Digital Delight: Market Rewards 21st Century Leaders!
“We’re only at the very, very beginning of this next generation of computing and I think that every industry leader will be the ones that transforms first. I don’t care what industry you’re talking about.” — KIM STEVENSON, CIO, INTEL
When I was just a young boy, Saturday morning was the best time of the week. Why? On that day, for each thirty minute period, there was a different cartoon show that showed up on television. My generation feasted on Scooby Doo, with intermittent learning briefs on ABC from “Conjunction Junction, What’s Your Function?” We learned about the Bill of Rights and even the Constitution in between taking in a little Bugs Bunny, the Tom and Jerry Show, or the Flintstones’s. Of course, one of the wonderful shows you could lose yourself in was the Jetson’s. At the outset of every episode, you got a chance to see a preview of what the twenty first century really might look like. There would be the father of the family, George, flying around in his vehicle, along with his wife Judy and their kids. At the time, the idea of flying vehicles was just a vision that a young kid could imagine, but increasingly, digital technology looks like it may make it a reality. With driverless cars and drones dotting the current landscape, flying cars may be just around the corner. So why do I bring this up?
The current investment landscape has made the decision to reward companies who appear to be in the pole position in their industry, especially if the segment is based on digitization. Conversely, if ones and zeros are not favorable to the segment, well, currently you are in the doghouse in a big way. The best example of this is Tesla being rewarded with a market value of over a hundred billion dollars. It is more than the combined value of GM and Ford. Tesla sold a little under 350K cars last year, while GM and Ford each convinced over two million buyers to lay down their hard earned money for a vehicle. Tesla is all electric based, while GM and Ford are not. Tesla has just opened a plant in China, and has a different business model than GM and Ford. It’s approach is to have it’s own dealership and control it’s supply chain. Orders are taken before a model is built, which is a different way of skinning the cat than the typical car manufacturer. Clearly, investors believe Tesla is (pardon the pun), in the driver’s seat, as it relates to capturing most of the market share as electric vehicles get adopted. What about the industry that might have the most to lose, that being oil producers?
Just as the investment world is rewarding Tesla, the largest oil companies in the globe are thought of, literally, as from the Flinstone Age. Energy as a percent of the S&P 500 has dropped to it’s lowest level in decades, perhaps unjustly and prematurely. Oil and gas may yet be displaced by electrification, and the largest oil and gas companies know this. They have been buying electric utilities and investing in electric charging stations, along with plenty of other digital areas in all parts of their businesses, particularly exploration and refining. So, the energy group is applying technology to become more efficient, although right now, very few investors care. If you look across other areas of the market, you see a similar dynamic. Companies which are believed to be strong in the digital domain are rewarded with multiples which could be considered, well, rich (expensive). The easy examples are Amazon, Facebook, Apple, Google, and Microsoft. Much of that is deserve as these companies have built massive earnings engines which generate enormous amounts of cash. The interesting dynamic here is how quickly some of these businesses have been built. Only in the last few years, Microsoft has ramped up it’s cloud area, as has Amazon, but Amazon has built a large advertising segment in only three years. Apple, once thought to be dependent on the Phone, now has millions of music and video subscribers, sixty million purchasers of Air pods (didn’t exist a few years ago), and an emerging payments segment (just added a credit card). With Facebook moving heavier into on line advertising and looking into counterinsurgencies and media (so is Amazon), building a large business from scratch can transform any company. All areas are in play, health care, government, education, media, consumer services, and payments, to name a few. Let’s turn our attention to the payroll processing and retirement areas, shall we?
Last week, payment processor Paycom joined the S&P 500 Index, chosen instead of Workday, an enterprise software provider. Both have strong digital businesses. The payroll processing and retirement provider area is one which I have become quite familiar with over the last few years. You see, they are related as payroll processors have businesses which are integrated with 401k and 403b plans. If you are saving for retirement, the 401k area is usually where individuals who either own or are working for businesses have a nice leg up because of the higher contribution limits as compared to a traditional or Roth IRA (nearly 20k versus 6k, even higher if you are a sponsor). Payroll processors like ADP and Paychex dominate the small business area and have complete solutions that include retirement components, although what they provide in the 401k area typically has higher costs for businesses and benefit ADP and Paychex versus plan participants (imagine that). Paycom has built a big business as an alternative, as has Intuit with Quickbooks for small businesses. Anyway, if you have 401k questions or are looking for help with your plan, please email as I am sure I can lend a hand.
Elsewhere in the market this week, investors got a little skittish with the news out of China that the corona-virus is spreading. A few years ago, it was SARS, and that had a big effect on the country’s GDP, so many are concerned it is deja vu. Over time, usually these scares get handled by the health experts, but they can take some time. On the earnings front, the most notable reports last week came from Intel, JNJ, IBM, Interactive Brokers, Comcast, Union Pacific, and Halliburton. Most came in with earnings ‘surprises’, and next week the reporting season continues in full force. One thing you should keep your eye on is how your companies are building and integrating digital technology to help grow the enterprise. If you are like me, you might be looking out for flying vehicles.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org. Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.