|Characteristics||Checks & Tools|
|Durable Competitive advantage||Check Economic Moat at Morningstar, Vuru.co, industry specific rankings|
|Thick Profit Margins||Check Gross and Net Profit Margins against competitors at Gurufocus|
|Low Capital Expenditures||Read financial statements, check Morningstar|
|Integrity||Check Annual Reports, Statements, Conference call, attend AGM|
|Look after the long term interests of shareholders|
|Capable Management||Glassdoor, LinkedIn Reviews, Past Track Records|
|Great Culture||Glassdoor, LinkedIn, talk to existing employees|
|Growing Business (Scalability)||Check Total Addressable Market,|
|Healthy Debt||Check Quick Ratio, Debt/Equity, Current Ratio at Morningstar or financial reports|
Federal Express just announced its conference call and FedEx is known as the bellwether of the global economy. In its latest quarterly announcement, it was forecast of above 2% growth in the global economy and there was also a rise in packages and volume sent in the last quarter. So far so good and it looks like the bull still has some room to run.
So what other companies earning is important to note for global economic health?
A simple check will be the top constituents in the MSCI Index. As of this writing, it’s as below
- General Electric (In particular the sales in China to estimate the growth in second largest economy)
- 3M Co
- Honeywell International
- United Technologies Corp
- Union Pacific Corp
- Lockheed Martin Corp (Would exclude this as it’s in the defense sector)
- United Parcel Service
- Caterpillar (This is a good gauge as the items are big ticket items and does reflect corporate optimism in the industry)
- Diverse – Both in where the companies are and in the end markets served
- Tends to be economically sensitive
- Highly correlated to broad markets
- Tends to have lower profit margins
- Corporate Spending – Economic strength, Corporate financial health, access to cheap capital
- Construction spending in turn driven by
- available market supply,
- real estate prices,
- vacancy rates,
- consumer spending,
- financing conditions and tax incentives,
- regional economic and population growth and demographics,
- input availability
- Beneficiaries of increased construction spending
- Aerospace and Defense (heating systems, air con, elevators, security systems)
- Building Products
- Construction and Engineering
- Commercial services such as waste management services
- Industrial Conglomerates
- Transportation Industries
- Beneficiaries of increased manufacturing
- Electrical Equipment
- Industrial Conglomerates
- Trading companies & Distributors
- Transportation Industries
- Transportation Equipment demand is primarily driven by an overall growing economy and industry profitability. Major industry beneficiaries are:
- Aerospace & Defense
- Industrial Conglomerates
- Industrials exposed to commodities
- Construction and engineering
- Industrial Conglomerates
- Road & Rail
- Trading Companies & Distributors
- Government Spending
- Defense Spending (Aerospace & Defense, Construction & Engineering, Machinery, Industrial Conglomerates)
- Infrastructure Spending (Machinery, Construction & Engineering, Industrial Conglomerates, and Electrical Equipment)
- Capital Goods’ industries make up the bulk
- Wide sector weights deviations can occur from country to country
- Concentrated in relatively few large players
- Market values of the largest firms outweigh global peers by far
- Barriers to entry in some industries
- Government involvement in some
based on https://www.msci.com/gics
|Capital Goods||Aerospace & Defense||Aerospace & Defense
Manufacturers of civil or military aerospace and defense equipment, parts or products. Includes defense electronics and space equipment.
Defense companies mainly found in US and dependent on the size of US defense budget. Defense backlog often include
Aerospace companies manufacture non-defense related commercial airplanes and other industrial goods. Mainly duopoly of large aircrafts but extremely competitive with emerging countries designing new planes.
|Building Products||Building Products
Manufacturers of building components and home improvement products and equipment. Excludes lumber and plywood classified under Forest Products and cement and other materials classified in the Construction Materials Sub-Industry. Competition is a major issue due to limited barriers to entry. Demand is driven primarily by residential and commercial construction and remodeling activity.
|Construction & Engineering||Construction & Engineering
Companies engaged in primarily non-residential construction. Includes civil engineering companies and large-scale contractors. Excludes companies classified in the Homebuilding Sub-Industry. Projects usually take years and awarded based on their technical expertise, prior track record, and bid competitiveness.
|Electrical Equipment||Electrical Components & Equipment
Companies that produce electric cables and wires, electrical components or equipment not classified in the Heavy Electrical Equipment Sub-Industry.
Demand for both mainly driven by global industrial production and capacity utilization levels, corporate capital expenditures and manufacturing capacity investments (upgrades, expansions, new facilities, etc).
|Heavy Electrical Equipment
Manufacturers of power-generating equipment and other heavy electrical equipment, including power turbines, heavy electrical machinery intended for fixed-use and large electrical systems. Excludes cables and wires, classified in the Electrical Components & Equipment Sub-Industry.
|Industrial Conglomerates||Industrial Conglomerates
Diversified industrial companies with business activities in three or more sectors, none of which contributes a majority of revenues. Stakes held are predominantly of a controlling nature and stakeholders maintain an operational interest in the running of the subsidiaries.
|Machinery||Construction Machinery & Heavy Trucks
Manufacturers of heavy duty trucks, rolling machinery, earth-moving and construction equipment, and manufacturers of related parts. Includes non-military shipbuilding.
|Agricultural & Farm Machinery
Companies manufacturing agricultural machinery, farm machinery, and their related parts. Includes machinery used for the production of crops and agricultural livestock, agricultural tractors, planting and fertilizing machinery, fertilizer and chemical application equipment, and grain dryers and blowers.
Manufacturers of industrial machinery and industrial components. Includes companies that manufacture presses, machine tools, compressors, pollution control equipment, elevators, escalators, insulators, pumps, roller bearings and other metal fabrications.
|Trading Companies & Distributors||Trading Companies & Distributors
Trading companies and other distributors of industrial equipment and products.
|Commercial & Professional Services||Commercial Services & Supplies||Commercial Printing
Companies providing commercial printing services. Includes printers primarily serving the media industry.
|Environmental & Facilities Services
Companies providing environmental and facilities maintenance services. Includes waste management, facilities management, and pollution control services. Excludes large-scale water treatment systems classified in the Water Utilities Sub-Industry.
|Office Services & Supplies
Providers of office services and manufacturers of office supplies and equipment not classified elsewhere.
|Diversified Support Services
Companies primarily providing labor oriented support services to businesses and governments. Includes commercial cleaning services, dining & catering services, equipment repair services, industrial maintenance services, industrial auctioneers, storage & warehousing, transaction services, uniform rental services, and other business support services.
|Security & Alarm Services
Companies providing security and protection services to business and governments. Includes companies providing services such as correctional facilities, security & alarm services, armored transportation & guarding. Excludes companies providing security software classified under the Systems Software Sub-Industry and home security services classified under the Specialized Consumer Services Sub-Industry. Also excludes companies manufacturing security system equipment classified under the Electronic Equipment & Instruments Sub-Industry.
|Commercial & Professional Services||Professional Services||Human Resource & Employment Services
Companies providing business support services relating to human capital management. Includes employment agencies, employee training, payroll & benefit support services, retirement support services and temporary agencies.
|Research & Consulting Services
Companies primarily providing research and consulting services to businesses and governments not classified elsewhere. Includes companies involved in management consulting services, architectural design, business information or scientific research, marketing, and testing & certification services. Excludes companies providing information technology consulting services classified in the IT Consulting & Other Services Sub-Industry.
|Transportation||Air Freight & Logistics||Air Freight & Logistics
Companies providing air freight transportation, courier and logistics services, including package and mail delivery and customs agents. Excludes those companies classified in the Airlines, Marine or Trucking Sub-Industries.
Companies providing primarily passenger air transportation.
Mainly three types of airlines – the major airlines, the regional airlines and the low-cost airlines.
Companies providing goods or passenger maritime transportation. Excludes cruise-ships classified in the Hotels, Resorts & Cruise Lines Sub-Industry.
Shipping generally is broken down into wet and dry bulk. Dry bulk shipping is the transportation of bulky raw materials such as coal, iron ore that react badly to water.
Demand is driven by the strength of the global economy and demand for food and commodities. Industry profitability is driven by freight rates, which are most commonly linked to the Baltic Dry Freight Index.
Wet bulk shipping is the transportation of wet goods, primarily oil and petrochemicals. The industry is very cyclical.
|Road & Rail||Railroads
Companies providing primarily goods and passenger rail transportation.
4 types of railroads in US:
Companies providing primarily goods and passenger land transportation. Includes vehicle rental and taxi companies.
|Transportation Infrastructure||Airport Services
Operators of airports and companies providing related services.
|Highways & Railtracks
Owners and operators of roads, tunnels, and rail tracks.
|Marine Ports & Services
Owners and operators of marine ports and related services.
Bullish and Bearish Industrial Fundamentals
|Bullish Drivers||Bearish Drivers|
|Increasing GDP||Decreasing GDP|
|Increasing Industrial production||Decreasing Industrial production|
|Increasing Durable goods orders||Decreasing Durable goods orders|
|Improving ISM Manufacturing numbers||Decreasing ISM Manufacturing numbers|
|Increasing Construction spending||Decreasing Construction spending|
|Increasing Defense spending||Decreasing Defense spending|
|Increasing Commodity prices||Decreasing Commodity prices|
|Improving Corporate financial health||Worsening Corporate financial health|
|Easy Access to capital||Difficult Access to capital|
|Increasing Monthly sales orders||Decreasing Monthly sales orders|
|Increasing Rail volumes||Decreasing Rail volumes|
|Increasing Cargo volumes||Decreasing Cargo volumes|
|Increasing Truck tonnage||Decreasing Truck tonnage|
Ways to evaluate economic health
- Business cycle indicators (www.conference-board.org)
- Industrial Production (www.federalreserve.gov)
- Advance report on Durable goods (www.census.gov) manufacturers’ Shipments, inventories, and orders
- ISM Report on Business (www.instituteforsupplymanagement.org)
- Business inventories
- Capacity utilization (www.federalreserve.gov)
- Construction spending (www.census.gov)
- Infrastructure spending (www.bea.gov)
- Defense spending (www.defense.gov)
- The Architecture Billings Index (www.aia.org)
Measuring corporate health
- Company Earnings Announcements
- SEC Filings
- News Sources
- Corporate Profit reports (www.bea.gov)
- Interest Rates
- Equipment Leasing and Finance Association’s monthly leasing and finance index (http://www.elfaonline.org/)
- New Business Volume
- Aging of Receivables
- Average losses as a percentage of net receivables
- Credit approval ratios as percentage of all decisions submitted
- Total number orf employees
- Loan Survey (www.federalreserve.gov)
Industry Specific Indicators
- Capital Goods – Monthly machine orders released by some companies such as
- Boeing (Aerospace & Defense)
- Emerson Electric (Electrical Equipment)
- Deere (Agricultural Equipment)
- Fastenal (Trading Companies & Distributors)
- Grainger (Trading Companies & Distributors)
- Illinois Tool Works (Machinery)
- Parker- Hannifin (Machinery)
- Transportation metrics
Infrastructure can be broken to
- Energy – Electric power generation, transmission, and distribution, and natural gas transmission and distribution.
- Social – Schools, Hospitals, Stadiums, public housing, community facilities and prisons.
- Telecommunications – Fixed and mobile phone lines, the internet, cable networks, satellite, television and radio towers.
- Transport – Airport runways and terminals, railways, toll roads, bridges, highways, tunnels, ports, logistics centers, and other transit systems.
- Water and Sanitation – Potable water generation and distribution and sewage collection and treatment.
Infrastructure Investment Drivers
- Supporting Economic Growth
- Overusing aging infrastructure
- Growing Urbanization
- Encouraging Foreign Direct Investment
- Ensuring Public Safety
Risks to Infrastructure Growth
- Economic and government – bureaucracy, corruption, budget, lack of public support. Delays are common.
- Execution – Labor shortages, commodity and machinery shortages, and cost overrides and increases
- Financial Market – Difficulty raising funds.
Participating in Infrastructure Boom
- Public Private Partnerships
- ETFs and mutual funds
- Broad-based – IGF, GII, MGU, FGIAX, CSUAX, KGIAX
- Water exposure – PHO, FIW, CGW, PIO
- Energy exposure – NLR, MFD, TYG
- Other – PKB, EVX
- Buying infrastructure-related stocks
- Construction & Engineering
- Electrical Products
- Industrial Conglomerates
- Transportation Infrastructure
Aerospace & Defense
- Defense companies tend to do well when expectations for future defense spending and military modernization efforts are rising
- Defense companies have historically outperformed in bear markets and recessions because product demand is less variable compared to more economically sensitive industries
- Aerospace companies tend to do well when air travel fundamentals are favorable, including sustained economic growth, increased air traffic, and airline profitability.
- Market acceptance of a new design is crucial given production and design costs and the number of years the planes remain in service
- A number of the larger US Aerospace & Defense companies reach a diversified set of markets, linking them to the broad economy as a result
Air Freight & Logistics
- Package delivery demand tends to correlate with economic strength and do well when economic growth expectations are increasing.
- Weak economic conditions and oil high prices can limit profits and industry success.
- Driven by consumers wealth and travel demand.
- Both discretionary and elastic. Hence airline pricing can affect demand, profitability, and share prices.
- Rising oil prices can have a detrimental effect on profits and share prices.
- Tend to do well when residential and non-residential construction is strong and remodeling activity is elevated.
Construction & Engineering
- Tend to do well when corporate and government spending on infrastructure and commercial construction is strong
- Pay attention to major project delays and escalating project costs as it will affect profits.
- Global shortages of qualified engineers can cap the growth of individual firms
Commercial Services & Supplies
- Very diverse and generally do well when corporate spending is high and the economy is strong.
- Environmental & Facilities Services tend to do well during periods of economic growth and strong construction levels.
- Tend to be more defensive than other industrial industries.
- Demand historically follows economic conditions and sensitive to activity in the construction market, industrial production levels, electronic component production and spending by utilities for replacements, expansions, and efficiency improvements.
- Do well when pricing increases can stay above input cost pressures.
- A slowdown in corporate profitability and a decrease in manufacturing levels can slow electrical equipment demand.
- Do well when the global economy is strong.
- Strong infrastructure spending helps drive the larger industrial conglomerates that manufacture large fixed assets.
- Global diversification helps drive relative outperformance when the global economy performs better than the domestic economy.
- Demand for machinery has historically followed general economic conditions and sensitive to construction market activity, industrial production levels, commodity prices, and corporate capital expenditure trends.
- Dry bulk shipping demand is generally driven by the strength of the global economy and demand for food and commodities. Shipping rates are also driven by dry bulk demand, as well as available ship supply and port capacity, both of which are expected to increase moving forward.
- Wet bulk shipping demand is driven by demand for oil and oil derivatives like petrochemicals.
- Container ship firms are driven by global trade and available supply ships.
- Driven by corporate activity and consulting and legal service needs.
- Human Resource & Employment Services companies tend to be driven by employment demand and corporate profitability
Road & Rail
- Trucking and Rail companies are driven by global economic growth and consumer and corporate spending levels.
- Historically highly sensitive to oil prices and corporate success will be likely be driven by how well it can pass on higher costs to its customers.
- Operational improvements play heavily on stock prices and profitability
Trading Companies & Distributors
- US trading companies tend to be leveraged to US economic growth and industrial production and manufacturing levels, while foreign firms tend to be driven by global economic growth and commodity prices.
- Sales are driven by both corporate and government spending levels
- Historically considered the defensive industry as toll-road demand is usually fairly stable.
- Decrease in road traffic primarily driven by the macro environment and oil prices
- Port operators tend to do well when global trade is strong. Limited global capacity magnifies the industry’s sensitivity to elevated product demand.
Examples of falling demand:
- Recession – regional or global; perceived or real
- Reduction in corporate capital expenditures
- Weakening corporate profitability
- Difficulty accessing credit to purchase new equipment
- Falling construction activity
- Commodity pressures – high prices drive commodity producer expansions but hurt manufacturers who have the commodity as an input cost
- Reduction in government infrastructure and defense spending
- Removal of government tax incentives for equipment purchases and alternative energy spending
- Inability to source necessary parts and supplies
Industrial Websites and Data Sources
|Aerospace Industries Association Forecast||http://www.aia-aerospace.org|
|AIA Construction Forecast||https://www.aia.org|
|Annual Construction Equipment Business Outlook||https://www.aem.org/|
|Current Market Outlook (Commercial Boeing)||http://www.boeing.com/commercial/market/|
|FAA Aerospace Forecast||https://www.faa.gov/data_research/aviation/|
|International Air Traffic Association Industry Outlook||www.iata.org|
|ISM Manufacturing Report on Business||https://www.instituteforsupplymanagement.org|
|USDA Agricultural Projections||https://www.ers.usda.gov/|
|Air Cargo World||http://aircargoworld.com/|
|Air Transport Association||http://airlines.org/|
|Association of Equipment Manufacturers||https://www.aem.org/news/|
|Industrial Market Trends||http://news.thomasnet.com/|
|Manufacturing Economy Daily||http://www.nam.org/|
|McGraw Hill Construction||https://www.construction.com/|
|Quadrennial Defense Report||https://www.defense.gov/News/Special-Reports/QDR/|
|Supply Chain Brain||http://www.supplychainbrain.com|
|Journal of Commerce||http://www.joc.com/|
|Bureau of Economic Analysis||https://www.bea.gov/|
|Bureau of Transportation Statistics||https://www.bts.gov/|
|Cass Information Systems Freight Index||http://www.cassinfo.com/transportation-expense-management/supply-chain-analysis/cass-freight-index.aspx|
|Department of Defense||https://www.defense.gov/|
|Electroindustry Business Confidence Indices||https://www.nema.org/Intelligence/Pages/Electroindustry-Business-Conditions-Index.aspx|
|Equipment Leasing and Finance Association||https://www.elfaonline.org/|
|Robotics Industries Association||https://www.robotics.org/|
|World Trade Organization||https://www.wto.org/|
Your Investment Profile/Strategy
Before making any investments, be it equities or any financial products or investment instruments, you need to understand your investment profile.
- Investment Timeframe (how long)
- Your risk appetite
- Your investment strategies and asset allocation plan
- How much time you have to review your investments
- Your investable amount
- Your expected ROI/investment goals
Risks involved in the investment instruments
In any investment instruments, there is always risks. Even cash is not spared as there is inflation risk. Understand the risks associated with the investment before committing. Make calculated risks and optimize the Sharpe ratio.
Expected ROI in the investment instruments
What is the expected ROI from it and how what is the timeframe.
Time needed to review the investment instruments
In every investment instruments, we always need to review it periodically. Some more, some less. But one thing that is finite is our time. Invest in something that you can manage.
Manager of the investment instruments
In most investment instruments unless you personally manage it, there is always a person or organization that administers/manages it. You want to put your money to someone that you can trust. Someone that has high integrity. You rather put your money to someone with high integrity and low competence than a high competence and low integrity person. One of the most important factors that Tom Gayle uses is that he assesses the integrity of the management of the company that he is going to invest in. You also want to place your money to someone with good track record.
Commission and Management Charges of the instruments
I had invested in products that gave marginal returns but charges me with management fees. In the end, I paid more management fees and the returns were no better than bonds.
Fundamentals of the Investment Instruments
Invest in something that you know comfortably in. You must understand how does the investment product works and what are the factors that will appreciate or depreciate the value. For equities, understand how the sector works and what is the company business model and growth plan.
- An earnings-to-price yield of twice the triple-A bond. (If the triple-A bond is yielding 5.5%, the required earnings yield is 11%, or a price/earnings multiple of 9.1 or less.)
- A P/E ratio down to four-tenths of the highest average P/E ratio the stock attained in the most recent five years.
- A dividend yield of two-thirds the triple-A bond yield (or 3.67% today).
- A stock price down to two-thirds of tangible book value per share.
- A stock price down to two-thirds of net current asset value. (Current assets less total liabilities.)
- Total debt less than tangible book value.
- Current ratio (current assets divided by current liabilities) of two or more.
- Total debt equal or less than twice the net quick liquidation value as defined in rule five.
- Earnings growth of 7% compounded over the past 10 years (or a doubling of earnings over the past 10 years).
- No more than two years of declining earnings of 5% or more over the past 10 years.
Companies with a minimum trailing 12 month after tax profit margin of 7% and rising.
Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising.
Compare sales and EPS growth to the same period last year
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year.
Insider owns at least 10%.
Cash Flow from operations
Positive cash flow
Profit Margin Consistency
Profit margin must be consistent or on a rising trend
R&D as a percentage of sales
This is not that important for non-high tech and non-medical stocks. But for stocks in the high tech and medical ones, we would like to see an increase in spending on R&D to stay on the cutting edge.
Cash and Cash Equivalents
Consistent and Rising Trend
Account receivable to sales
This methodology wants to make sure that a company’s accounts receivable do not get significantly out of line with sales. It’s a warning sign if a company’s accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more.
Long-Term Debt/Equity Ratio
The FOOL Ratio (P/E to Growth)
Average Shares Outstanding
Company is not increasing the shares to dilute it. E.g. Raising capital through new shares issuance to pay off debts and not for expansion
Daily Dollar Volume
Greater than 1 million and lesser than 25 million.
Not less than $7
Income Tax Percentage
Make sure that the business is paying the full rate to Uncle Sam. Due to previous earnings losses, some companies can carry forward up to a few years of tax credits. While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth. If companies are paying less than 34 percent per year in taxes, you should tax their income at that rate, to see through to the real growth.
Reference: Motley Fool Investment Workbook
Reference Fisher Investments on Consumer Staples
Difference between Consumer Staples and Discretionary
Staples – Inelastic (necessity)
Discretionary – Elastic (income or price affects consumer demand)
Consumer Staples Sector Drivers
- GDP Growth
- Consumer Spending – Personal Consumption Expenditures (PCE) and what the consumers are spending on. Higher PCE, +ve for Consumer Staples
- Business Spending
- Government consumption and investment
- Net exports
- Interest Rates – Affects some companies on borrowings
- Currency – Market of companies
- PPI (Cost of materials)
- Crude, Intermediate Goods, Finished Goods (affect consumer staples company differently)
- Trade Policy
- Elastic/Inelastic Preference
- Brand Value
Consumer Staples Industry and corresponding sub-industries
- Distillers & Vintners
- Soft Drinks
- Food Products
- Agricultural Products
- Packaged Foods & Meats
- Household Products
- Personal Products
- Food and Staples Retailing
- Drug Retail
- Food Distributors
- Food Retail
- Hypermart & Super Centers
Food Industry Drivers
- Population Growth
- Shifting Consumer Preferences
- Demographic Shifts
- Foreign Markets
- Supply Drivers such as weather, competition for resources, and technology advancements
Beverages Industry Drivers (Non-Alcoholic)
- Population Growth
- Shifting consumer preferences
Beverages Industry Drivers (Alcoholic)
- Population Growth
- Shifting consumer preferences
- Foreign Markets
Tobacco Industry Drivers
- Price Increases Offset Volume Declines
- Pricing and Mix
- Foreign Markets
Household & Personal Product Drivers
- Brand Equity
- Foreign Markets
- Innovation. Firms operating in these industries spend a lot on R&D in the form of consumer learning to develop new products
Food & Staples Retailing Drivers
- Demographic Trends
- Private Label
- Relatively noncyclical
Challenges in Consumer Staples
- Finding ways to grow in mature industries
- Innovation for organic growth
- Merger & Acquisition but need to check whether there’s synergy
- Dealing with volatile input costs
- Product Formulations (use less expensive alternative)
- Restructuring (e.g. JIT inventory)
Consumer Staples in Emerging Markets
- Matching EM Needs (e.g. packing less for single serve)
- Different Natural Resources Standards
- Direct Sales Networks
- Building Distribution to match rapid growth
- Market Penetration Strategies
Useful Consumer Staples Sector Resources