September Charts of Interest: Some Stocks Stay Expensive

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I tend to write my charts of interest commentary over the course of a month as various charts and tables come to my attention. Often, the theme becomes apparent as I do this. Such was the case this month as investment firm WisdomTree examined what has happened to very highly valued stocks.

Stocks with the highest price-to-sales (P/S) ratios return, on average, –2% annually over the next five years. However, some managed to buck this trend. Here are those winners and their sales growth:

But it’s not just strong sales growth that matters. WisdomTree says that the median sales growth for the winning companies “is almost 50% annually!” This high rate of sales growth is very difficult to maintain, especially as the absolute dollar amounts to sustain it grow larger.

Quoting from the report, “When we look at [the second table], with the aggregated statistics on the sales growth for winners and losers, it’s clear that just growing sales faster than the market is not enough. Even the losing companies grew their sales more than six times faster than the market and still had huge negative returns. Median sales growth for the winning companies is almost 50% annually!

“The sales growth that a company must sustain to continue to stay competitive and justify its high multiples doesn’t become easier with longer horizons either … For every surviving company that also beat the S&P 500 over the next five years, there were 2.4 that underperformed.”

It’s Hard to Stay on Top

AC/DC sang about it being a long way to the top. A sequel song would have been about the difficulty of staying at the top.

Research Affiliates crunched the numbers on what happened to the 10 most valuable technology stocks in the world at the peak of the dot-com bubble. None of them outperformed the S&P 500 index by the peak of the next bull market in 2007. Just one, Microsoft Corp. (MSFT), outperformed the S&P 500 over the 23-year period ending in December 2022.

Tightening the Belt on Share Repurchase Plans

“[S&P 500 second-quarter 2023] buybacks decline 18.8%, as sector expenditures shift again; buyback tax reduced operating earnings by 0.34%” tweeted S&P Dow Jones Indices senior index analyst Howard Silverblatt last week. Preliminary numbers show share repurchases totaling $174.92 billion last quarter. If this number holds, it would be the smallest spending on buybacks since the fourth quarter of 2020 ($130.59 billion).

In commenting on the drop, The Financial Times wrote, “Companies are now facing a combination of new investment demands and higher borrowing costs, making buybacks less of a priority.”

Corporate Executive Chatter

Fears of an economic hard landing appear to be subsiding among corporate executives. FactSet found that just 62 companies mentioned “recession” during their second-quarter 2023 conference calls.

“After peaking in [second-quarter] 2022, the number of S&P 500 companies citing ‘recession’ on earnings calls has declined for four straight quarters ... In fact, this quarter will mark the lowest number of S&P 500 companies citing ‘recession’ on earnings calls for a quarter since [fourth-quarter] 2021 (14),” observed senior earnings analyst John Butters.

Furthermore, just under 60% of all S&P 500 companies mentioned “inflation” during their second-quarter earnings conference calls. At 296, FactSet says, “This is the lowest number of S&P 500 companies citing ‘inflation’ on earnings calls going back to [second-quarter] 2021 (221).” Even though inflation remains high, this is a positive trend.

(The x-axis on this chart could be much clearer. Unfortunately, this is how it was posted by FactSet.)

What’s the Fed Going to Do in November?

The futures markets are nearly certain that the Federal Open Market Committee (FOMC) will keep interest rates unchanged at its next meeting. November is a different story. Traders are currently pricing in nearly a one-in-three chance of another quarter-point rate hike being announced then. Federal Reserve chairman Jerome Powell said that he’s data-dependent, so we’ll have to see what the data says.

Government Shutdowns Have Had Little Effect on the Stock Market

I can’t predict whether U.S. Congress will pass a short-term spending bill or cause the government to shut down (though as of this afternoon, it seems like we are headed for the latter). What I can do is share data from CFRA Research’s chief investment strategist Sam Stovall about how the stock market has reacted to previous shutdowns. As you can see below, the S&P 500 has barely budged on average.

It’s Not Investing, It’s Gambling

Two weeks ago, Bally’s opened Chicago’s first casino. The casino’s temporary location is three blocks away from the AAII office. (A permanent home for the casino is being built.)

I mention this because I like my odds better at the slot machines than I do speculating on shorter-dated options—those that expire in five days or less. Citing data from the Chicago Board Options Exchange (CBOE), The Wall Street Journal recently wrote, “For popular one-day options tied to the broad S&P 500 index, individual investors made up around one-third of all trades.” Shorter-dated options, and one-day options in particular, have a high probability of expiring worthless or at least incurring a substantial loss.