“It’s our contention that equity may be in the money, depending on where the liabilities lie.” David Tepper (Carolina Panthers Owner, Net Worth: $11B)
In the investment world, the general belief about the relative intellectual capabilities of credit analysts versus equity practitioners is the credit guys are always a little bit sharper. Essentially, those who invest in stocks are less capable than those whose sole job is to evaluate debt levels and liquidity. In a world where there is over ten trillion of negative yielding sovereign debt, along with over ten trillion in corporate debt in the US, evaluating the ability to pay is critically important for anyone evaluating securities. You see, as Mr. Tepper so wisely indicates, stock investors rank below debt holders on the balance sheet. Depending on the amount and classification of the debt, an equity investor may be buying into a company which is obligated to pay out a substantial amount of whatever cash it generates to service the interest and debt it owes. Of course, this is where detailed analysis of the business is critical. Nowadays, with interest rates continuing to bounce along at rock bottom levels, interest obligations for most corporations of any size are quite manageable. We all know owing less is much better than owing more, and the same holds true for corporations. The best investors, many of them working at large companies, use debt quite expertly, and with every continent of the world offering cheap rates, now is the time to get it. Being the low man on the balance sheet totem pole, equity owners typically focus on growth, so how debt proceeds are deployed and the eventual return on that capital ultimately determines, as Mr. Tepper so eloquently states, whether you will be ‘in the money’, by how much, and for how long. Yes, improving one’s skills as a debt analyst certainly will help improve your equity investing, and it’s important to keep this in mind for the foreseeable future.
In the market’s this week, investors were buoyed by the belief that an incoming Biden administration (nauseating as it is to even say it) will appoint ex Federal Reserve Chairman Janet Yellen as Treasury Secretary. The Dow Jones Industrial Average broke 30,000 and the other major market indexes closed at record highs as well. On the earnings front, Medtronic reported a nice surprise, as did retailers Dell, Best Buy, Tiffany’s, and Dick’s Sporting Goods. December is shaping up for a big month on the IPO front as AirBnb and other well known consumer brands will become available on public markets. Interestingly, Tesla overtook Berkshire Hathaway in market value as investors have placed their capital on what they consider the clear favorite to dominate the electric car market. The whole concept of the electrification of transportation has been embraced by the largest manufacturers across the globe. Of course, the key question is the rate of adoption by consumers of electric autos. There are a number of factors which will affect adoption rates, including price, tax credits, financing, charging duration’s and availability, and willingness to change purchasing habits. Investors have bid up the whole sector in anticipation of the electric vehicle boom. Some of this is also in conjunction with the Democratic candidate most likely becoming the President of the United States. Jumbled Joe says its going to happen, must make it so, eh? Time will tell on that one, especially over the next decade.
With Thanksgiving over, the last month of the year for many investors will be spent considering positioning for next year and tax related issues. On the political front, all eyes are on Georgia as the question of Senate control remains front and center. In the meantime, I hope your turkey, cranberries, and pumpkin pie tasted great and you are happy and healthy during the last month of 2020.
Get all Y H & C Investments weekly blogs and monthly newsletters by sharing your information below-
Thank you for reading the blog this week, and if you have any questions about investing, please email me at email@example.com.
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.