We believe that Chinese policymakers have started stimulus programs that will include tax cuts, required reserve ratio reductions, policies to boost local government spending, and more direct lending to private enterprises. We also expect a U.S.-China trade deal and diminished Fed rate hike concerns to also help improve the outlook for emerging markets more broadly.
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Effective in 2017, FASB accounting rule changes for the tax benefit of stock compensation (ASU 2016-09) lowered GAAP tax rates, boosting both earnings and operating cash flow. The positive impact was accentuated by a bull market and generous grants of stock compensation. Given significant share price declines in 2018 for some companies, we see potential for this ‘boomerang’ to begin negatively impacting GAAP tax rates and operating cash flow in 2019. Among sectors, the greatest impact will be in communication services, consumer, financial, healthcare, technology, and some industrials. The 75 companies we find to be most at risk are included on pages 4-6.
Since plummeting -20% from the end of September to the day after Christmas, the S&P 500 has bounced back by roughly +10%. We believe that the rebound has primarily been driven by Fed’s recently more dovish tone, which has undone most of the damage done following the 12/19 FOMC meeting. Looking ahead, we expect investors to become increasingly focused on fundamentals and global growth prospects. In this note, we briefly review the six key developments that we’ll be closely monitoring in order to determine whether our bullish base case remains intact.
We believe that weak productivity growth has been the biggest secular drag in the aftermath of the 2008-09 Financial Crisis. Looking into the back half of 2019 and 2020, U.S. fiscal stimulus will be fading, while monetary conditions will most likely continue to gradually tighten around the world. The critical question at this point will become whether or not productivity growth picks up to compensate.
Twenty-First Century Fox (FOXA) announced that it has filed a form 10 for the spin-off of Fox Corporation. Fox Corporation will include a portfolio of news, sports, and broadcasting businesses. The transaction is expected to close in the first half of 2019. For the fiscal year ended 2018, FOX had revenues of $10.2 bn.
Increasingly, over the past year, we’ve been focused at identifying potential short stock ideas/avoiding stock blow-ups. Our short screens comprise the 10 most potent valuation, earnings quality, capital creation, capital allocation, and sentiment metrics we’ve found to be most useful in searching for ideas on which to complete additional fundamental analysis. These short screens represent the backbone of the process that we use for which to dig deeper and identify the most compelling short ideas.
Earnings results over the past three reporting seasons have been strong, with companies handily surpassing analysts’ expectations on both the top- and bottom-lines. This includes S&P 500 companies in aggregate beating revenue by +1.3% and earnings by +6.5% during 3Q earnings season.
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