By David Nelson, CFA CMT
Despite all the noise about using their new found wealth to expand CAPEX Goldman data points to stock buybacks increasing by 13% to just shy of $1Trillion for 2019. Politics aside CEOs continue to take the easy way out. Readers know my position on buybacks as being overused and often a signal that management has run out of ideas. Buybacks reduce the share count boosting EPS without actually growing the bottom line and do nothing for revenue. As a tool they aren’t all bad as sometimes company stock is too cheap to avoid. Having said that, it does return capital to shareholders and in turn the economy but not as good as building an old-fashioned factory or service center.
Markets continued their march higher last week with large caps leading the way on the heels of better than expected earnings from now the largest company in the index Microsoft (MSFT)* and another shareholder favorite Facebook (FB). Amazon followed with a monster bottom line beat. It’s important to remember that Amazon can print just about any number it wants. Cut a little on CAPEX and earnings explode. As strong as the report was the highlight was a major change in Prime cutting the standard two-day shipping to just one, giving consumers what they want even before they know they want it. Brilliant for a company to stay that far ahead of demand.
The Elephant in the Room
The most striking observation from the conference call was the fact that not a single analyst asked about AWS (Amazon Web Services). Management was the only one who noticed the elephant in the room forcing them to bring up the crown jewel themselves. Given the strong performance out of Microsoft’s Azure product it was important to show off a division with 42% jump in revenue supporting a $30 Billion annual run rate.
However, it was also clear that the law of large numbers eventually hits even the best as overall revenue at Amazon has slowed to 17%. Law of large numbers or an early sign that the consumer is slowing?
The earning’s news wasn’t all good with Intel (INTC) putting in its worst one-day performance in a decade on the heels of a disappointing report cutting guidance for the year. In hindsight, I guess not a surprise considering estimates have been sliding for 6 months.
Economy still has legs
If anything is wrong with the overall economy, it certainly isn’t showing up in key data like GDP. Coming in a full percentage point above estimates the Q1 advance look came in at 3.2%. The evidence continues to pile up that last year was a policy mistake by the FOMC. The good news is that the Fed changed course quickly, unusual for an institution with a history of being slow to respond to data.
Question most asked by TV interviewers is how much further can this market run? At just under 17x forward estimates the market isn’t cheap but stocks don’t live in a vacuum. The risk-free rate is one of the most important tools in security analysis. If interest rates stay benign than stocks are still the better asset class.
Stocks setting records along with the index at an all-time high are just what you expect in a bull market, but it also breeds complacency. We still have all the usual suspects to deal with including slow growth overseas, China trade negotiations and a paralyzed Washington. So, in the words Sgt. Phil Esterhaus played by the late Michael Conrad from the 80’s hit series Hill Street Blues “Let’s be careful out there!”
*At the time of this article some funds managed by David were long MSFT
