In our financialized US economy with increasingly indexed securities markets, capital appreciation and alpha require a forcing function: the price-insensitive buyer.This is true not just for Value/Smallcap equities, but all assets.
Spot-on. I remember 15 years ago I was covering Chinese banks. We hired a young guy from China and I was teaching him everything I knew about fundamental investing in banks. One day he says to me, "You know what, Rob? None of this matters. Policy is the only thing that matters in China. Focus on policy, not fundamentals." As a classic "value guy," I was repulsed at the thought that price wouldn't follow fundamentals. Yet here we are. Western markets have completely turned Chinese.
Totally wild. Have to unlearn everything. Reminds me of coming out of college and hitting the trading floor and old hands telling me "all this economics you spent nights staying up cramming? Toss it. Useless."
a less cynical take…the large growth stock outperformance is largely an earnings story, it was in 2022 as well just in the other direction. this is quantifiable.
not all small/value is doomed, small value stocks are working as long as they have high/reasonable FCF margin…which seems reasonable to me.
plenty of value cyclicals are working like CAT or URI…because their EPS is rising. i agree many commodity companies have taken the first big step to clean up balance sheets and focus on FCF….the future is less dark.
a lot of dispersion among the mag7 recently which would suggest it’s not all passive index flow…TSLA+AAPL going the opposite direction despite big equity fund inflows recently
Fair point Mr Blonde - nice to have you here mate! You were actually one of my favorites back when you were active on X before the break, because we have probably have disagreed as much as agreed (or more) on individual points over time, and yet your pushback is always among the most thoughtful and I always learn something. Seriously - appreciate it! And totally agree on dispersion in Mag7, definitely seeing it and it is influencing narratives bigtime.
I prefer the structure of dividends over stock buybacks, but the current environment driven by passive cap-weighted insensitive buyers heavily rewards buybacks over dividends.
Having management pay dividends today is like stubbornly being the one guy in the theater who refuses to stand up when everyone else is, and thus misses the show.
Right. If you invest in "value" don't expect your return from a re-rating of the multiple, it's going to come from earning the FCF through and hopefully management spending that on buybacks.
Also, immediately subscribed. Less people reading your stuff makes me even more excited!
Mate really really appreciate it! I am excited to be doing this and think the format is healthier for my sanity - hopefully that translates into value for you too!!
Great article. And there is a circular effect to this. Investors in value realise
the only stocks which work are the ones with buybacks. So you have a double effect. The company buys back shares and active funds prioritize stocks with buybacks. So those stocks start to trade well with less volatility. Then the quants notice a trend developing and they become marginal buyers too. But like you say. It starts with the corporate buyback.
We used to rely on governments to redress the balance when incentives worked against the Principals- in this instance, shareholders. Now everyone has been captured, not least the swarm of ‘Consultants’ who enhance the agents’ ability to avoid rational scrutiny.
I disagree that dividends don't matter. A good dividend enables the shareholders to compound by doing their own buybacks. You just won't see it in the share price.
yes, if capital appreciation is of zero interest to the shareholder certainly. Think there is more of an attraction there to private/unlisted - dividend harvesting to pay debt and meet distributions to LPs etc etc... the problem is without buybacks the net outflow of Active bleeds the share price so unless the dvds are fantastic and offset that... (plus your dividends are double taxed for Americans - not efficient)
I will never forgive myself for not plowing back into this. I owned it a long time back and missed it. But textbook case of the buyback float-tightening forcing function in action.
Spot-on. I remember 15 years ago I was covering Chinese banks. We hired a young guy from China and I was teaching him everything I knew about fundamental investing in banks. One day he says to me, "You know what, Rob? None of this matters. Policy is the only thing that matters in China. Focus on policy, not fundamentals." As a classic "value guy," I was repulsed at the thought that price wouldn't follow fundamentals. Yet here we are. Western markets have completely turned Chinese.
Totally wild. Have to unlearn everything. Reminds me of coming out of college and hitting the trading floor and old hands telling me "all this economics you spent nights staying up cramming? Toss it. Useless."
I love Cloudbearstack 🥹
Bless
Mom’s going to outperform again this year, isn’t she?!
It's so easy right? Just set it and forget it.
https://x.com/mrblonde_macro/status/1746606303147917367?s=46&t=JKPQNED2xQ7Rbw6aXAJrKQ
a less cynical take…the large growth stock outperformance is largely an earnings story, it was in 2022 as well just in the other direction. this is quantifiable.
not all small/value is doomed, small value stocks are working as long as they have high/reasonable FCF margin…which seems reasonable to me.
plenty of value cyclicals are working like CAT or URI…because their EPS is rising. i agree many commodity companies have taken the first big step to clean up balance sheets and focus on FCF….the future is less dark.
a lot of dispersion among the mag7 recently which would suggest it’s not all passive index flow…TSLA+AAPL going the opposite direction despite big equity fund inflows recently
Fair point Mr Blonde - nice to have you here mate! You were actually one of my favorites back when you were active on X before the break, because we have probably have disagreed as much as agreed (or more) on individual points over time, and yet your pushback is always among the most thoughtful and I always learn something. Seriously - appreciate it! And totally agree on dispersion in Mag7, definitely seeing it and it is influencing narratives bigtime.
Very true, unfortunately.
I prefer the structure of dividends over stock buybacks, but the current environment driven by passive cap-weighted insensitive buyers heavily rewards buybacks over dividends.
Having management pay dividends today is like stubbornly being the one guy in the theater who refuses to stand up when everyone else is, and thus misses the show.
Foreign investors also do better from buybacks. No WHT.
Wow! Excellent post, I could not like and save this fast enough, thank you!
thank you General!
Right. If you invest in "value" don't expect your return from a re-rating of the multiple, it's going to come from earning the FCF through and hopefully management spending that on buybacks.
Also, immediately subscribed. Less people reading your stuff makes me even more excited!
Mate really really appreciate it! I am excited to be doing this and think the format is healthier for my sanity - hopefully that translates into value for you too!!
Great article. And there is a circular effect to this. Investors in value realise
the only stocks which work are the ones with buybacks. So you have a double effect. The company buys back shares and active funds prioritize stocks with buybacks. So those stocks start to trade well with less volatility. Then the quants notice a trend developing and they become marginal buyers too. But like you say. It starts with the corporate buyback.
was talking with a major manager recently who flagged that their buyback factor in shareholder yield funds was a hands down performance standout.
Yes, so that's the quant factor coming into play.
This is such an unbelievably cynical piece…and probably also 100% correct.
I hate being wired this way but can't help it :-(
We used to rely on governments to redress the balance when incentives worked against the Principals- in this instance, shareholders. Now everyone has been captured, not least the swarm of ‘Consultants’ who enhance the agents’ ability to avoid rational scrutiny.
Great post out the gate! Pumped for your regular pieces on here.
thank you mate! Huge fan as you know :-)
Great stuff. Been following you on twitter, and I like this format better. Just subscribed!
Joshua thank you so much, really appreciate the support!
I disagree that dividends don't matter. A good dividend enables the shareholders to compound by doing their own buybacks. You just won't see it in the share price.
yes, if capital appreciation is of zero interest to the shareholder certainly. Think there is more of an attraction there to private/unlisted - dividend harvesting to pay debt and meet distributions to LPs etc etc... the problem is without buybacks the net outflow of Active bleeds the share price so unless the dvds are fantastic and offset that... (plus your dividends are double taxed for Americans - not efficient)
A poetry
🙏
$AMR is a great example for a very successful buyback strategy.
I will never forgive myself for not plowing back into this. I owned it a long time back and missed it. But textbook case of the buyback float-tightening forcing function in action.
NYCmoms from twitter here. I am delighted to be able to read your thoughts without the twitter assholes
Thank you Alisa! Better for my sanity too :-)