TEK2day Podcast

Quality Companies Outperform Over The Long-Term

We will say it until we are blue in the face: Management Teams Matter.

A high quality management team starts with a high-quality CEO. Quality management teams build quality companies. They do the hard, tedious work required to build the best products and processes in order to deliver maximum customer value. CEOs of these companies typically share certain attributes. For example, they invest for the long-term and work to drive long-term shareholder value. They will not for example chase a short-term “hype” opportunity to drive short-term gains as MicroStrategy (tkr: MSTR) CEO Michael Saylor has done in his pursuit of Bitcoin riches. Quality companies and CEOs such as Andy Florance of CoStar Group (tkr: CSGP), Henry Fernandez of MSCI (tkr: MSCI) and Bill Stone of SS&C Technologies (tkr: SSNC), are in it for the long haul. They won’t chase M&A targets with exorbitant valuations. They won’t roll out flavor of the month products that deliver negligible customer value. They will invest to deliver long-term shareholder value. This long-term approach may translate to underperformance during bubble periods such as the mother of all bubbles that we operate in today. However, quality management teams won’t blow you up. They won’t make poor capital allocation decisions nor deliver poor financial performance. Quality companies do tend to outperform when the economy and markets are soft and when markets are “normal”. Quality companies also tend to outperform over multi-year periods. Below we benchmark CSGP, MSCI and SSNC vs. the NASDAQ Composite. Read full article here: https://tek2day.com/2021/07/08/quality-companies-outperform-over-the-long-term/

1.) VCs are not aligned with Entrepreneurs.

2.) Many of these EV CEOs are frauds as are the companies. We told you so a long time ago. It matters who the CEO is.

3.) Fed Chairman Jerome Powell is campaigning for his job to be renewed in February rather than behaving as an adult as the Fed works to inflate the debt away.

CEORater Quick Take: We expect CEOs and CFOs to retire at a record pace by year-end 2021 due to the rigors of COVID. Last year it was establishing WFH environments. This year it is defining back-to-the-office policies and executing on them. Lots of CEO and CFO retirement announcements should come between October 2020 and December 2020. We may also see M&A activity spike near year-end as founder CEOs in particular step away from the non-revenue generating rigors of 2020 and 2021.

We compared the year-over-year percentage change in M2 (measured each month) to the year-over-year percentage change in the NASDAQ Composite (measured each month on a one-month lag) and found a strong correlation as measured by a correlation coefficient of 81.7%.

Our analysis covered the percentage change in M2 from April 2020 (when the money supply was increased to combat COVID), through March 2021. We used March 2021 as an endpoint as by then the NASDAQ Composite had traded off and had begun to plateau. Thus it would seem that some of the “free money” mailed to companies (PPP), individuals (federal unemployment relief), and used to purchase government agency bonds as well as corporate bonds (Fed Reserve actions) either directly made its way into NASDAQ-listed names or helped support NASDAQ valuations indirectly. This speaks to the asset inflation brought on by loose fiscal and monetary policy.

Read the full article at this link where you may access our data table in full: https://tek2day.com/2021/06/17/strong-correlation-between-m2-growth-nasdaq-composite-growth/

One of the great distortions caused by the joint fiscal and monetary policy of 2020 and 2021 is that equities and the lowest-rated non-investment grade credits are two of the all too rare places where investors may earn a return. Savers and Fixed Income investors be damned. Many companies are enjoying their stocks trading at all-time highs. Management teams are getting a pass on lackluster operating performance as a result of their stocks trading higher over 2020 and 2021. To this we say “What about opportunity cost?”

Consider Roper Technologies (tkr: ROP). ROP shares trade at an all-time high, yet organic revenue declined in the most recent quarter on a Y-O-Y basis (we have been critical of Roper’s M&A strategy). ROP is not alone. Many companies are enjoying record valuations with less than stellar operating performance. Don’t fall for the excuse that a company is victim to its industry which may be suffering from COVID or some other such exogeneous factor. If that’s the case, reduce waste, ensure the core business is strong, and look for opportunities to strengthen the company with smart, strategic partnerships and acquisitions. My advice would be to focus on the former at the present moment until such time as valuations begin to pull back.

"Rewarding Non-Productive Activities with New Money Leads to Price Inflation":

The punchline is that a significant percentage of new money creation over the past year was allocated to non-productive use cases. “Helicopter” money to individuals and non-performing firms are two examples. When capital is deployed for non-productive use (acquiring cryptocurrencies for example), that capital invariably bids up prices causing asset price inflation. Conversely, recipients that are able to deploy capital in a productive manner (small software development firm for example), create value through production of goods and services (Software products in this case), which does not lead to asset price inflation. Below we have included two charts published by the Federal Government which illustrate our point and speak to the asset price inflation or “bubbles” we have voiced our concern about over the past 14 months. (more....)

Read the full article here: https://tek2day.com/2021/06/09/why-we-have-price-inflation/

More bogus CPI numbers reported yesterday. The CPI itself is a poor price inflation measure given it excludes so many asset classes such as equities, art and crypto. Let’s focus on one CPI line item – “food at home” which was up 0.7% over the past 12 months ended May. Sorry, that’s a bogus number. My family’s grocery bill is up 20-30%. That percentage increase is in absolute terms and does not contemplate the old retail trick of shrinking packaging while maintaining prices which is happening. We’ve sampled a couple of local restaurants over the past two weeks and noted that prices were flat yet portion sizes were reduced by 20-25%. These prices increases are not transitory. Food suppliers are not going to triple inventories simply to get prices down. Same for lumber and metals. It’s not happening. What is clear is that the Federal Government and the Federal Reserve are working in concert to inflate prices, thereby inflating GDP, thereby inflating tax receipts, thereby shrinking outlays to interest expense on the mountain of debt outstanding. Buckle up because price inflation will get worse, not better.

Don't believe the Fed's spin that asset price increases are "Transitory". Price appreciation is here to stay given that the Fed has inflated the Money Supply (M1) by 4.7x since January 2020.

“Inflation” to lead headlines again when CPI data is reported. Real-world price appreciation is well ahead of the Fed’s 2% target.

If last month was any indication the term “inflation” will dominate market-related headlines when May CPI data is released on Thursday June 10th at 8:30am ET (See Google Trends chart below for search term “inflation” as of Thursday May 27th). Recall that when April CPI data was released on May 12th, many were surprised to learn of the 4.2% annual increase (April 2021-April 2020 period). We don’t publish a TEK2day inflation model, but trips to the grocery store, farmers markets and Home Depot were sufficient to directionally indicate that prices have increased over the past few weeks. Price increases are a predictable by-product of a foolish monetary policy that has inflated the money supply (M1) by 4.7x since January 2020 (chart below). Stagflation is the end-game to this experiment in ultra-inflationary monetary policy. As to the question of “transitory inflation” – that is Fed marketing spin. A casual glance at housing prices, equities, building materials, precious metals, commodities, used car prices, art, food, etc. speaks to something more permanent. The catalyst of course is the Fed’s dramatic expansion of the money supply. However, don’t blame Mr. Powell for The Fed’s actions. COVID forced his hand after all. “Good times create weak men, and weak men create hard times”. – G. Michael Hopf

I’ve yet to be convinced of the value proposition of incorporating ESG into the investment decision-making process. What are the definitions of the “Environmental” and “Social” elements of ESG and how are each directly correlated to alpha generation? You are preaching to the choir as it relates to “Corporate Governance” – the “G” in ESG. No other variable is as important to a company’s success as is the Management Team/CEO. The composition of the Board of Directors is a close second.

Link to the full TEK2day ESG article: https://tek2day.com/2021/05/31/g-is-where-the-value-is-in-esg/

Here is the link to the TEK2day Electricity Generation article referenced in the episode: https://tek2day.com/2021/05/19/evs-musk-biden-and-homer-simpson/

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