CWS Market Review – May 28, 2024

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This week, the stock market looks to close out a strong May. This is very much welcomed after a relatively poor April. Earlier today, the Nasdaq closed above 17,000 to reach a new high. That’s a 10-fold increase in 15 years.

We have a decent earnings season to thank for May’s rebound. The overall earnings results weren’t spectacular, but they were much better than what had been expected. As always, what matters on Wall Street is how well one does compared with expectations.

Wall Street isn’t much bothered by Armageddon, as long as it’s unfolding better than their models told them it would.

Historically, the early part of summer has been a mildly positive time of year for stocks. Since 1957, the S&P 500 has gained an average of 2.28% from May 25 to July 17. That’s about one-fifth of the index’s average annual capital gain. After that, however, the market hasn’t gotten moving again until late October.

Growth Is Leading Value

I like to keep an eye on how well Growth stocks are doing versus Value stocks. This is a quick and easy way to read the mind of the market. If Wall Street starts to get nervous, then Value stocks tend to do well, but if Wall Street is feeling optimistic, then Growth stocks take charge.

Lately, I’ve been impressed by how well Growth stocks are doing. Shares of Nvidia (NVDA), the growthiest of all, got another 7.1% boost today. That’s a gain of $180 billion.

The Growth/Value tradeoff tends to be cyclical. In plain English, once Growth starts beating Value, or vice versa, you can expect that to last for several months, or even several years. When Value leads Growth, it tends to be swift and sharp; but when Growth leads, it tends to be long and steady.

Here’s the S&P 500 Value ETF (in black) and the S&P 500 Growth ETF (in blue) since the early part of this year:

Last year, Growth stocks did very well against Value stocks, except for the last part of the year when Value started to shine. Since the start of this year, Growth has gotten its groove back, especially in the last few weeks. On Tuesday, the S&P 500 Growth ETF (SPYG) outpaced the S&P 500 ETF (SPY) for the sixth day in a row.

Value stocks also tend to do well when short-term interest rates are going down. While that’s not happening at the moment, there’s a good chance rates will start to come down before the end of this year.

Are Growth stocks telling us to be optimistic? Could be. Today’s consumer confidence report was unexpectedly strong. For May, the Consumer Confidence Index rose to 102. This was the first increase in four months. The reading for April was revised higher to 97.5.

Despite today’s report, consumer confidence has generally been dour in recent months. This has perplexed some analysts because the overall economic performance hasn’t been so bad. Kyla Scanlon has dubbed this effect the “vibe-cession.”

I suspect that certain problems in the economy have an outsized impact on the public’s perception of the economy. Inflation is a good example, particularly car insurance costs.

Since December 2021, car insurance costs are up by 45.8%. Consumers are very sensitive to these costs even though car insurance makes up less than 3% of the CPI. Consumers “feel” that increase more than they do other prices. Since 2019, the price of a Big Mac has doubled.

On Thursday, the government will release its first revision to Q1 GDP. The initial report said that the economy grew in real annualized terms of 1.6% for the first quarter of this year. That’s not that great and it’s down from some strong numbers for the second half of last year. Wall Street thinks the government will revise Q1 GDP down to 1.2%.

Elliott Looks to Shake Up Texas Instruments

This morning, Elliott Investment Management sent a letter to the board of directors of Texas Instruments (TXN) recommending some major changes.

Elliott is a well-known activist hedge fund. By activist, I mean a fund that takes a large position in a stock and then advocates for some important changes in the hopes of giving the stock a boost. Oftentimes, this means paying out a dividend or boosting capital expenditures.

Activist funds are a controversial topic and I can easily see both sides of the debate. Critics say that activist funds are out to make a quick buck (or several billion bucks) and are willing to sacrifice the long-term financial stability of the company to get the share price moving.

Activist defenders claim they’re merely defending shareholders and protecting them from sclerotic management. I won’t settle the debate here, but it’s been going on since the days of Gordon Gekko in Wall Street.

Elliott now owns $2.5 billion of Texas Instruments stock. TXN used to be a very good stock until about three years ago. It’s been lagging badly since then. In 2022, TXN made $9.41 per share. This year, it’s expected to make $5.16 per share.

According to Elliott, TXN can vastly improve its free-cash flow. Elliott thinks TXN can deliver free-cash flow of $9 per share by 2026. That’s 40% above what Wall Street currently expects.

As much as the activists are criticized, I have to concede that they often make good points. From CNBC:

Elliott believes Texas Instrument’s rigid adherence to a capital expenditure plan put in place in 2022 has eviscerated shareholder returns by greatly reducing a metric by which TI has always asked to be judged – free cash flow.

Citing the reduction of free cash flow from $6.40 a share in 2022 to an expected $1.83 a share this year Elliott maintains that TI has alienated investors who might otherwise gravitate to its dominant position in serving the automotive and industrial complexes with analog chips. Its stock price, Elliott insists, has suffered as a result, trailing its peer group by substantial margins over the last two, four, six and ten year periods.

The focus of Elliott’s letter is the 2022 capital expenditure plan which called for TI to ramp its Capex spending to a high of $5 billion a year from 2023-2026 bringing that spending to as much as 23% of revenues from what had been capex spending of roughly 5% revenues over the preceding decade.

This morning, the shares opened 3.4% higher and touched a new 52-week high. If the market responds that way, it’s difficult to say that activists aren’t serving the needs of shareholders.

As far as these letters go, Elliott was much friendlier than most. Still, Elliott can easily be ignored. Even a large firm like Elliott owns a little over 1% of the outstanding shares. These activist moves always make me wonder if they truly want changes or if they are only interested in the one-day rally on the news that an activist fund is getting involved.

A similar event happened recently to one of our Buy List stocks. I’ve long been a fan of Miller Industries (MLR), and it’s done well for us this year.

In March, an activist fund that owns 3.25% of Miller sent a letter to Miller’s board recommending several changes. The firm criticized Miller’s executive pay and suggested a share buyback and a dividend hike.

Miller said that the fund’s letter was “a self-serving and short-sighted public complaint, with spurious allegations and no credible path for long-term value creation.” Still, a few days later, Miller announced a $25 million share buyback. For the most part, boards should be focused on growing the business and should be neutral on a company’s share price.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on May 28th, 2024 at 8:37 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.