Another new week for the markets, and money continued to look for equities to remain in bullish territory. One thing we all know from the history of investor behavior is that higher prices tend to beget higher prices — until that simply stops working. Fundamentals aside, of course.
Looking at today’s movers, Moody’s (MCO) was spiking higher on news it is settling several debt downgrade suits the company was facing. Eaton Corp (ETN) was also up following its earnings release this morning. Elsewhere, Wall Street analyst upgrades pushed stocks like SunTrust Banks (STI), PVH Corp (PVH), Walt Disney (DIS), and Abercrombie & Fitch (ANF) higher. On the flipside, cautious commentary had names like Bristol Myers (BMY) and Eastman Chemical (EMN) lagging for much of the day.
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We’re hearing lots of gripes about Apple’s (AAPL) decision to use the debt markets in its approach for enhancing shareholder value (dividend increases, share buybacks), rather than use its large cash hoard. First off, the company is likely trying to avoid a tax issue regarding the money it has sitting overseas, but that reason itself makes some steam a bit. Apple is battling an issue that is affecting many companies we follow these days, namely, that revenue growth is getting harder to come by. Thomson Reuters was out with a note recently saying only 43.9% of S&P 500 companies have reported revenue figures ahead of analysts’ expectations, and we are more than halfway through this earnings season. For companies like Apple, which are fortunate to sit on a huge cash hoard, they have the ability to use past success (evidenced by their $145 billion in cash) to keep their share price from getting hit harder than others which may not be in such a strong position. Eventually, companies like Apple will need to continue to innovate. There’s only so much financial engineering a company can do over the long term.
Companies can also choose to grow through acquisitions, and some have that strategy as a major part of their corporate DNA. Oracle (ORCL) and General Electric (GE) have made this a common practice for decades. The risk is just as great if the synergies aren’t reaching their desired goal, but some companies get really good at the process. Warren Buffett’s Berkshire Hathaway has the acquisition game down pat, for example.
So while it’s not exactly clear how a company can best put its cash to use (acquisitions/dividends/buybacks/R&D), there are several options out there — as well as multiple ways to reach a company’s goals (existing cash/debt/leverage). The same could be said for investors.
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