[1] Stocks are risky! The key take-away from the market turmoil so far in 2016 is a reminder that stocks are risky (*). Indeed! Here's Prof. Damodaran:
The global equity markets collectively lost $5.54 trillion in value during the month, roughly 8.42% of overall value. The global breakdown of value also reflects some regional variations, with Chinese equities declining from approximately 17% of global market capitalization to closer to 15%. The good news is that there have been dozens of months that delivered worse returns in the aggregate. In fact, the US equity market's performance in January 2016 would not even make the list of 25 worst months in US market history. What I learned from January 2016 is that stocks are risky (I need reminders every now and then), that market pundits are about as reliable as soothsayers, that the doomsayers will remind you that they "told you so" and that life goes on. I am just glad the month is over!
(*) Aswath Damodaran: "January 2016 data update", Musings on markets, 1 February 2016
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[2] Platform companies. Morgan Stanley analyst Kate Huberty recenly argued that Apple would command a forward P/E multiple of 18x if valued as a "large-cap platform company across industries"; however, the forward P/E multiple would tumble to 13x if the company were to be valued as a large-cap IT harware vendor. But what is a platform company? The FT has been publishing some interesting articles on this topic: "In its simplest form, a platform company is one that expands by constant acquisitions, usually powered by huge debt ... basically a company dependent on acquisitions for growth, taking advantage of cheap borrowing costs to buy up businesses to expand quickly. The recent travails of hedge fund manager Bill Ackman (of Valeant fame) has led him to admit: "We believe 'platform value' is real, but, as we have been painfully reminded, it is a much more ephemeral form of value than ... other assets" (*).
(*) Arash Massoudi, Miles Johnson & Dan McCrum: "Platform party topples over into hangover" Financial Times, 2 February 2016.
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[3] Platform companies & short-sellers. Short-sellers, understandably, do no like platform companies. Here's Jim Chanos: "They're investment banking-driven. Those roll-ups are just huge fee payers to Wall Street". This is from the FT (*):
Valeant Pharmaceuticals, Altice, Platform Specialty Products and Nomad Foods have all grown rapidly by making a string of big acquisitions facilitated by record-low interest rates. That activity has placed these platform companies among the leading participants in the overall mergers and acquisitions boom. Since August, shares in each of the four have fallen by more than 50 per cent, as investors began to take fright at their heavy debt burdens and ability to grow without further deals. Valeant, Altice, Platform Specialty and Nomad have a collective debt burden of $78bn at a time when the cost of corporate debt has been rising. The $1.1bn in fees paid by the four companies since 2013 is a significant revenue source. The figure is roughly equal to the amount of fees paid by Swiss based corporations in 2015 and close to the total fees made from South and Central America over the same period. Valeant has paid $398m in total investment banking fees since 2013, a figure which includes payments to banks that helped fund, advise and underwrite its debt-backed expansion. The largest recipients of fees from Valeant were Goldman Sachs and Deutsche Bank, which received $60m and $48.5m respectively, according to estimates from Thomson Reuters and Freeman Consulting.
(*) Arash Massoudi, Miles Johnson & Dan McCrum: "Wall Street the winner as four 'roll-ups' spend $1bn on investment bank fees", Financial Times, 2 February 2016.
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[4] Accounting reforms. A new IASB financial reporting standard is likely to have implications about the way revenue and leases are accounted for:
All will have an impact on investors, as they have the potential to affect lending arrangements, dividend policies, tax planning and share prices. They also represent a step up in regulatory co-operation between the US and international standard setters. Converging the different corporate reporting frameworks has been fraught. While the two regulators were largely able to agree on the revenue recognition and lease accounting standards, attempts to agree a common base for assessing financial instruments failed in 2014 ... However, it is the new standard for accounting for leases — known as IFRS 16 — that is arguably the most important, because it ends a practice that investors claim has hidden assets and liabilities from plain sight (*).
(*) Kate Burguess & Harriet Agnew : "Accounting’s big shake-up to bring more transparency", Financial Times, 21 January 2016
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