Corporate governance advocates have long tried to persuade investors they can have it both ways: Do good, and you end up doing well too. New research suggests that advice may not hold true.
Some of corporate reformers’ pet moves, like allowing shareholders to vote on directors each year and avoiding special provisions to thwart takeovers, can boost the value of a company, a new Harvard University study finds. But there’s a big catch: The market may have already factored any benefits tied to these moves into the stock price. While at one time knowing whether a company had good governance might have been valuable information for investors, ever since a wave of public attention brought these issues to the fore in the 1990s, it hasn’t been effective as a guide for picking stocks. “Just because something is a good governance provision doesn’t mean it’s a good investment,” says co-author Lucian Bebchuk.
Tech investing used to be synonymous with initial public offerings. But these days many pros say investors would do better to stick with Silicon Valley’s version of blue chips.
On Monday all eyes were on deal site Groupon (GRPN), which reported a modest second-quarter profit. While Groupon has won fans from consumers and merchants and enjoyed a high profile IPO late last year, disappointing growth and confusing accounting disillusioned some investors. The stock lost two-thirds of its value since debuting in November. But it’s hardly the only recent IPO to have tanked. Facebook (FB) and music site Pandora (P) have both fallen by roughly half. Video-game maker Zynga (ZNGA) is down more than 70%.
U.S. corporate earnings are up about 8% during the second-quarter reporting season. But don’t worry: Wall Street analysts predict the growth rate will quicken again soon, reaching a handsome 13% next year.
On second thought, worry. A turnaround like that would require, if not quite a biblical miracle, at least an economic one.
While stocks have been on a tear over the past few weeks, many retail investors find themselves in a familiar position: on the sidelines.
The Standard & Poor’s 500-stock index was up again this week after hitting a three-month high of 1390 on Friday and notching its fourth straight week of gains. Over that period, the index rose nearly 3%. But many retail investors missed out on the rally, yanking $9 billion from equity mutual funds in July, according to the most recent available data from Lipper, a research firm. Even with stocks reaching new milestones, “mutual-fund investors couldn’t get themselves to pile more money into their accounts,” says Jeff Tjornehoj, a senior analyst at Lipper. Separate data suggests retail investors are bailing from equities just as pros are rushing in. Exchange-traded funds that track stocks took in $13 billion in July, and $41 billion this year. Analysts use such inflows as a gauge of institutional activity, because ETFs are still viewed largely as a tool used by financial advisers, traders and other professional money managers.
You gotta hand it to Bill Gross. The legendary bond investor has a net worth estimated in the billions, an ocean-side office in Newport Beach, Calif., and a reported devotion to yoga. But despite those seemingly sunny, serene circumstances, Gross maintains one of the more glum outlooks among professional money managers. In his August investment outlook letter, the founder of Pimco projects the death of stocks—or, as he puts it, “the cult of equity is dying.” He sees inflation-adjusted returns of around zero for a diversified portfolio of stocks and bonds. What’s an investor to do?
For one, take Gross’s words with a grain of sea salt, experts say. “These are great headline grabbers, but his crystal ball on equities is no better than anyone else’s,” says Larry Glazer, managing partner at Mayflower Advisors, a wealth management firm in Boston. In 2002, Gross predicted that the Dow would fall from 8,500 to 5,000, instead of rising as it did to a peak of 14,000 in October of 2007. Gross has a better track record with bonds—his $263 billion Pimco Total Return Fund has outperformed its benchmark and its fund peers for much of the past 10 years—but his early withdrawal from Treasuries cost the fund dearly in 2011.
Just over half of S&P 500 companies have reported results for the second-quarter earnings season. Two-thirds of these have exceeded Wall Street’s earnings estimates, according to Thomson Reuters I/B/E/S.
Don’t uncork the Champagne just yet, though. There are four big “buts”.
Shares of gun maker Sturm Ruger (RGR) have jumped 2.4% since Friday’s Colorado theater shooting. Smith & Wesson (SWHC) shares are roughly flat. Both outperformed the Standard & Poor’s 500-stock index, which has fallen 1.7% since Friday.
The bizarre stock gains seem related to speculation that the massacre, in which a lone man allegedly shot and killed 12 people and wounded 58 others in a crowded Aurora movie theater using an AR-15 assault rifle and other legally obtained guns, will lead to a sales rush for such weapons amid fears the tragedy will lead to future bans or restrictions on sales.
With Apple (AAPL) up a whopping 50% this year, is it time to sell some shares? One surprising place to find some guidance, say analysts: the resale market for iPhones.
The iPhone is Apple’s best-selling product, in part because it’s easy and inexpensive for customer to sell their old ones for new models. Here’s how it works: The retail price of a new iPhone starts at $600, but most customers pay wireless carriers a subsidized price of just $199 in exchange for a two-year contract. Since demand for used phones remains high here and abroad, resale sites such as eBay and Gazelle.com offer customers upwards of $200 for their older models – enough to get a new one for free. Gazelle, for instance, currently offers $277 for an 16 gb iPhone 4S in good condition.
Have retail investors completely bailed from the stock market? Just about, analysts say.
The European financial crisis and the poor employment outlook prompted global investors to pull $41.6 billion from equity funds in the second quarter. If those outflows seem mild given the volatility of the past few months, it’s because the majority of retail investors may have already dumped their stocks, says Cameron Brandt, a global markets analyst for EPFR Global, a research firm. Consider: investors yanked $54 billion from stock funds last August alone, following the Standard& Poor’s credit rating of U.S. debt and heightened concerns about the debt crisis in Europe. “There isn’t a lot of retail money left in the market,” says Brandt.
Indeed, retail investors keep fleeing stocks at a precisely a time when the “smart money” from institutional investors is going in, data shows. This year through July 4, U.S. stock mutual funds—which are mainly used by retail investors—lost $3.1 billion, according to fund researcher Lipper. However, stock exchange-traded funds, which can be a gauge of institutional activity in the short term, took in $35.2 billion for that same time period, says Tom Roseen, an analyst with Lipper. Retail investors are instead pouring money into cash and bonds, with $125.8 billion flowing into taxable bond mutual funds this year.
If the U.S. cuts its reliance on Middle East oil in half, analysts say patient investors who own U.S. energy stocks may be able to power their portfolios for years to come.
By 2020, nearly half of American’s crude oil be produced domestically thanks in part to greater use of techniques like hydraulic fracturing, the Wall Street Journal reported. That, combined with more efficient car engines and a greater supply of renewable fuel, will vastly diminish the need for Middle Eastern oil, energy analysts say. Such improved domestic production could enrich the equipment manufacturers and oil refiners. “From a fundamental perspective, we like where the industry is at the moment,” says Stewart Glickman, an equity analyst for S&P Capital IQ. “But you have to have an iron stomach for energy investing.”
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