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It’s time to take advantage of share price falls

The price-to-earnings ratios of many quality businesses have fallen sharply over the last six months.  In many cases, the falls were justified.  Now…

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The price-to-earnings ratios of many quality businesses have fallen sharply over the last six months.  In many cases, the falls were justified.  Now that valuations have dropped, I believe investors have a far better chance of making attractive returns.  The proviso, of course, is that you buy businesses that grow their earnings.

Celebrating the recent fall in share prices might be a step too far, but investors who plan to be net buyers of equities should be at least a little excited about the recent declines.

The ASX 200 decline year-to-date of just 3.4 per cent masks the more serious declines of even the highest quality companies. Indeed, 112 of the biggest 200 companies listed on the ASX are below their price at the beginning of the year. And the average decline is 17.7 per cent. The median decliner is down 15.4 per cent.

Zip is off 76 per cent year-to-date, Pointsbet is down 60 per cent, Kogan is 47 per cent lower, Boral is 43 per cent below its price at the beginning of the year, and even high-quality company, Reece, is 38 per cent weaker. Meanwhile, other high-quality companies such as REA Group, Wesfarmers, ARB Corporation, Credit Corp and Super Retail Group are off between 15 and 25 per cent in less than 16 weeks.

Of course all of this is happening because inflation is surprising to the upside, scaring many investors as well as central bankers.  And in response the central bankers are reversing the massive stimulus that was foisted on markets and economies in response to COVID-19. 

The punch bowl that drove massive asset inflation during the pandemic is being taken away. It really is as simple as that.  The US Federal Reserve will put its balance sheet on a new course, reducing its size by up to a trillion US dollars per year.

So there’s no debating; we are in the midst of a correction.  There is however a silver lining.

PE ratios have compressed materially over the course of the last six months.  Now that they are lower, investors have a better chance of making attractive returns, provided they buy businesses that can grow earnings.  Let me explain with a few simple tables.

 Table 1.  Internal rates of return equal earnings growth when PEs remain constant.

Table 1 demonstrates the investor’s return, from buying and selling a share at the same PE multiple, matches the rate of earnings growth.  In all three examples the earnings growth is 10 per cent per annum.  It matters not whether the stock was purchased at 10, 20 or 30 times earnings; the investor’s internal return will match the earnings growth rate provided the shares are sold at the same PE multiple that was paid for them.

Table 2.  Internal rates of return equal earnings growth when PEs remain constant

Table 2 simply reinforces the earlier point.  On this occasion the EPS growth rate is 20 per cent in all cases and irrespective of the PE the investor’s return matches the EPS growth rate provided the shares and purchased and sold on the same PE.

China’s economic woes, the invasion of Ukraine, supply chain disruptions and the possibility of recessions and stagflation have all offered reasons for investors to sell stocks to the extent PE’s have compressed materially.  As I mentioned earlier however it doesn’t matter what the contemporaneous catalysts are, throughout history whenever rates go up or inflation accelerates, PE have compressed – without exception.

Now that PEs have compressed, investors must find businesses whose earnings will grow.  Warren Buffett once observed: “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.”

Compressed PEs may offer that “rational” price. 

PE ratios can of course fall further and any escalation of tensions between Western allies and China or Russia would certainly do that.  Investors would have to simply ride through what we all hope would be a temporary interruption to the peace the western world has mostly enjoyed since the fall of the Berlin Wall.   To protect oneself from the idiosyncratic risk of PE contraction, it is important that not only does the company’s earnings grow, but they grow at a rate that meets or exceeds market expectations.  If growth is expected to be 20 per cent and comes in at 18 per cent, the PE may contract further, offsetting the benefits accrued to investors from the earnings growth.

Table 3.  A bonus from PEs bouncing.

Assuming global peace is maintained, investors have another benefit from investing after PE compression.  Inflation will eventually peak and interest rates will eventually stop being raised.  At that point PE ratios may start to expand again.

Table 3 reveals the bonus in terms of internal rates of returns earned by investors from a jump in PE ratios at the time of sale.

In the first example, shares are purchased on a PE of 15 and earnings grow by 10 per cent per annum.  If the PE stayed at 15 at the time of sale, the investor would earn 10 per cent per annum.  But in this example, in the final year, the PE jumps to 20 times.  The result is an 18 per cent per annum return.

PE compression and stock market falls may just be the rational price investors in equities and managed funds have been waiting for.

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Economics

CED Releases Report on Using Census Bureau Data to Boost Child Care & Employment

CED Releases Report on Using Census Bureau Data to Boost Child Care & Employment
PR Newswire
NEW YORK, June 28, 2022

NEW YORK, June 28, 2022 /PRNewswire/ — Today, CED released the fourth and final installment of its unique 2022 series that ana…

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CED Releases Report on Using Census Bureau Data to Boost Child Care & Employment

PR Newswire

NEW YORK, June 28, 2022 /PRNewswire/ -- Today, CED released the fourth and final installment of its unique 2022 series that analyzes the role of paid child care in the economy—including its impact on labor force participation. The new report serves not only as a road map for researchers to build on CED's findings. The report is also useful to policymakers as they consider key questions related to the use of paid child care—especially for women—and its connection to the workforce and economic growth.

Specifically, the new report details how researchers can effectively leverage the underlying data from the Census Bureau's Current Population Survey (CPS), which CED used as the basis for its report series about paid child care. As detailed in the primer, the CPS is a monthly survey of US households jointly sponsored by the Census Bureau and the Bureau of Labor Statistics. As part of its Annual Social and Economic Supplement (ASEC), the survey includes questions about the use of paid child care since 2001 and about such expenditures since 2010.

"Our work uncovered several groundbreaking insights, including that boosting women's labor force participation by one percent—which more paid child care could help achieve—would generate nearly $73 billion of additional income for women," said Dr. Lori Esposito Murray, President of CED. "CED's series examines data more extensively and over a long a time period than any previous work. This fourth and latest report provides a foundation for the research community to discover additional insights, which will help inform public policies that generate more prosperity for the nation's families and the economy more broadly."

The report, The Economic Role of Paid Child Care in the U.S., Part 4: Child Care Data in the Current Population Survey, a Primer, covers five key aspects of the CPS data:

  • The design of the CPS and its Annual Social and Economic Supplement;
  • What specific data the survey captures;
  • The sources from which that data comes;
  • Best practices for using the data; and
  • Likely technical issues which come with the data and how to handle them

The series is the first deep analysis of paid child care usage mined from the CPS data. Findings highlighted from the first three installments in the series include:

  • A high price tag: In 2020, the average income of families using paid child care was $149,926.
  • COVID-19's impact on participation: From 2019 to 2020, children in paid child care dropped by nearly 20 percent.
  • The primary drivers of paid child care usage are labor force attachment, household income, and educational attainment.
  • Despite declining labor force attachment across all genders, men participate in the labor force at a higher rate than women.
  • Paid child care usage is directly impacted by maternal labor force participation trends.
  • A one percent increase in the labor force participation of women ages 18-54 would produce multiple economic benefits, including an additional income of approximately $73 billion.
  • Short-term changes in paid child care correspond with three key factors: labor force participation, actual hiring of mothers, and increased income.
  • Long-term changes in paid child care correspond with three different key factors: maternal labor force, real income, and the overall total of the male and female labor force.

The prior three reports as part of this series focus on 1) the link between paid child care and income; 2) the link between child care access and mothers' workforce participation; and 3) the economic benefits of increasing women's participation in the labor force. More information on the series, which was produced with funding from the W.K. Kellogg Foundation, can be found here.

About CED

The Committee for Economic Development (CED) is the public policy center of The Conference Board. The nonprofit, nonpartisan, business-led organization delivers well-researched analysis and reasoned solutions in the nation's interest. CED Trustees are chief executive officers and key executives of leading US companies who bring their unique experience to address today's pressing policy issues. Collectively they represent 30+ industries, over a trillion dollars in revenue, and over 4 million employees. www.ced.org 

About The Conference Board

The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

 

View original content to download multimedia:https://www.prnewswire.com/news-releases/ced-releases-report-on-using-census-bureau-data-to-boost-child-care--employment-301576752.html

SOURCE Committee for Economic Development of The Conference Board (CED)

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Copado’s Third Annual State of Salesforce DevOps Report Finds Teams Recovered from Last Year’s Dip in Quality but Struggle to Maintain Speed

Copado’s Third Annual State of Salesforce DevOps Report Finds Teams Recovered from Last Year’s Dip in Quality but Struggle to Maintain Speed
PR Newswire
CHICAGO, June 28, 2022

The longest running Salesforce DevOps report shows teams rebounding to p…

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Copado's Third Annual State of Salesforce DevOps Report Finds Teams Recovered from Last Year's Dip in Quality but Struggle to Maintain Speed

PR Newswire

The longest running Salesforce DevOps report shows teams rebounding to pre-pandemic levels for change fail rate and time to recover 

Research shows how high-performing teams use commercial low-code DevOps tools to release more often, recover faster and achieve business value

CHICAGO, June 28, 2022 /PRNewswire/ --  Copado, the global leader in low-code DevOps, today released the findings from its third annual "State of Salesforce DevOps" report, which collects data and insights on the key trends in low-code software delivery. Based on thousands of data points collected from over 450 global Salesforce customers using DevOps to accelerate and improve the speed and quality of their implementations, the report highlights the improvement in quality, examines the possible causes of the decline in velocity, identifies the qualities of the teams that are thriving, and makes recommendations on how teams can maximize their development resources.

Adopting key principles from DORA, the report analyzed performance across Salesforce teams in terms of the dual goals of innovation velocity and release quality and security. Using the four metrics of lead time for change, deployment frequency, change failure rate and mean time to recovery, the report categorized respondents into four performance profiles that can be used to identify and measure the characteristics of both high and low performance.

Key takeaways from the Copado 2022 State of Salesforce DevOps report include:

Quality-first DevOps is increasing

The 2021 report found a significant reduction in quality and stability as evidenced by increased change failure rate and mean time to recover. Copado attributed that to the 2020 COVID pandemic and the ensuing disruption to team workflows. In 2022, that trend seems to have reversed, with stability returning to the 2019 levels.

Teams showed 8x shorter time to restore (96 hours in 2021 compared to 12 hours in 2022) and reported 50% lower change fail rate (38% in 2021 compared to 20% in 2022). In 2022, the change failure rates and recovery times were roughly the same as in 2019.

Salesforce teams tapped the brakes in 2022

Teams may have overcompensated for stability over the last year by reducing their velocity. This year's report shows a reduction in deployment frequency which dropped by half compared to the two previous years, from 475 per year to 230 per year on average. Elite performers continue to release faster with an average lead time of 8 days, compared to 50 days for low performers. Since 2019 the percentage of teams with lead times less than a week has declined from 69% to 49% and the number of users able to deploy on demand has shrunk from 23% to 10%.

Overall, compared to low performers, elite performers have:

  • 4x shorter lead times
  • 46x more deployments, 94% of elite performers release at least weekly vs. only 13% of low performers
  • 5x fewer production failures
  • 8x faster time to recover, less than four hours for elite performers and more than 18 days for low performers

"The last three years of research has taught us a lot about the challenges that Salesforce teams face and where they excel," said Andrew Davis, senior director of research and innovation at Copado. "Last year, the report showed the impact of a global pandemic and shift to remote work on the ability to ensure quality and stability. This year we've seen quality and stability trends bounce back. This points to the resilience and commitment of the community of Salesforce developers, admins, and business users who find a way. We've reached a point in time where the level of customization that can be built into the Salesforce platform makes it necessary to adopt DevOps tools and practices to manage software delivery well."

Salesforce teams continue to grow in size and complexity
For the second year in a row, Copado found that Salesforce teams are growing. This year, 46% of respondents report that their teams have grown, 41% have remained steady and just 13% report their team decreased in size. The continued growth in the size of development teams means a continued increase in the complexity of the Salesforce orgs they are building.

For the third year in a row, Copado found a strong correlation between team size and lead time. This year, there was also a correlation between team size and change failure rate and time to recover. All of these metrics worsened as teams grew in size.

Traditional use cases for low-code application development have been largely for internal business applications with limited business impact. In 2022, 72% of respondents use Salesforce for building internal applications, but now 60% are using the platform to build business-critical apps, and 66% are using the platform to build customer-facing apps, while 37% are building all three types. A much more rigorous release process should be applied to customer-facing and business-critical applications than needs to be applied to internal business apps. It should also be noted that these types of apps are usually much more sophisticated than internal apps.

Performance improves with commercial low-code DevOps tools
Low-code application development on Salesforce is the fastest way to translate ideas into innovation, but without enterprise software delivery capabilities in place, the power of low-code is undone by quality issues, manual processes and orchestration challenges. The report found that teams using DevOps tools designed specifically for Salesforce release 50% more frequently than teams using build-your-own platforms like Jenkins.

Copado also found that those who are highly involved in Enterprise Agile Planning (74% of respondents) and also use a commercial Salesforce tool for DevOps are 39% more likely to work at a company that is exceeding its goals. Given the current economic environment and growing importance of proving ROI and value realization for technology investments, teams that are investing in process improvements are better able to ensure that they're getting the greatest benefit.

Change failure rates can be reduced with automated testing
Teams need to shift to faster, more automated ways of ensuring quality. Automated testing of Salesforce applications is an opportunity area now that the Salesforce platform is used more often for external customer-facing and business-critical applications. Yet if there is any testing in the development process, manual testing is the most common method. One-third of Salesforce development teams use manual testing, 29% have minimal to no testing and 21% automate critical tests, while only 19% are practicing test-driven development.

The full report with a forward written by Peter Coffee, vice president of strategic research for Salesforce, can be found at: https://www.copado.com/devops-hub/ebooks/2022-state-of-salesforce-devops-report

Methodology
Copado surveyed over 450 executives, managers, and members of Salesforce delivery teams to learn about their development lifecycles. Conducted in April 2022, the survey included companies ranging in size from one employee to more than 1 million employees. Sixty percent of these companies have more than 500 Salesforce users. The goal was to better understand the challenges of innovating on the Salesforce platform. The analysis was done on the Tableau Analytics platform including data visualization, cross tab analysis, and core BI. 

Salesforce and others are among the trademarks of salesforce.com, inc.

Follow Copado

LinkedIn: https://www.linkedin.com/company/copado-solutions-s.l/

Twitter: https://twitter.com/CopadoSolutions

Blog: https://www.copado.com/learning/blog/

About Copado
Copado is the leading DevOps and testing solution for low-code SaaS platforms that run the world's largest digital transformations. Backed by Insight Partners, Salesforce Ventures and SoftBank Vision Fund, Copado accelerates multi-cloud, enterprise deployments by automating the end-to-end software delivery process to maximize customers' return on their cloud investment. More than 1,000 companies rely on Copado to drive digital transformation with speed, quality and value including Boston Scientific, Coca-Cola, Fair Trade, Linde, MassMutual, Schneider Electric and Shell. Copado DevOps 360™ processes over 50 million DevOps transactions per month and is rated with a 100% score on the Salesforce AppExchange. More information can be found at: http://www.copado.com.

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SOURCE Copado

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China Stocks Outperform On Unexpected COVID Shift

China Stocks Outperform On Unexpected COVID Shift

Update (0920ET): China’s move to ease quarantine rules for inbound travelers from three…

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China Stocks Outperform On Unexpected COVID Shift

Update (0920ET): China's move to ease quarantine rules for inbound travelers from three weeks to just one week has bolstered sentiment for Chinese equities. 

Bullish calls are rising on Chinese stocks as the CSI 300 Index inches near a bull market. 

Fred Hu, the founder of China-based investment firm Primavera Capital Group, told Bloomberg that he believes Chinese tech firms have turned the corner after a $2 trillion rout sparked by Beijing's yearslong technology crackdown. 

NASDAQ Golden Dragon China Index plunged more than 76% since its peak in early 2021, coinciding with Beijing's crackdown start. The index hit a low in March and has since bounced 67% -- because the crackdown fears show signs of softening. 

Hu believes "this could be the beginning of a new era for China tech ... There's a lot of value to be discovered," adding that investors still need to be selective in picking stocks. 

Adding to support is the People's Bank of China's accommodative monetary policy, which is the opposite of global central banks that aggressively tighten interest rates to prevent the surge in inflation from turning into dreaded 1970s-style stagflation. Today's quarantine reduction news, tech crackdown abating, and PBOC easing have produced a more optimistic outlook for Chinese stocks. 

However, a lingering threat of a US slowdown could be problematic for all investors. 

Lorraine Tan, director of equity research at Morningstar, told Bloomberg TV: "Even if we do get some China recovery in 2023, which could be a buffer for this region, it's not going to offset the US or global recession."

* * *

China unexpectedly slashed quarantine times for international travelers, to just one week, which suggests Beijing is easing COVID zero policies. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks.

Inbound travelers will only quarantine for ten days, down from three weeks, which shows local authorities are easing draconian curbs on travel and economic activity as they worry about slumping economic growth sparked by restrictive COVID zero policies earlier this year that locked down Beijing and Shanghai for months (Shanghai finally lifted its lockdown measures on May 31). 

"This relaxation sends the signal that the economy comes first ... It is a sign of importance of the economy at this point," Li Changmin, Managing Director at Snowball Wealth in Guangzhou, told Bloomberg

At the peak of the COVID outbreak, many residents in China's largest city, Shanghai, were quarantined in their homes for two months, while international travelers were under "hard quarantines" for three weeks. The strict curbs appear to have suppressed the outbreak, but the tradeoff came at the cost of faltering economic growth. 

The announcement of the shorter quarantine period suggests a potentially more optimistic outlook for the Chinese economy. Bullish price action lifted CSI 300 Index by 1%, led by tourism-related stocks (LVMH shares rose as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%). 

"The reduction of travel restrictions will be positive for the luxury sector, and may boost consumer sentiment and confidence following months of lockdowns in China's biggest cities," Barclays analysts Carole Madjo wrote in a note. 

CSI 300 is up 19% from April's low, nearing bull market territory. 

Jane Foley, a strategist at Rabobank in London, commented that "this news suggests that perhaps the authorities will not be as stringent with Covid controls as has been expected." 

"The news also coincides with reports that the PBOC is pledging to keep monetary policy supportive," Foley pointed out, referring to Governor Yi Gang's latest comment. 

She said, "this suggests a potentially more optimistic outlook for the Chinese economy, which is good news generally for commodity exporters such as Australia and all of China's trading partners." 

Even though the move is the right step in the right direction, Joerg Wuttke, head of the European Chamber of Commerce in China, said, "the country cannot open its borders completely due to relatively low vaccination rates ... This, in conjunction with a slow introduction of mRNA vaccines, means that China may have to maintain a restricted immigration policy beyond the summer of 2023." 

Alvin Tan, head of Asia currency strategy in Singapore for RBC Markets, also said shortening quarantine time for inbound visitors shouldn't be a gamechanger, and "there's nothing to say that it won't be raised tomorrow." 

Tyler Durden Tue, 06/28/2022 - 09:20

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