Empire(s) "Ready to" Strike Back!

As history has taught us, empires rise and fall. We had seen this with Roman empire, British Empire, Ottoman empire and many more. Same can be said for companies. But even fallen empires or companies can rise if they can learn from their falls and innovate to prosper the new changing world. Apple had proven this when it came back from its almost bankrupt status in 1997. Let's look at some of companies which have been under decline for years for many reasons - some of which were their own mistakes (GE and Boeing), changing industry (Oil to green), disruptive new industries and behaviors (streaming, online advertisements) and some of them were just unlucky due to COVID which no one was prepared for. Now that companies and populations have learned to live with COVID and 2020 is 2 months away from ending, let's look at some of the companies (old empires) and see how they may perform in months ahead. Basic filter I used to define "empire" is that company must be at least 50 years old and has more than 50 Billion revenue.

• Disney (DIS $128) - The company got hit on multiple fronts - its theme parks/cruises/hotels are closed, its normally billion $ movies cannot be released since theaters are closed. The entertainment industry is  getting disrupted where people are getting most of their entertainment via streaming networks like Netflix. Sports world is barely functioning reducing the value of ESPN franchise. However despite all these challenges, Disney is going to be winner in new world. As I have written in Aug 2019 about "Streaming Wars", Disney+ has been a success with over 60 million subscribers in less than one year. Disney also got Hotstar which is very popular in India. With Disney+, Hotstar, Hulu, ABC/ESPN, Disney has multiple streaming channels to reach world. It also has rich content library and assets like Pixar, Marvel, Starwars and so on. It should think of creating "Disney Family" on lines of Amazon Prime and provide incentives for families to be lifetime members (access and discounts to theme parks/hotels/cruises, all streaming channels, early access to movies and so on). Disney has potential to be a big winner in decades to come
• Walmart (WMT $143) - At the rate Amazon and online shopping was taking off, it was just a matter of time Walmart would have gone the same way as Sears and K-Mart. Fortunately Walmart acquired Jets.com and created online presence just in time...they got lucky that they were ready when COVID hit. Now programs similar to Amazon Prime and in-store experience, Walmart can hold its market leadership in retail. Walmart management is ready to experiment with Flipcart, Tik-Tok type of strategic investments. This empire is surely ready to pull some punches.
• Boeing (BA $166) - There are only 2 companies which can make planes of all types (Boeing and Airbus). Unfortunately Boeing had its own problems with 737MAX crashes and eventual grounding and then COVID virtually stopped 80% of air traffic and hence all new plane orders. However you can't create another Boeing like you can create a software company. The technology take decades and as MAX experience had shown, even small mistakes could cost lives and tens of billions of losses. Boeing will survive - MAX flying again by end of year and airline traffic resuming slowly, Boeing stock could be flying high again in 2021
• General Electric (GE $7.6) - Under Jack Welch's leadership, GE reached most valued company status. Now it's valuation is 1/10th of peak valuation. The new GE is also very different. Under new leadership, GE has shedded assets in financial, energy, lighting, home appliances and returning to its core strengths - aviation, healthcare and power turbines. CEO Larry Culp had proven that he can turnaround a troubled empire by making it smaller and nimble. The stock is trading in single digit for most of the year due to potential bankruptcy risk. But GE is the most promising turnaround, leveraged vaccine and economy normalizing play and stock could return to double digit in next couple of years
• Exxon (XOM $34)/Chevron(CVX $72) - Exxon was most valuable company just 10 plus years back. However the world has changed in last 10 years and unfortunately Exxon is still stuck in 20th century of "drilling" and big oil projects. At current price, it's dividend yield is nearly 10%. With Biden clearly suggesting that "oily" days are over, Exxon needs to transform itself quickly if it wants to survive past 2050. But as immediate term returns, Exxon and Chevron could provide double digit returns in 2021
• IBM (IBM $116) - The Big Blue continues to transform itself and despite its best efforts, continues to shrink. On Wall Street, its popular to compare any new-comer to "valued more than IBM". This year Zoom zoomed past IBM valuation few months back and now worth nearly 1 and 1/2 times of IBM. For its credit, IBM's new CEO has realized the valuation gap and trying to split into two companies - slow growing services company and hopefully fast growing cloud and software company. It's possible that this would play out and benefit investors in coming years
• AT&T (T $28) - AT&T is another company which keeps on transforming itself and at times make big mistakes (like acquiring DirecTV when cord-cutting was gaining momentum). But if they can spin off DirecTV, then new AT&T can focus on three valuable franchises - wireless, internet connectivity and media. With HBO, it already has close to 100 million subscribers. Warner Brothers assets and HBO brand can be leveraged to expand internationally. It's healthy dividend, 5G upgrade cycle and streaming/media assets could help it strike back.

These old "Empires" could transform and strike back at new "Empires" which were born in 1990's. Governments may help by starting proceedings (like its lawsuit against Alphabet) but don't count on it (since last real breakup happened in 1984 when Ma Bell was broken). These empires need to learn, innovate and transform themselves at warp-speed. Even banks like C ($44), BAC ($25), Wells Fargo ($23) and JP Morgan ($100) would eventually recover and be relevant in world disrupted by FinTech companies like PayPal and Square.

Happy Dussehra to all readers. 

/Shyam

What Matters? 4Es: Economy, Employment, Earnings and Elections!

The 2nd surge of COVID infections is gaining momentum across many countries with US continuing to lead in number of cases and deaths. President Trump's COVID and outbreak at white house in last two weeks demonstrated that even highest and most secure facility in world could not prevent COVID penetration..the blame goes to administration for not taking precautions (the way they would take against terrorist threats). It feels that our own personal house is more safer than White house. 

Markets had their best week since July when similar summer surge was happening and it continued to make highs till end of Aug. It a way markets are delinking from COVID story. We are at similar juncture and 4 factors would matter most for future direction.

Economy:

Q3 economy should show ~25% growth compared to Q2 (when it went down by 30+ % due to sudden lockdowns in March). That would be highest growth ever recorded for US economy. Over weekend, I visited St. Pedro's Square in San Jose Downtown for a quick pizza night. And the place was packed with outdoor dining - people enjoying dinner while watching game 5 of NBA finals all while maintaining social distancing and masks. That means people are tired of sitting at home and having quiet dinners on Friday evenings. They want to get out, spend their savings and enjoy a nice evening out. Its good sign for economy as long as precautions are taken to avoid covid surge. Expect Q3 economic bump to continue in Q4 and into 2021. Stimulus talks are going back and forth and eventually both parties would agree to $2 Trillion stimulus which is desperately needed to keep the steady progress on economic front. 

Employment:

The dreaded double digit un-employment is over. With latest readings, US is on its way to recover to full employment (generally considered when unemployments falls below 4%) in about 2 years (currently it's at 7.5%). While it's good sign, there are still millions of people un-employed or have stopped looking for work. In absence of stimulus bill, airlines and many businesses in travel, retail, hotel industry would have to go thru another round of layoffs to survive. But politicians would come together after elections and pass the bill no matter the results of elections. Steady progress but more is needed

Earnings:

If there is one E which is doing extremely well, its corporate earnings. Q3 earnings cycle will start next week and by all indications it would be repeat of Q2. Expectations would be beat by majority of companies due to lower expectations. WFH companies (SAAS companies, online retail etc) would continue to do very well. Even economically sensitive companies (energy, financials) would start showing some green shoots. The earnings would benefit due to generally lower costs of operations and no impact on productivity. With over $10 Trillion worldwide stimulus, businesses are able to minimize impact on topline.

Elections:

While more October surprises could come, markets are realizing that Biden win is over 85% secured. Trump has very small chance of winning 2nd term. In fact I won't be surprised if Biden ends up with decisive win with over 300 electoral votes. That would remove post-election chaos. Markets would love to have divided government with GOP holding slim margin in senate but won't mind blue wave similar to 2008 elections. Democrats controlling all three branches mean more stimulus which in short term would be good for economy. So "contested election" risk had gone down significantly. People are so tired of 2020 that they just want to feel normal and Biden as president feels normal. So this time vote would be not for Biden but for "return to normal".

With this backdrop of 4Es, how should one position? Here is one suggestion. Invest in "ETF" ETFs

ETF - Energy (XLE: $30.60), Technology (XLK: $122), Financials (XLF: $25.25)

One can decide to split the investment equally or go for 30:40:30  or 25:50:25 depending on one's risk/reward profile. Energy and Financials are down significantly and trading at historic discounts to S&P (SPY) but could recover in 2021 when things become normal. Technology has gone up significantly and could continue the momentum in 2021 as a bet on future.

/Shyam