Bruce Springsteen ....on Wall Street!
“It’s hard to be a Saint in the City” is the last song on Bruce Springsteen’s first album in 1973 – “Greetings From Asbury Park” - on side B no less (that’s right - he’s been at it over 45 years). The song chronicles the struggle of a young man’s attempt to do what he believes is right and good while growing up on the streets of a city (ostensibly nearby NYC for NJ native “The Boss”). This song recently popped up on the XM Springsteen channel and I drew parallels between the lyrics and Wall Street’s (The City) periodically penal treatment of stock prices of companies that are doing what’s right and good - "the Saints".
Last week Darren Jaroch, the Lead Portfolio manager for Putnam’s Equity Income Fund, spoke to several Piedmont Wealth Advisory clients at our annual Barolo dinner. During the lively Q&A, he outlined his teams disciplined stock selection approach. As is the practice of many long-term value biased investment managers (including Warren Buffet), Darren’s team focuses heavily on Fundamental Analysis to evaluate companies to include in their portfolio - (think companies who have actual profits and verifiable positive cash flow and have demonstrated ability to pay their shareholders dividends – even annually increasing them).
This approach requires disciplined process and patience for both the investor and the managers. The difficulty with this strategy for "media hyped / whats the next big thing" minded investors is that Wall Street "the city" occasionally beats down the prices of these stocks when the logically projected growth rate reported doesn't meet their ofttimes lofty expectations.
To clarify, projected future years growth rates are shared by the company on a regular basis to “Wall Street” (groups of analysts and portfolio managers) during their Quarterly Earnings Calls. Company CEO’s and CFO’s discuss the trailing quarter results and are inevitably asked to forecast their upcoming quarter and years performance – to “provide some visibility into the future”! These “Saints” (honest intelligent CEO's /CFO's) speak openly and thoughtfully about what they see impacting their company's future revenue and profitability projections – economic downturn, tariffs, growing / declining market share, new product launches, etc. However, “the City” (Analysts) are seemingly trained to listen for & reward great “revenue growth rate” stories. Their assumption is "great growth rates" will translate into great profits. Following the calls - glowing reports and buy recommendations flood the media.
In cases like this “the city” has rewarded companies projecting growing revenues (but low to no profits) by issuing glowing reports . At some point the music stops (and prices drop) when these companies do not deliver either the overly optomistic growth rate or more importantly any profits. We are seeing this lately with Tesla and some on Wall Street are starting to see some cracks in the Netflix story.
In “Only the Good Die Young”, Billy Joel offers – “I’d rather laugh with the sinners than cry with the saints” ….but when Wall Streets sinners (stocks priced for revenue growth perfection) come tumbling down after repeated shortfalls – the only ones crying are the shareholders. Fundamentally sound companies such as JP Morgan, Microsoft and Johnson and Johnson will likely never win an investor return sprint – but they have shown the ability to run and compete nicely in a marathon. We like the marathon runners story! Remember, sometimes crying with the Saints is actually more rewarding over the long haul. Without to much effort we all can remember some of the "sinners" of our younger days who carried the torch of greatness for a period of time only to have that torch quickly run out of gas never again to be reignited.
Investor Patience and Disciplined Process – the cornerstone of Piedmont Wealth Advisory’s approach.
Please note: No companies listed above or references to them are intended to serve as recommendations to buy or sell. They are included for illustrative purposes only. Every investor has differing goals, objectives and risk tolerances and these should always drive the decision-making process in selecting investments.
Douglas Birnie
Managing Director
