I read a great article in Forbes today about how investors shouldn't invest in stock in companies where growth stalls, but earnings increase. The valid point made was companies who stall usually have shrinking sales in the future. The article showcased two companies, Microsoft and McDonald's and stated only 7% of companies have significant growth after a stall point.
Microsoft and Intel are both great companies, but I would not invest in either at this point. I think both companies will continue on, but their sales will only be a shadow of what they used to be. This is due to the breakage of the classic WinTel duopoly on desktop and laptop computers. The breakage occurred because consumers and companies switched to tablet and phone computers operating iOS or Android. Many workers still need desktop computers, thereby creating a limited demand for them, but many companies switched to thin clients for their desk bound workers in place of the more expensive desktop computers.
In an attempt to stay relevant, Microsoft threw in the towel with the effectively free Windows 10 OS, Microsoft will leverage their patent portfolio into earnings that will flow into the future, so don't expect the company to disappear. They also produce a killer tool, the Surface Pro 4. Its a high performance tablet type ultra light laptop computer. The company will do fine in the future, but they won't have those huge sales and profit numbers from years ago.
Intel is in a similar position to Microsoft, where sales have cooled, but they are still bringing out innovative products. Lay offs are on the horizon as frequently seen in cooling companies. Intel is reporting flat sales, quarter to quarter, which means their sales potential has been met. However, their new line of server chips, Skylake and Greenlow, are both stellar in performance and low power consumption.
McDonald's surprised me. During the Great Recession, they were the darlings of Wall Street because they posted high growth sales and smart marketing in the form of coffee. Today, though, they are the cheapest game in town. You can get a breakfast for $2 because all beverages are a dollar, and there is an extensive dollar menu. Nowhere else is this possible. Fast food is all about the average ticket and low prices will make that all important metric diminish. The Forbes article indicates the McDonald's success story is about to change.
I don't think McDonald's, Intel, or Microsoft are alone in flat sales. If you look at NYSE YTD stock charts, that market is lower now than it was on January 1st, 2015, and this usually indicates weak fundamentals. NASDAQ is showing opposite trends with YTD growth. Likely this opposing trend is due to a tech bubble, I don't see how tech can continue to rise with Amazon offering $50 quad core tablets. A rising tide raises all ships, but an ebb tide lowers them.
I see evidence of lowering prices creating an ebb tide. Acquaintances tell me Toyota called them to turn in their 2014 car to buy a 2015 car to lower their payments. Gasoline, a main driver of inflation remains low. Social Security COLA (Cost of Living Adjustment) won't be powering an increase for seniors this year due to low inflation. With the China Economy receding and leaders employing desperate measures to keep growth at 7%, I would say we have a period of slack global demand. US GDP Growth is similarly slow. I would expect to find more companies with dismal increases in sales.
One area is booming, and that is Real Estate. Here in Portland OR, we have a housing shortage with rents and home prices increasing dramatically. Market values rose 20% over the past year. Of course, this reminds me of the go go years in the early 2000s. If people start to use their houses as ATM machines, then the economy could start to grow again. Time will tell.
All in all, we are in interesting times. Hopefully everyone will come together to ensure a return to fast economic growth.