New Mauboussin Report: The Incredible Shrinking Universe of Stocks – The Causes and Consequences of Fewer U.S. Equities

Credit Suisse’s Global Financial Strategies team has published a new report, “The Incredible Shrinking Universe of Stocks – The Causes and Consequences of Fewer U.S. Equities”

  • There has been a sharp fall in the number of listed stocks in the U.S. since 1996.
  • While listings fell by roughly 50 percent in the U.S. from 1996 through 2016, they rose about 50 percent in other developed countries. As a result, the U.S. now has a listing gap of more than 5,800 companies.
  • The propensity to list is now roughly one-half of what it was 20 years ago. The net benefit of listing has declined.
  • Mergers and acquisitions (M&A) are the leading reason for delisting, and initial public offerings (IPOs) are the primary source of new listings. In the last decade, M&A has flourished while IPOs have floundered.
  • Regulation has increased the cost of listing and facilitated meaningful M&A.
  • As a consequence of this trend, industries are more concentrated and the average company that has a listed stock is bigger, older, more profitable, and has a higher propensity to disburse cash to shareholders.
  • Exchange-traded funds have filled part of the list gap.

Click here to read the full report.

See here for a collection of links to other Mauboussin papers.

New Mauboussin Report: To Buy or Not To Buy – A Checklist for Assessing Mergers & Acquisitions

To Buy or Not To Buy: A Checklist for Assessing Mergers & Acquisitions

“Companies that act early in an M&A cycle tend to generate higher returns than those that act later. The first movers enjoy the benefits of a larger pool of targets and cheaper valuations than companies that buy later in the cycle. Cheap and accessible financing prompts action by buyers at the end of the cycle. So do bandwagon effects, or what Warren Buffett, chairman and chief executive officer of Berkshire Hathaway, calls the ‘institutional imperative.’”

Credit Suisse’s Global Financial Strategies team has published a new report, “To Buy or Not To Buy.”

  • Companies spend more on mergers and acquisitions (M&A) than any other alternative for capital allocation.
  • Empirical analysis shows that M&A creates value in the aggregate, but that the seller tends to realize most of that value.
  • While the market’s initial read of a deal is not perfect, there does not appear to be a bias.
  • Careful studies show that value creation is largely independent of EPS accretion or dilution.
  • Buyers see their stock rise when the present value of synergies exceeds the premium they pledge to the seller.
  • The form of financing and category can send signals about a deal’s merit.
  • We suggest answering four questions in order to assess mergers and acquisitions: How material is the deal? What is the market’s likely reaction? How did the buyer finance the deal? Which strategic category does it fall into?

Click here to read the full report.

See here for a collection of links to other Mauboussin papers.

New Mauboussin Report: Looking for Easy Games – How Passive Investing Shapes Active Management

Looking for Easy Games – How Passive Investing Shapes Active Management

“As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.’” –Warren E. Buffett

  • Investors are rapidly shifting their investment allocations from active to passive management. This trend has accelerated in recent years.
  • The investors leaving active managers are likely less informed than those who remain. This is equivalent to the weak players leaving the poker table. Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain.
  • Active management provides price discovery and liquidity, valuable social goods. However, the fees are higher for active managers than passive ones, identifying skill ahead of time is not easy, and there is a cost to assessing skill.
  • Passive management has lower costs and hence higher returns per dollar invested than active management does in the aggregate. But passive management introduces the possibility of market distortions.
  • Active managers have to constantly ask, “Who is on the other side?” The unrelenting objective is to find easy games, where differential skill pays off.

Click here to read the full report.

See here for a collection of links to other Mauboussin papers.

New Mauboussin Report: Capital Allocation Outside the U.S. – Evidence, Analytical Models, and Assessment Guidance

Capital Allocation Outside the U.S. – Evidence, Analytical Models, and Assessment Guidance

Credit Suisse’s Global Financial Strategies team has published a new report, “Capital Allocation Outside the U.S.” It includes new charts and examples and reflects the latest academic research.

  • Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share.
  • In this report we examine the sources and uses of capital for Japan, Europe, Asia/Pacific excluding Japan, and Global Emerging Markets. This extends our analysis beyond the United States, which we discussed in a prior report.
  • Countries or regions with a high return on invested capital (ROIC) can fund a substantial percentage of investment internally whereas those with low ROICs must rely more on external financing.
  • Capital allocation is also determined by the largest sectors in a country’s or a region’s economy, the stage of economic development, cultural norms, and regulations.
  • We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.

See here for a collection of links to other Mauboussin papers.

mmcapall

Measuring the Moat (Updated Version)

Credit Suisse’s Global Financial Strategies team has published an updated version of the report, “Measuring the Moat.” It includes new charts and examples and reflects the latest academic research.

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation 

  • Sustainable value creation is of prime interest to investors who seek to anticipate expectations revisions.
  • This report develops a systematic framework to determine the size of a company’s moat.
  • We cover industry analysis, firm-specific analysis, and firm interaction.

See here for a collection of links to other Mauboussin papers.

mtm

New Mauboussin Report: Capital Allocation – Evidence, Analytical Models, and Assessment Guidance

Capital Allocation: Evidence, Analytical Models, and Assessment Guidance

Credit Suisse’s Global Financial Strategies team has published a new report, “Capital Allocation.”

  • Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share.
  • Capital allocation is always important but is especially pertinent today because return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash.
  • Internal financing represented more than 90 percent of the source of total capital for U.S. companies from 1980-2015.
  • M&A, capital expenditures, and R&D are the largest uses of capital for operations, and companies now spend more on buybacks than dividends.
  • This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook.
  • We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.

mm_capall

See here for a collection of links to other Mauboussin papers.

New Mauboussin Report: The Base Rate Book

The Base Rate Book: Integrating the Past to Better Anticipate the Future

Credit Suisse’s Global Financial Strategies team has published a new report, “The Base Rate Book.”

Successful active investing requires a forecast that is different than what the market is discounting.

Executives and investors commonly rely on their own experience and information in making forecasts (the “inside view”) and don’t place sufficient weight on the rates of past occurrences (the “outside view”).

This book is the first comprehensive repository for base rates of corporate results. It examines sales growth, gross profitability, operating leverage, operating profit margin, earnings growth, and cash flow return on investment. It also examines stocks that have declined or risen sharply and their subsequent price performance.

We show how to thoughtfully combine the inside and outside view.

The analysis provides insight into the rate of regression toward the mean and the mean to which results regress.

mmbr1

See here for a collection of links to other Mauboussin papers.