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| U.S. stock indices rose 20% and higher in 2017. Who were some of the winners and losers?What will happen in 2018? |
A year later, equity market players (investors, analysts, traders, and bankers) are patting themselves on the back and feeling fortunate. The markets survived and even thrived during Trump-triggered political volatility. It was a good year. Most stock indices were up around 20%, some higher. Arguably, the biggest winners are investors who parked funds in mutual-fund indices and ETF's, avoiding higher management fees to reach such lofty returns.
With the Dow eclipsing 25,000 in early January and some momentum carrying over, will 2018 be even better?
A year later, pundits and columnists do what they always do. They contemplate whether a correction is ahead and a long-run bull market will be derailed. They assess the short-term favorable impact of the latest U.S. tax legislation. They ponder the impact of large companies with billions in cash residing in foreign balance sheets repatriated back into U.S. operations. They decipher patterns in consumer spending, consumer and corporate debt levels, and hidden messages from Federal Reserve Board governors.
And then they dare to predict boldly where we might go from here. The market, meanwhile, follows its own course.
A quick look back.
What companies and sectors were winners and losers? What explains a momentous surge or an inexplicable decline when the market in general is trending upward? Let's examine a sample.
Among S&P 500 sectors, tech, healthcare, pharmaceutical, banking and industrial stock portfolios all exceeded 20% returns. Consumer, retail and real estate sectors lagged, although they experienced gains. Energy stocks, as a sector, had losing returns, even as oil and commodity prices bounced back from 2015-16 lows. (All, of course, depends on how a sector is defined and what stocks are included in a vast array of energy-related companies.)
Across all industries, there were some real winners, where gains exceeded 40% and share prices vaulted to new highs because of new corporate strategies, new markets, and well-planned expansion and because of the continuing phenomenon of "the internet of things" and plain ole luck.
The computer-chip maker Nvidia saw its shares increase by 85% in 2017 (and the rise continues in 2018). It benefits from growing markets in gaming and artificial intelligence. With P-E ratios above 50, investors have expectations of continued growth in sales and earnings. The $8 billion-revenues company is expanding quarter after quarter and generating over a billion in annual cash flow to add to a balance sheet with mounds of cash (over $5 billion) and a modest amount of debt.
PayPal is a fin-tech stock that also surged in 2018 (88% increase). It has gone through transitions and iterations (mergers, spin-offs, etc.) and now stands alone. Like Nvidia, investors are paying for grand expectations of growth. At PayPal, investors perceive monetary payments will become more digital, and such electronic wallet payments will no longer be an experiment or a technology fashion.
Like Nvidia, PayPay's P-E (price-earnings) ratios exceed 50 and reflect educated guesses the company will continue to grow. Income in recent years has fluctuated and in 2017 was flat from quarter to quarter (generating satisfactory 10-11% returns on book equity). The company appears to have adopted an Amazon corporate strategy of focusing on revenue growth, managing costs reasonably, but not allowing rigorous cost control to keep it from growing as rapidly as it wants to.
Revenues are approaching $13 billion annually. The company operates with almost no debt, lots of invested cash, and a strong equity cushion. Some observe PayPal is a financial institution; others classify it as a technology company. Many see it as a combination-- a major participant in financial technology with years of a track record and a realistic strategy.
For those who endured tough times with the company, Freeport McMoRan, the global copper-mining company, was a 2017 winner. Its shares increased 46%. Just a year or two ago, with commodity and copper prices imploding, the company was a financial mess. Losses were rampant, revenues plummeted (with declining copper prices), and a mountain of debt couldn't be managed. Ratings agencies and creditors worried. And it had to confront political turmoil and labor strife in its mines in Indonesia.
The company went through significant restructuring. It redefined its businesses, shed some operations, sold assets to raise cash, and has managed to get the debt burden under control ($20 billion in debt has declined to less than $13 billion). It helps, too, prices for copper and gold (two of its mined products) have rebounded.
At Freeport, investors and traders aren't necessarily buying long-term sustainable growth, as much as they are rewarding a company for having solved operating problems, dealt with debt, and, of course, taking advantage in upswings in mineral prices.
Even in a winning year in equity markets, there are losers--companies and industry sectors that are struggling, where products and prospects are dim, cash is disappearing and corporate strategy is confusing or questionable. That applies to much of the retail industry (think Sears, JCPenney, Macy's, The Gap, etc.), where companies coast to coast are near panic trying to respond to online-shopping trends.
Sears and JCPenney are attempting every trick in the retailing book to stuff the flow of losses, although both will likely report 2017 fiscal losses. Share prices have declined in the last few years, but occasionally bounce up and down as investors evaluate whether company managers have restructured adequately or have adopted the miracle strategy that will turn their fortunes around.
Macy's encounters the same, but it still makes money. In 2017, Macy's shares declined 30%. The company continued to address falling revenues, dwindling cash flow, and debt. Shutting down stores is a short-term solution. New marketing strategies, supposedly a long-term solution, haven't worked as well as hoped. Investors and traders aren't sure what's next for the company or any old brick-and-mortar retail company. At least Macy's is reporting earnings (barely) (about $300 million in 2017 (estimated) on a precipitous drop in revenues (about 6% return on book equity).
Macy's management is fortunate it's not confronting what Sear's and JCPenney are facing today: another year of high-probability losses in 2018, cash disappearing from the balance sheet, and futures even more uncertain than that at Macy's.
Under Armour, the upstart sneaker and athletic-apparel company, suffered a 50% decline in stock value and might have been a victim of excess enthusiasm in a company thought to be able to gnaw at Nike's market share.
Until this year, the company had been performing well--double-digit percentage revenue growth, steady earnings improvement, and good returns. In 2017, growth was stunted, and quarterly earnings were erratic. Had the company reached a peak? Had it run out of clever ways to attack Nike's stranglehold of the marketplace? And has the industry saturated?
In recent days, Under Armour's share values have recovered in small amounts. Traders may have soured on the company during the year, but may have corrected their pessimism.
It's January, and observations about equity portfolios are as varied as the industries that comprise the S&P 500. Optimists point to economic metrics, employment figures, companies' optimism and companies with billions of cash searching for creative ways to invest in the long term. Pessimists remind all that bubbles burst and we've been down these euphoric paths many times before.
Tracy Williams
See also:
CFN: The Recent Spike in Bank Stocks, 2017
CFN: Shareholder Activism at P&G, 2017
CFN: Amazon and Whole Foods, 2017
CFN: What Happened at JCPenney? 2013
CFN: Second-Guessing Snap, 2017
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