Investing
Key Takeaways
The disconnect between price & earnings recoveries
Pricing pressures accompanying the recovery
An ever growing dependence on technology
With more than 300 billion emails sent per day**, it is hard to believe that email has only been in existence for 50 years. While there have been countless improvements and innovations made to the system since its origination, the communication method itself has become an integral part of our daily lives, especially as many of us still work from home! As for the financial markets, the primary way corporations communicate their results, outlook, and analysis of critical trends and risks with shareholders is through earnings conference calls, and with more than 90% of the S&P 500’s market capitalization now reported, it is prudent to evaluate some of the messages firms have sent. At this juncture last year, these calls were not nearly as valuable due to the heightened uncertainty caused by the COVID-19 pandemic, but this year, the transcripts are critical in calibrating our equity market outlook.
Waiting For A Reply From The Market | Our expectation for an above-average earnings season has come to fruition with the strongest quarterly year-over-year earnings growth since 1Q10, sales and earnings beats near record levels, and consensus earnings estimates for 2021 and 2022 being revised 5.6% and 3.1% higher respectively. Despite these improving trends, the S&P 500 has rallied only 1.5% since the unofficial start of earning season. This lack of market response suggests that these results were already priced in, and that near-term risks (e.g., tax hikes, political tensions) are weighing on investors’ minds.
Catalysts For Earnings Rebound Could Be Copied | In reviewing the transcripts for numerous companies across various industries, the catalysts supporting the earnings rebound were similar. The key drivers mentioned are the same fundamental reasons we’ve maintained for our long-term positive view: (1) the US economy moving toward a sustainable reopening, (2) the robust pace of vaccinations and (3) record breaking fiscal stimulus. In addition, other messages that regularly appeared include:
– Pandemic Deepened The Attachment To Technology | With heightened levels of cash on balance sheets, many companies outlined either planned or already completed tech-oriented capital expenditures. Whether it be improving the online customer experience, providing more exact delivery times for packages, or expanding payment options, it is clear that “technology will be a powerful engine” for the recovery and future growth as “technology needs continue to evolve at a rapid pace.”
– Consumer Dependence On Deliveries | While e-commerce was a growing trend prior to the pandemic, the lockdowns led to an increase in online orders as consumers sought items unavailable at their local stores or simply desired to avoid brick and mortar retail locations for health reasons. Earnings calls across various industries showed that “digital is a significant growth opportunity,” with some firms hoping to maintain their sizable gains in digital households. Package carriers reinstating “next-day service guarantees” due to customers placing a “high value on the reliability” only accentuates on-line importance.
– Companies Subscribing To The ESG Movement | There has been no shortage of companies making headlines for initiatives related to ESG principles, and the 1Q21 earnings calls only added to the list as pharmaceutical companies expressed concerns over patient access and pricing in all communities, retailers adding transparency about board composition, hotel chains highlighting shifts towards renewable energy sources, and tech companies stressing the lowering of their carbon footprint.
– COVID-19 Impact Still In The Subject Line For Some Companies | With the hope for a sustainable reopening becoming a reality, investors turned to ‘reopening’ companies with expectations that the rebound would most benefit these stocks. Our concern: a price-to-earnings disconnect as many of these stocks have recovered much of their price declines without the accompanying bounce back in revenues and earnings. For example, hotel chains are facing a lack of visibility in bookings with some 30% or more below pre-COVID revenues, airlines are missing business travelers with some commenting that margins may not be recovered until 2023, and cruise lines are yet to resume operations in the US.
– May Not Be Able To Transmit Price Increases To Consumers | We’ve anticipated the base effects of the recovery resulting in a transitory rise in inflation, and many of the largest companies within the S&P 500 identified issues related to backlogs, supply chain disruptions, and rising commodity costs. While some industries may have more leverage than others, the Consumer Staples sector may have difficulty passing on their input price increases to consumers as necessary “temporary COVID-19 spending” on items such as cleaning supplies, sanitizer, paper towels and toilet paper wanes.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.
Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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