Monday, September 29, 2014

Female Board Nominees Increase

Since 2008, the number of female board nominees at S&P 500 companies has risen from 15 percent to 30 percent. For Russell 3000 companies, the number of female board nominees has also doubled over the same period, from 11 percent to 22 percent. Surprisingly, even with the large increase in female nominees, the number of female board members at S&P 500 companies has only risen from 16.3 percent to 18.7 percent. The increase in female board members is international as the number of female board members in Great Britain and Canada has increased as well.

Friday, September 19, 2014

Changing Zs

The Altman Z-score is designed to measure the financial strength (or lack thereof) for a company. But, as corporate financing decisions have changed, so has the Z-score. Historically, a Z-score less than 1.8 indicated possible financial distress, but Edward Altman argues that now negative Z-scores indicate financial difficulty. Currently, there are are six companies in the S&P 500 with negative Z-scores. Of course, the Z-score was designed to measure the financial strength of manufacturing companies. For non-manufacturing firms, the Double Z Prime score is more appropriate

Investing In An Efficient Market

If we assume that the stock market is efficient, where should you invest? In an efficient market, the best alternative is likely a passive index fund. For example, funds that track the S&P 500 exactly mimic the portfolio composition of the S&P 500. Stocks are bought or sold only when changes are made to the companies included in the S&P 500. As a result, there is no management decision on which stocks to buy or sell, so management costs are small and the return of the fund will almost exactly track the S&P 500. With an actively managed fund, the manager must outperform the market in order to offset the management fees, a daunting if not impossible task in an efficient market. Eugene Fama, the Nobel prize winning father of the efficient markets hypothesis, argues that a passive investment strategy is likely the best performer. And none other than famed investor Warren Buffett has directed that most of his wealth be invested in passive index funds after his death.   

Tuesday, September 16, 2014

Buybacks Increase

Stock buybacks for the first six months of 2014 have reached $338.3 billion, the largest amount in the first six months of a year since 2007. The top repurchasers so far this year are Apple ($32.9 billion), IBM ($19.5 billion), and ExxonMobil, Pfizer, and Cisco, each with more than $9 billion in repurchases. Even more amazing is that companies spent 31 percent of the cash flow generated in the second quarter on buybacks. We feel the textbook makes a compelling case that share repurchases are a more tax efficient method of paying dividends. However, critics argue that share repurchases are used to artificially boost stock prices and that management isn't investing as much as it could in the business, which will hurt long-term growth.

The SEC And Financial Reports

Financial scandals always seem to draw headlines, from Enron to Parmalat. Regulations such as Sarbanes-Oxley have been enacted to help reduce the likelihood of future financial scandals. With the additional tools, the SEC has become more focused on efforts to uncover financial fraud. For example, if a company impairs an asset, the SEC will ask why a company didn't impair the asset earlier. The SEC is also making sure that as company's financial statements have year-to-year consistency, as well as whether a company's accounting is consistent with industry practices.As a result, company management must be familiar with the company's accounting procedures and internal controls. Remember, the goal of the SEC is that a company accurately disclose its financial condition and risks

Sunday, September 14, 2014

Credit Risk Yield Spread Increases

In recent years, the yield spread for low-grade or junk bonds has been relatively low. However, recent economic and Federal Reserve indicators have led junk bond investors to demand a higher yield spread. For example, Global Management LLC recently sold eight-year junk bonds with a coupon rate of 9.25 percent. When the bonds were originally marketed, the coupon rate was 8.5 to 8.75 percent. And AK Steel Holding had to increase the coupon rate in its new bonds from 7.5 percent to 7.75 percent. For BofA Merrill Lynch, the yield spread that investors require for that company's high yield debt has increased from 3.8 percent to 4.05 percent.

Thursday, September 4, 2014

Macros For Excel

You may have noticed when you open the Excel Master files you have downloaded, Excel will likely open the files in "Protected Mode". The reason this happens is that Excel allows you to create macros. Macros are a program written to eliminate the need to redo common tasks. For example, you can create a macro to calculate the future value of a growing annuity, a function that is not readily available in Excel. However, in using a spreadsheet created by someone else, there is the possibility that they have written a malicious macro in to the Excel workbook. As this article explains, using the Protected Mode allows you to see everything that is coded into the workbook without allowing the workbook access to your computer, thus preventing a malicious code from being loaded onto your computer.  

Wednesday, September 3, 2014

A Busy IPO Market

2014 may be the biggest year for IPOs since 2000. One big IPO, Alibaba, is expected to raise about $20 billion on its own. But other deals have hit the market this year. For example, there have been 51 biotech IPOs through September 2nd, an increase of 113 percent over 2013. As many as 40 more IPOs are expected to hit the market before the end of the year, which could bring the amount raised in 2014 IPOS to $80 billion, the second largest IPO year on record for funds raised.

Tuesday, September 2, 2014

Capital Budgeting For A College Degree

The decision to attend college is at least in part a capital budgeting decision. A recent report by economists at the Federal Reserve Bank of New York completed that analysis for us. The NPV of a college degree today is about $273,000, down from a high of $338,000 in 2001, but three times the 1980s NPV of $80,000. Additionally, the payback period today is about 10 years, much quicker than the 15 to 25 years during the 1970s. What about the IRR? The IRR overall for a college degree is about 15 percent. Engineers have the highest IRR at 21 percent, while education majors have the lowest IRR at about 9 percent.