Under the Hood of the 500 Largest US Companies

Standard and Poor’s gives us a tremendous amount of data from the largest US companies through their S&P 500 earnings reports.  Using this data, I put together what I thought were some of the most important trends happening in US businesses today:

1.  Sales are growing- for the last quarter of 2012, sales grew over 7%.  Ever since the bottom of the market in 2009 commentators have been saying that earnings growth has come entirely from cost cutting.  This is just plain wrong.  Since March of 2009, sales are up over 30%.

2.  Profit margins are shrinking- the amount of profit companies squeeze from every dollar in revenue hit its lowest level since the 4th quarter of 2009.  Currently, margins are slightly above 8%, which is still slightly above the longer term average of 7.7%. 

3.  Dividends continue to expand- cash dividends from the largest US companies have increased by 67% since the third quarter of 2009.  At the end of February 2013, the dividend yield on the S&P 500 was 2.2%, which is still above what you can earn on a 10 year treasury bond.

4.  Valuations are attractive- many metrics continue to point to attractive valuations.  The P/E ratio shows that the price of the market is 15 times its earnings.  This is slightly below it’s average of 18 since 1988. 

Probably the most encouraging data point is the 7% jump in sales in the 4th quarter of 2012.  If you remember, this was a time when all of the news centered around the fiscal cliff.  The idea that uncertainty and/or higher tax rates were going to cause consumers and businesses to retrench did not seem to materialize. 

Another Example of Our Conflicted Industry…

Many of you who know Greenspring’s story know that one of the main reasons we started this firm was a fundamental belief that the brokerage model is broken and that clients should be working with an objective advisor that is agnostic when it comes to investment products.  Well, another example of that broken model has been revealed in a recent article at the New York Times.  Brokers and former brokers from one of the largest banks in the world have disclosed some of the selling practices, which (surprise, surprise!) are heavily tilted towards the firm’s proprietary products:

Current and former brokers in the program contend that the bank, at times, prioritized profit to the detriment of its clients. While such criticism is not uncommon in the financial industry or other sales-driven businesses, the brokers say JPMorgan took an extreme approach.

To bolster sales, said the advisers, many of whom spoke on the condition of anonymity because they feared retribution, JPMorgan largely pushes its own bank-branded investments, which include a mix of mutual funds. While the practice can be legal, competitors have moved away from such investments after facing perceived conflicts. The concern is that, driven by fees, banks will push their own products over lower-cost options with stronger returns.

Having spent the first part of my career at a similar firm, I can tell you this is the norm, not the exception.  Click over if you want to read the entire story:

Selling the Home Brand: A Look Inside an Elite JPMorgan Unit

Real Estate Caused This Mess, Can It Get Us Out?

Earlier today we got the new home sales report, and the data was positive.  Here are some of the details:

  • Homes sales in January were up 15% versus a consensus of 3%
  • Sales were up nearly 29% from a year ago
  • Median price of a new home was $226,400, up 2.1% from a year ago
  • The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.1 in January from 4.8 in December. All of the decline was due to a faster selling pace. Inventories of new homes were unchanged

It’s this last bullet that is interesting.  With the supply of homes dropping so quickly, there is a very good chance that new home construction will continue its steady climb, in order to keep pace with demand.  Here is a historical look at the months supply of new homes:

FRED Graph

As you can see it is rare that the supply of new homes stays at these levels for extended periods and when it does, it typically creates pent up demand.  It has taken several years to work off much of the excess we experienced in the real estate boom, and we still may have some more time to go, but this area of the economy is showing signs of life again, which is welcomed news for investors.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.