Mellow May Adapts to Retail Results
Mellow doesn't always make for a good story, but it makes for a good life.
As summer officially starts with the Memorial Day weekend, capital market participants continue to grapple with the impending lift off of interest rates. In a speech on Friday, Fed chair Janet Yellen stuck with the party line of being data dependent. She believes the economy will strengthen as the year progresses, and while concerned about first quarter softness, the Fed appears to be targeting September as a date to do the deed (start raising interest rates). Global central banks are another integral variable of the current investment landscape, and while Mrs. Yellen and company are looking at lifting, the rest are knee deep in easy, easier, and easiest. Across the pond, the never ending saga regarding Greece's repayment of debt obligations slumbers on, like a fly buzzing around a half eaten meal. Investors want to forget about it's trivial place but cannot because of the lingering concern that if Greece goes, it will begin a procession of countries which will also want to exit the Euro. With most countries in the globe far more concerned with deflation and overcapacity than a sudden explosion of costs, lower for longer remains the most probable policy path.
In the equity markets last week, financial results from a slew of retailers showed how the market differentiates those deserving of capital from entities whose operational expertise is not up to par. Consider the reaction of investors to the performance of Wal-Mart, Target, and Best Buy. Wal Mart remains the largest retailer on the planet with sales of nearly half a trillion dollars, yet the stock gave up nearly 5% last week because international sales were down over 10% and operating income lost 8.3%. Target and Best Buy are different animals all together. While not nearly as large as Wal Mart, both are starting to gain some traction in their efforts to compete with Amazon and the fellows in Arkansas. Target was helped dramatically by it's on line division, which saw sales jump 38%. Clearly, the big bulls eye was helped by it's focus on health, family items, and concentrating their efforts in apparel. Best Buy improved because of better sales from phones and appliances.
In the home improvement area, Home Depot was the nicest abode on the block as it continues to execute and attract more customers. The CEO from Lumber Liquidators resigned unexpectedly last week. I guess selling formaldehyde laden flooring is not the most attractive proposition, especially when compared to the offerings of Home Depot. Urban Outfitter's proved, once again, how difficult the retail area is when it's Anthropology division disappointed with top line growth. Retail remains hard, harder, and hardest, but it is also where there is the most opportunity for those who want to try and find covered up gems.
In the technology area, Salesforce reported sterling results and the stock gained over 5% for the week. I have long known about Salesforce as it's CEO came from Oracle. It has been one of the great performers over the last ten years and I missed it because I always found it too expensive. Investors remain impressed with the business model and constant expansion. The company has done a very good job of reinvesting it's capital and creating new growth engines, especially in their product portfolio. You only have so much capital, you cannot own every winner. Still, this company consistently rubs it in the face of those who doubt it can compete with Oracle, Microsoft, and SAP. Etsy announced their earnings and the market was unimpressed, to say the least. Etsy is a very good example of a fine company which is burdened by it's pre-public venture capital valuation. It went public at a stupid price, and it has subsequently got more absurd. When expectations are not exceeded, public investors just sell, sell, sell. If you buy these situations at inflated prices, it is very difficult to have good returns unless the company hits it out of the park every quarter.
In the cable and telecom area, last week Verizon agreed to buy AOL, and this week, the seventh largest cable company was purchased by Altice, a large cable acquirer led by John Malone protege Patrick Drahi. It is being reported Time Warner Cable will make up it's mind this weekend about which company will be it's buyer. Altice is a bidder, along with, well, take a guess. I suspect the next few months will see volumes drift lower as the Hampton's becomes the preferred destination for many money managers. However, if the fly in Europe goes splat, volatility will spike and what is usually a sleepy summer could get very hot real quick. Make sure you stay cool. Thanks for reading the blog this week, and if you have any comments, questions, or thoughts about investing, please email me at
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.