CWS Market Review – November 28, 2023

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RIP: Charlie Munger

As I was preparing today’s newsletter, I got the news that Charlie Munger, Warren Buffett’s long-time partner, had died just a few weeks before his 100th birthday.

I don’t have enough time to offer a tribute, but I wanted to share with you some of my favorite Mungerisms:

“Someone will always be getting richer faster than you. This is not a tragedy.”

“People calculate too much and think too little.”

“99% of the troubles that threaten our civilization come from too optimistic accounting.”

“Knowing what you don’t know is more useful than being brilliant.”

“Investing is where you find a few great companies and then sit on your ass.”

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”

“Necessity never made a good bargain.”

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Rest in peace, Charlie.

A Great Month for Stocks

This has been a very good month for stocks. Unless something major happens later this week, November will go down as one of the best months for the S&P 500 in years.

I’m also pleased to see that our Buy List has outpaced the market on the way up. So far this month, the S&P 500 has gained 8.6% while the Buy List is up 10.6%.

The reason for the rally is quite simple. Investors have been convinced that the Fed is done, or just about done, with its rate hikes. One of the oddities we’re seeing is that there’s a pronounced gap between the Fed’s tough-sounding rhetoric and the market’s expectations. Even today, Fed Governor Michelle Bowman said that more rate hikes are needed. I’m not so sure she’ll get her way.

The market loves lower interest rates and that appears to be what it will get. The Fed meets again in two weeks and it’s highly unlikely that the FOMC will hike rates. Futures traders see about a one-in-three chance of a rate cut by March.

I’ll give you an example of how much the market loves low interest rates. I ran a test. I took all the data for the S&P 500 and the three-month Treasury yield over the last 18 months.

I then separated the data into three buckets: days when the three-month Treasury yield fell, days when it increased and days when it stayed flat. Then I looked at how the S&P 500 performed on those days.

On days when the three-month yield increased, the S&P 500 fell at an annualized rate of 7.63%. When the yield was unchanged, so were stocks. The S&P 500 rose at an annualized rate of 0.06%. But when the three-month yield fell, the S&P 500 rose at an annualized rate of 41.4%. Falling rates are the fuel of a stock rally.

The good news is that inflation has abated in recent months, but the Fed wants to be clear that it won’t stop hiking until inflation gets back to its target of 2%. This could be a mistake.

I think it’s more important that the trend of inflation heads lower rather than hitting some arbitrary target. Bear in mind that the price for gasoline has fallen for 60 days in a row. At some point, the Fed will have to give in and admit victory.

Lately, we’ve also seen a rally in long-term bonds. I’m somewhat hesitant to highlight a drop in long-term yields because it comes after a dramatic rise in yields. The yield on the 10-year Treasury rose from 3.3% in April to 5% in September. It’s back down to about 4.3%.

There are emerging signs that the economy is on shaky ground. The consumer was spending money feverishly this summer, but that’s faded away.

Worst Year for Home Sales in 30 Years

The housing market, in particular, is quite weak. Existing-home sales in the U.S. are on pace for their worst year in three decades. This is the impact of higher mortgage rates. On Monday, the government said that new-home sales fell 5.6% in October.

That was below expectations. Wall Street had been expecting an annualized rate of 723,000 new homes sold. Instead, it was just 679,000.

What’s happening is that so many people locked into mortgages at very low rates. That means that now they’re reluctant to take on new higher-yielding mortgages.

The Fed has thrown a deadly right hook at inflation, and it hit the housing market square in the face. Mortgage rates peaked in October and have started to come down along with Treasury yields.

Tomorrow, the government will revise its report on Q3 GDP growth. The initial report said that the U.S. economy grew in real annualized terms of 4.9% during the third quarter. That was the best quarter for economic growth since Q4 of 2021. Consumer spending greatly helped the economy during Q3.

Wall Street is starting to turn its attention to Q4. The Atlanta Fed’s GDPNow model says that the economy will grow at a 2.1% rate in Q4.

Broadridge Financial Hits New High

As I mentioned before, our Buy List has been acting well lately. I wanted to share with you one of our better-performing stocks which has been Broadridge Financial Solutions (BR).

This is actually a follow-up because I mentioned Broadridge in August 2022 in our free newsletter. At the time, the company had just reported very good results and it had been highlighted in Barron’s. This is part of what the magazine had to say:

Broadridge has been a steady stock for rocky times. That is thanks to a model heavy on recurring-revenue businesses and exposure to long-term trends that should remain in place no matter the near-term path of the economy or interest rates. Broadridge stock’s recent rally could cap gains in the near term, but the company’s long-term positive trajectory remains intact.

The company has a near monopoly in the business of managing and distributing investor communications for practically every public company in the U.S., plus mutual funds, exchange-traded funds, and more. That includes proxies, regulatory disclosures, and other reports and filings required of all U.S. securities issuers. Those are non-discretionary communications that companies and funds need to distribute no matter what the world is doing. That segment tends to grow at the pace of overall stockholdings in the U.S., with Broadridge able to eke out higher profit margins thanks to a continuing shift from printed documents delivered by mail to digital investor communications.

Broadridge also has a smaller but faster-growing segment focused on back-office functions for asset managers, investment banks and broker-dealers. Those include trade processing and settlement, record-keeping, and a variety of other compliance or regulatory functions. That is a software-as-a-service business that has expanded through a combination of organic growth and Broadridge buying companies with adjacent or complementary software and services.

The only thing better than a monopoly is a near-monopoly. It gets less attention from the authorities. The important point that Barron’s covers is Broadridge’s recurring revenue. That’s a great quality for a business to have.

I like looking at BR’s stock chart because you can tell when its earnings report comes out:

Earlier this month, Broadridge reported another strong quarter. For its fiscal Q1, BR earned $1.09 per share. That’s up 30% from a year ago, and it was 12 cents higher than expectations. Total revenues increased 12% to $1.431 billion, and recurring-revenue growth was up by 8%. Last quarter, BR bought back $150 million of its shares.

I’m glad to see that Broadridge is standing by its previous guidance. That calls for recurring-revenue growth of 6% to 9%, and EPS growth of 8% to 12%. The latter works out to a range of $7.57 to $7.85 per share. BR should have little trouble reaching that.

In August, Broadridge raised its annual dividend by 10% to $3.20 per share. The company has now raised its dividend in all 12 years since it went public, and 11 of those increases were by double digits.

The stock hit another 52-week high on Tuesday. We now have a 40.6% gain in Broadridge this year. Broadridge is a good example of a business that’s not well-known but has a strong, durable moat.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on November 28th, 2023 at 6:22 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.