Institutional Investor Review: Macro Shift in Progress?

One thing I'm far too guilty of ignoring is what other investors (primarily the large institutions) are doing to move stocks. This is a small attempt to correct that.

As everyone knows, the broader markets have gotten off to a very poor start to begin the year, Thursday's schizophrenic response to Ben Bernanke announcing his pro-rate cut stance notwithstanding. In fact, I would argue that without the news of a possible Bank of America buyout of Countrywide (CFC), the markets would have ended down even after that news – something that would be a very discouraging sign for longs.

As it is, the S&P 500 is down 3% early in the year, with the Nasdaq off 6%. It seems that pretty much everything that isn't a consumer staple is down. This kind of swift move signifies that big institutions are moving a lot of money, and this could mean a huge shift in terms of what begins to work and what doesn't.

When the economy looks bad and recession is on the horizon, as everyone is starting to agree thanks to Goldman Sachs (GS), it is going to warrant changes on the part of investment managers. Where does it look like they're applying money? The obvious places are the consumer staples and pharmaceuticals. Consider the performances of the following stocks since the start of the year:

-Coca-Cola (KO), up 7%
-Pfizer (PFE), up 6%
-Pepsi (PEP), up 5%
-Merck (MRK), up 4%
-Colgate (CL), up 4%
-Johnson & Johnson (JNJ), up 2%
-Kimberly Clark (KMB), down 1%
-Procter & Gamble (PG), down 1%

Another good place to look is at the big diversified utilities:
-Exelon (EXC), up 4%
-Public Service Enterprise (PEG), up 3%
-PG&E (PCG), up 3%

ConEdison (ED) seems to be the outlier here, down 4%

This isn't just a phenomenon one notices on the charts. In terms of volume and money flows, a noticeable change seems to be afoot. The data I use takes the average of high and low prices for the stock and multiples it by shares traded, to roughly determine the value of stock trading hands. Looking at the cash volume helps offset for the changes in price. For example:

-The last two days has seen an average of $1 billion in KO stock change hands. This is more than twice the average amount seen since the start of December 2007.
-Monetary volume in PFE the last two days is over $1.3 billion, 50% above the previous month's average.
-PEP has seen a 75% jump in the cash value of traded shares over the last two days.
-MRK has seen a 35% rise.
-Money volumes in CL have increased 37%.

It looks like the big money is loading up on stocks that will continue to do well in hard times. Coinciding with this is evidence that the high-multiple tech stocks that represented such great secular growth stories in 2007 – in the face of a decelerating economy, not an outright recession – are falling out of favor. Consider the four Nasdaq-100 darlings that were so essential to that market's gains in 2007:

-Amazon (AMZN), down 9% year-to-date.
-Apple (AAPL), down 10% YTD.
-Google (GOOG), down 6% YTD.
-Research in Motion (RIMM), down 11% YTD.

As one wades into somewhat smaller growth stocks, the selling has been even more extreme:

-Akamai (AKAM), down 19% YTD.
-Crocs (CROX), down 22% YTD.
-Garmin (GRMN), down 18% YTD.

And looking at small-caps, the Russell 2000 as a whole is off 6%, the same as the decline in the Nasdaq. That decline has applied equally to the growth and value indices.

I'll continue tracking the staples, pharmas, and utilities over the next week to see if more follow-through emerges to make the picture somewhat clearer. The most likely scenario that emerges out of this is a general multiple expansion given to several of these names.

In the consumer products companies, KO looks to be more fully valued than most, with an Enterprise Value/Free Cash Flow (EV/FCF) multiple of 30x giving it a yield of 3.3%, equivalent to the yield on 3-month Treasuries. Likewise, CL at 29x EV/FCF, even with marginally better long-run growth prospects than Coke, doesn't appear to be exceptionally cheap. And while KMB appears cheap at 23.6x EV/FCF, it's long-run growth is estimated to be 75% that of Coke – meaning on a growth-adjusted basis (basically PEG, except with EV/FCF) these stocks look to be trading in-line with each other.

JNJ is a part pharma, part consumer company, so it only gets part of the lower-multiple stigma of pharma earnings. While this is in no way scientific, a cursory analysis of the above stocks suggests that the market value for one percentage point of consumer products growth looks to be 3x current earnings, while one percentage point of pharma growth looks to worth about 2x current earnings. JNJ looks to be priced as a very cheap pharma, even though 15% of their operating profits come from the consumer division. Under that rule of thumb, with Johnson & Johnson's 9% five-year growth estimate, the EV/FCF multiple should be 19.35x, or about 25% higher than the present 15.6x.

There is a lot more detail to go into with these stocks – not to mention all the other good recession-type possibilities out there. Stay tuned for more...

Disclosure: none.

Comments

[Harold A.Maio]

Thursday's "schizophrenic&qu... response to Ben Bernanke

I regret to say I do not know what meaning you are attaching to the above term.