Weekend Reading

15 July 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Quote of the week: “We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterized the past is over; that the rapid improvement in the standard of life is now going to slow down; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us. I believe that this is a wildly mistaken interpretation of what is happening to us.”  This is a quote from John Maynard Keynes in the 1930s after the largest US economic crisis.

Wall Street’s safest bets are now in bubble territory (Ellie Ismailidou and Anora Mahmudova, @EllieIsma and @AnoraJourno, MarketWatch)

While the S&P 500 is up ~5%, there is one sector that is up over 21% in the first half of 2016. Can you guess what sector that is? Technology, Healthcare? No, it’s plain old Utilities. This sector hasn’t seen this strong of first half performance in 25 years. Yet the sector’s earnings growth for 2016 is only expected to be 4%. This disparity is causing valuations to become very rich. Utilities typically offer a higher dividend yield than other sectors of the S&P 500. This has caught the attention (and asset flow) of many yield-seeking investors at a time when bond rates are dismal, if positive at all!

Bizarro World (Michael Batnick, @michaelbatnick, The Irrelevant Investor)

Would you buy a business for 25x earnings when it’s only had single-digit earnings growth over the past 3 years? Well, Mondelez recently put in a bid to buy Hershey with those terms. This continues the story from the last article; low volatility stocks have seen an uncharacteristic rise in price causing nose-bleed valuations.

A Medical Mystery of the Best Kind: Major Diseases Are in Decline (Gina Kolata, @ginakolata, NYT)

Medicine has come a very long way, but there is still much that we don’t know. Sometimes these unknowns turn out to be good. There are many major diseases, such as heart disease and cancer, that are on the decline and scientist are mystified.

Uber’s Achilles’ Heel (Justin Waldron, @jtwald, Medium)

The networking effect has made a nice moat for Uber. However, this may disappear as car manufacturers develop self-driving cars and decide to rent the cars to users for rides, instead of selling the car outright. “If Toyota can either sell a new Camry for $20,000 or rent it on demand for 200,000 miles at $.25 a mile and make $50,000 instead, they will pivot the business to on-demand rides. $.25 a mile is almost 5 times cheaper than the current rate Uber charges in San Francisco.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.