Profit margins, Meta, Brian Feroldi and UK shares - the best investing blogs and podcasts from the past week
Profitability is coming into fashion again. And not just any profitability. The kind of profitability that points to a business that can handle itself in a stagflationary environment, where inflation is pushing up costs while demand is shrinking.
These businesses were always there, and investors certainly love good, efficient and reliable, moat-like profit strength, but it hasn’t always been a “must” in recent years.
But with inflation trending higher for 18 months (pretty much everywhere - see the chart below), and recession on the cards, strong profitability could be the difference between life and death for many businesses in the months ahead.
Anecdotal evidence from earnings season over in the States suggests that shares are being beaten up worse than usual for profit misses. Suddenly the focus is on cost control and free cash flow.
Attention has shifted to the factors we should all be looking for in firms that can protect themselves from stagflation. On this subject there was some comforting research this week showing that some standard measures of company quality - like profit margins - can be surprisingly sticky over time.
Research from Dan Rasmussen’s Verdad Advisers has been exploring the staying power of different investment measures this year. An earlier study found that earnings growth - you might think an obvious metric for growth investors - is horribly mean reverting. It just doesn’t stay intact over time, so has limited predictive use.
By contrast, Verdad’s latest study of quality profit measures, like margins and return on assets, found that they stay very consistent over time. Good firms seem to stay good - and that’s good news for anyone looking for defensive profitability at the moment.
You can find that research here - Persistence of Margins,
Top posts from the past week
Opto Sessions - #141 - Brian Feroldi - Live Q&A: The 3 Principles of Long-Term Investing
I might have mentioned this before, but Opto is the publishing operation of CMC Markets, and it does some interesting stuff. This podcast, hosted by Haydn Brain, was done live on Twitter with investing educator Brian Feroldi (@BrianFeroldi). It kicks off with the subject of compounding, and how the human mind struggles with it, bear markets and investor psychology in up and down phases. Haydn gets him talking on the veracity of some old stock market adages, portfolio construction in the current conditions and investment objectives. He also gets listeners asking questions, too, which is a nice touch. It wraps up with some views from Brian on where investors can go for data and resources (Tikr) and his favourite investing quote (Ben Graham).
Andrew Hollingworth, Holland Advisors - Rejoicing as law and order is restored
The announcement this week of mass redundancies at Meta (after a collapse in earnings and a year-long collapse in its share price) was more evidence that the cycle shift we’re seeing is going to really hurt some firms. In Meta’s case, it’s finding out that its all-important digital advertising model isn’t immune from a massive downturn.
Meta aside, it’s increasingly clear that a lot of companies have been big beneficiaries of bewildering central bank policies since the last financial crisis). And now that normal service is resuming (in the face of startling inflation + recession), those same firms are going to have to adapt quickly. It turns out growth isn’t guaranteed and share prices don’t alway go up.
This article from Andrew Hollingworth is a welcome note to the new, more robust decision-making from central banks and the return of normal rates. This is the kind of view that would have been completely anathema until very recently. But it’s absolutely on the money - and more to the point, it’s good news for investors in shares.
For exactly the same view but with an American perspective, have a read of this article from Michael Batnick (The Irrelevant Investor blog): Stocks Want to Go Up
Aswath Damodaran, Musings on Markets - META Lesson 1: Corporate Governance
If you fancy indulging in some detailed analysis of why things have gone wrong at Meta (and other tech companies), this post from Aswath is worth a read. At 6,500 words it’s the first of three articles that are using recent events at Meta to explore broader problems in the market. This one starts with corporate governance, including the ludicrous genius-worshipping (of tech CEOs) in recent years that now looks like a big mistake.
The second article in the series is here: META Lesson 2: Accounting Inconsistencies and Consequences
Twin Petes Investing podcast 87 - the podcast is here and the YouTube video is here
I think these podcasts with the two Petes (@conkers3 and @wheeliedealer) are the closest you get to feeling like you’re sitting in a pub chatting about the stock market. On top of the usual discussion on what’s been happening recently (plus various other diversions), they had a special guest on this episode - @1James1n1. James is a UK private investor (really well followed on Twitter) and they get him talking about his approach, what he looks for and how he thinks - it’s a really interesting listen.
For other deep dives on UK shares…
UK Dividend Stocks - Is RM a Good Choice for Dividend Investors? (the answer is that there are quite a few red flags here, according to Jon)
Maynard Paton - M Winkworth: Yield Approaches 7% Despite Acceptable H1 2022, Quarterly Dividends Lifted 23% And Confidence Towards £2m Profit Forecast
Have a great weekend!
Ben
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