Chris Senyek, CFA, CPA Head of Macro Research Chief Investment Strategist 646-845-0759 [email protected]Chip Miller, CFA, CPA 646-845-0752 [email protected]Adam Calingasan, CFA, CPA 646-845-0757 [email protected]Portfolio Strategy Weekly Audio: Cash Usage: Alpha Opportunities A 5 Minute Audio Brief DO NOT FORWARD – DO NOT DISTRIBUTE – This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to www.WolfeResearch.com/Disclosures or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY 10170 March 10, 2015
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Chief Investment Strategist Portfolio Strategy …...3 Buybacks, Debt, and Free Cash Flow Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Thomson Financial, Bloomberg,
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Chris Senyek, CFA, CPA
Head of Macro Research Chief Investment Strategist 646-845-0759 [email protected]
DO NOT FORWARD – DO NOT DISTRIBUTE – This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to www.WolfeResearch.com/Disclosures or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY 10170
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Thomson Financial, Bloomberg, and FactSet.
• Meager wage growth and a stronger dollar are two items we believe puts the Fed on hold for longer than market expectations, despite a stronger than expected February jobs report
• Moreover, the Fed typically raises rates in stronger economic environments, and the U.S. outlook is currently slowing, in our view.
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Buybacks, Debt, and Free Cash Flow
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Thomson Financial, Bloomberg, and FactSet.
• Net buybacks to free cash flow after dividends are running ~21% currently, well below prior peaks of 30%+
• Despite zero interest rate policy, debt to equity ratios remain at over 25 year lows
• The market’s 4.7% free cash flow yield is still attractive on both an absolute and relative basis
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Cash Usage & The Market Cycle
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Moody’s, Thomson Financial, Bloomberg, and FactSet.
• We’ve found a number of Cash Usage strategies to add alpha over the course of the market cycle as well as those that tend to work in the mid to late innings of the market cycle
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Cash Usage: Alpha Opportunities
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Moody’s, Thomson Financial, Bloomberg, and FactSet.
• Among cash usage metrics, high gross cash to market capitalization has been the top stock picking tool over time. We attribute this to the market ascribing a low ‘value’ to cash on balance sheet with the stock ‘re-rating’ positively when cash is deployed
• Accelerating stock buybacks are the second best metric, and when combined with a high gross cash balance, the returns were significantly higher
– Accelerating buyback defined as high ratio of the 2 most recent quarters’ share repurchase amount to the past 12 quarters share repurchase amount
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Cash Usage Strategies Buyback Strategies
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Accelerating Buybacks and High Cash Balances
Notes: Universe = Russell 3000 market cap. > $250 million. Market data as of 3/2/2015. 2015E PE based on consensus estimates. Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Thomson Financial, Bloomberg, and FactSet.
• The top performing buyback strategy we’ve found historically has been buying companies with high cash balances and accelerating usage of their buyback programs
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5 = worst]
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F Ford Motor Co. Cons. Disc. 65,550 11% 10.4x 5% 2 3.0% 48% 33% 2%
Large New Buyback Programs: Another Big Alpha Contributor
Notes: This measures the returns of new buyback announcements since 2009 of $5 billion+ market cap. companies with no announced buybacks in the prior 3 years and repurchasing >8% of shares over the subsequent two years. Returns are measured beginning 3 days subsequent to announcement. Sector relative returns. Sources: Wolfe Research Macro Research; Company filings; Bloomberg; Standard & Poor’s; FactSet.
• Large, new buyback programs are positively rewarded by the market if actually executed
• Below are $5b+ market cap companies implementing large buyback programs since 2009 and the relative 2 year share price returns…2 year average outperformance of 10.7%
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Large New Buyback Programs: Recent Announcements
Notes: Universe = S&P 1500 market cap. > $2 billion. 2015E PE based upon consensus estimates. Market data as of 3/2/2015. (1) Remaining buyback based on # of shares originally authorized, less repurchases, x current stock price Sources: Wolfe Research Macro Research; Company filings; Bloomberg; Standard & Poor’s; FactSet.
NOV National Oilwell Varco, Inc. Energy 22,870 -18% 14.8x 9% 15% 9/30/2014 2,221 10%
QEP QEP Resources, Inc. Energy 3,809 -25% NA -22% 30% 1/30/2014 500 13%
BXS BancorpSouth, Inc. Financials 2,169 -5% 15.5x NA NA 12/11/2014 130 6% (1)
MSCI MSCI Inc. Financials 7,325 33% 26.5x NA NA 2/6/2014 550 8%
AFL AFLAC Inc. Financials 27,462 0% 10.4x NA NA 11/13/2013 1,837 7% (1)
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Large New Buyback Programs: Recent Announcements (cont.)
Notes: Universe = S&P 1500 market cap. > $2 billion. 2015E PE based upon consensus estimates. Market data as of 3/2/2015. (1) Remaining buyback based on # of shares originally authorized, less repurchases, x current stock price Sources: Wolfe Research Macro Research; Company filings; Bloomberg; Standard & Poor’s; FactSet.
IP Int'l Paper Co. Materials 24,094 22% 14.8x 6% 8% 9/10/2013 1,556 6%
TDS Telephone & Data Systems Inc. Telecom. 2,731 13% NA -7% 17% 8/2/2013 201 7%
UGI UGI Corp. Utilities 5,718 14% 17.7x 6% 7% 1/30/2014 466 8% (1)
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Shorts: High Capital Spending and Weak Free Cash Flow
Notes: We use monthly M2 growth less consumption (PCE) growth as a proxy for ‘excess’ money supply. Consumption is the largest part of U.S. GDP at roughly 70%. We believe that money not consumed by the economy tends to find its way into risk assets, driving up multiples. Sources: Wolfe Research Portfolio Strategy, Bloomberg, Standard & Poor’s, Compustat, Thomson Financial, and FactSet.
• A number of our best short idea screens are generated from companies making high capital expenditures relative to their peers
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Notes: Market data as of 3/2/2015. SIM = our proprietary Stock Idea Model based on five weighted and historically back tested factors, depending on the economic cycle. Sources: Wolfe Research Portfolio Strategy; Company filings; Standard & Poor’s; FactSet.
High Capital Spending and Weak Free Cash Flow (cont.)
Notes: Market data as of 3/2/2015. SIM = our proprietary Stock Idea Model based on five weighted and historically back tested factors, depending on the economic cycle. Sources: Wolfe Research Portfolio Strategy; Company filings; Standard & Poor’s; FactSet.
EDE The Empire District Electric Co. Utilities 1,088 10% 3 5% 17.9x -2% 170%
NI NiSource Inc. Utilities 13,388 25% 5 2% 23.4x -2% 153%
SJI South Jersey Industries, Inc. Utilities 1,902 1% 3 2% 16.1x -5% 147%
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DISCLOSURE SECTION
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