Profit warnings, war, ARK Invest and Peter Lynch - the best investing blogs and podcasts from the past week
Profit warnings - the scourge of the private investor and soothsayer of economic trouble - went north in a big way between July and September.
Far from surprising, it was almost a dead cert that the number of companies being rocked by economic storms from all directions was going to proliferate. At just over 10%, inflation has been on an upward tear for 18 months and recessionary forces are now in the mix. Stagflation beckons.
In the event, eighty-six companies hit the market with news of a profit miss. That was up from 51 in the same period (the third quarter) last year and up from 64 in Q2 this year. Dig into the numbers - as collated by EY-Parthenon - and the story of the stock market in 2022 is laid bare.
Eighty-six is the highest number of Q3 profit warnings since 2008, when the economy was nose-diving.
At 57%, more than half those issuing a warning blamed rising costs. But another 23% blamed ‘labour market issues’, which itself includes rising staffing costs as well as things like shortages and strikes. Basically, inflation is causing big problems, but it’s patchy…
Forty-four of the profit warnings were in consumer-facing sectors. But this wasn’t just cyclical sectors that hit trouble. Retail and travel and leisure - the classic consumer cyclicals - were far and away the biggest source of profit misses. But food production - which is normally a much more defensive industry - came in third. Rising inflation is causing a ton of issues for food manufacturers who presumably have the toughest task of all in trying to force their customers (supermarkets) to pay more.
Some say that profit warnings come in threes. That’s not always the case. But for those companies that do issue three profit warnings in a year the writing is very much on the wall. According to EY, one-in-five delist within a year of the final miss, most due to insolvency. The bad news? There are 28 companies on that list right now.
You can read the summary of the report here: Profit warnings issued by UK-listed companies in Q3 up 69% year-on-year The full report is here: Predictably unpredictable
Top post from the past week
Investment Talk - An Interview with Peter Lynch in 1996, Six Years After Retirement
There’s a witty line in this interview transcript where Peter Lynch is discussing bear markets and describes the phrase “market correction” as “a euphemism for losing a lot of money rapidly”. It captures the sense of humour in Lynch who was a household name in the 80s and 90s for making stunning returns at Fidelity’s Magellan fund.
Despite being an elite money manager, Lynch was always a vocal advocate for individual investors - so this is a very good read. The interview was done in 1996 and the text here is over 9,000 words. But there is some amazingly relevant stuff in it, not least his experiences of 1982, when inflation was in double-digits and recession was ravaging the US economy - the stock market sank and then rocketed. Wild times, indeed.
Behavioural Investment - The Power of Not Having a View
This article from Joe Wiggins is timely. It’s about the dangers of having a view (which is basically forecasting) on many of the things in financial markets that are impossible for almost anyone to take a view on. Such is the unpredictable nature of investing, having forthright views (often stemming from over-confidence) is a mistake because it’s almost always costly in some form or another. Much more preferable is remaining neutral and accepting that no-one really knows.
Masters in Business - Siegel and Schwartz on Stocks for the Long Run
Barry Ritholtz is very good at geeing up his guests and propelling conversations in different directions. It feels like he’s 100% committed in his podcasts, which isn’t always the case with others. In this episode he talks to Jeremy Schwartz (head of research at the ETF provider WisdomTree Asset Management) and Professor Jeremy Siegel (academic, economist and author of Stocks for the Long Run).
It’s a very US-oriented discussion but it has a kind of global appeal. Siegel is worth a listen and has a lot to say on the growth/value dynamic (from ~22 mins) and the outlook for strategies (preference for high yield and value), and a great deal on inflation, rates and central bank policy. No surprise he’s a critic of the Fed, because, as they all agree, once some kind of pivot comes, the stock market could well take off again.
Nicolas Rabener - Sector and Factor Performance in Wartime
This article from Nicolas Rabener (Finominal) takes a look back through the data at how stock markets react to major wars. Much of his work concentrates on World War 2, where individual sector performance figures are surprising: some industries you’d think would do well in a war didn’t perform nearly as well as others. The war in Ukraine this year has, depressingly, raised the spectre of a nuclear conflict, which as Nicholas notes, would leave most of us in preservation mode.
Stock Club - The Not So Distant Future ft. Brett Winton
Brett Winton has the title of Chief Futurist at ARK Invest, the somewhat divisive investment house run by Cathie Wood. ARK focuses on future innovation, so Brett’s job is to figure out what that looks like. This conversation explores his views on what the drivers are and how the technological future will develop. Forecasting to this extent takes some next-level assumptions and it’s interesting to hear how he squares this stuff. One example is that they’re reckoning that AI and software improvements are going to deliver global GDP growth way above consensus expectations up to 2030. It’s interesting too, to hear his top stock picks, which include Tesla (obviously), Roku, Zoom, Teladoc and Coinbase.
Have a great weekend!
Ben
Thinking & Strategy
Athenarium
The Winner’s Curse — Richard Thaler on the Anomalies of Auctions
Of Dollars And Data
The Present Defines the Past
The Long View
[Podcast] Morgan Housel: ‘Little Rules About Big Things’
Infinite Loops
[Podcast] Edward Slingerland: Trying Not to Try (EP.131)
Institutional Research
The Evidence Based Investor
How do small value stocks perform in a recession?
Alpha Architect
Momentum Factor Investing: 30 years of Out of Sample Data
Janus Henderson
Is it darkest before the dawn for UK investors?
Franklin Templeton
Growth or Value? For Active Managers It Can Be Both
Finominal
Volatility-based Equity Allocations
Robeco
Beyond Fama-French Factors: Alpha from Short-Term Signals
Securities & Markets
Mindfully Investing
Expected Return Forecasts – 2022 Edition
Klement on Investing
Buy what you know: Fund edition
Vox Markets
*VIDEO* Q&A with Paul Scott
Excess Returns
[Podcast] Show Us Your Portfolio: Ryan Kirlin
Quality Small Caps
[Podcast] Small Caps Podcast with Paul Scott – Episode 18