2014.”

Closures just 1% of base

“We looked at several factors in deciding which stores to close. We address the impact of increased density from our own stores, the impact of real estate positioning within the market and material changes to a store’s trade area. In total, this represents a very small portion less than 1% of our 8,200 plus store base.”

No plans to redomicile the company

“maybe I’d start with just retreating what I said, I think not on last earnings call, the one before that we have no plans to do so to do so, to do an inversion or redomicile the company.”