Grin And Bear It

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Happy Thursday!

Did you gingerly peek at your 401(k) retirement account balance recently to assess the damage? Were you afraid to look? Although expectations for stocks this year have been moderate from the start, it’s still hard to stomach a screen of red as a shareholder when you’re used to seeing green.

Last week was the worst performance for the S&P 500 and Nasdaq indexes since the start of the pandemic, and this week we’re yo-yoing and bringing back one of Wall Street’s more macabre terms – dead cat bounce. Fearing rising interest rates and an end to the Covid-era economic support from the Fed, investors are selling and taking their profits. Tech stocks – which tend to be in the riskier “growth” category, since values are based on future profits – is where the jitteriness is most intense. Interest rates rising will make it more expensive for businesses to take loans to fund innovation. Make sure to check-in on the crypto fans in your life because it’s been an absolute horror show for the famously risky and volatile asset. The market lost $205 billion in value in the span of a day last week and around $500 billion has been wiped since the start of the year.

It bears (ha!) repeating: stock market dips and corrections are inevitable as economies go through different cycles and monetary policy changes. As this chart of corrections since 1980 shows, a year later the S&P 500 was higher 90% of the time, rising 25% on average. Experts do warn this plunge may be more dramatic and painful because shares have had an incredible run for so long.

When you see the bear (market) approaching, remember to stay calm and make no sudden movements. The advice usually given to young investors is to stay invested in strong companies, diversify your portfolio with different sectors and assets to protect it from big blows (scroll for more about real estate!), and maintain an emergency fund so that you always have access to cash. You may hear some say “buy the dip.” It’s true that if you’re young and investing for long-term goals, crashes can be a buying opportunity. But it’s impossible to always time the market correctly and know when you’re getting a discount. Dollar-cost averaging is a popular strategy for those worried about navigating such choppy waters. Read more about it here and stay tuned for our breakdown of it in next week’s edition.

News you can use

• Morningstar has released a ranking of the best US-listed sustainable companies to own, noting that the biggest ESG risk is in the energy and utilities sectors, and the smallest is in technology and real estate. Corporate Knights separately published its Global 100 most sustainable list.
• General Motors just announced the single largest investment in its 114-year history: $7 billion to speed up battery cell and electric truck manufacturing. Hopefully EV makers have a plan to cope with lithium shortages, or we may have what’s being called a “great raw material disconnect.
• Amazon and Meta spent record amounts lobbying the US government last year as Big Tech braced for regulations on issues like antitrust and privacy (the latest effort is making its way through Congress). Interestingly, Amazon, Microsoft, and Alphabet also went on their biggest shopping spree in a decade last year.
• Despite sliding cryptocurrency prices, metaverse and crypto enthusiasts like Reddit co-founder Alexis Ohanian are building buzz around the play-to-earn video game trend aka GameFi (like DeFi, which we covered previously here).

‘Building’ your portfolio with real estate

Unlike the latest gadgets or EVs, getting into the “real estate market” may feel financially unattainable. But it can be a great way to diversify your portfolio and a source of income and returns for any investor with a brokerage account. That’s because those of us who haven’t reached Mr. Monopoly status can buy shares in companies that own real estate.

A real estate investment trust, or REIT (rhymes with “sweet”), is a large company that owns, and often operates, properties like apartments, offices, factories, greenhouses, timberland, and data centers. Those that are public have stocks trading on exchanges and usually pay dividends to shareholders. US listed REITs own and operate 10% to 20% of American commercial real estate.

The hot housing and rental market and the reopening of cities meant the real estate sector delivered the highest returns to stock market investors in 2021, outside of energy. (However, some experts warn that rising interest rates call for lowering expectations this year and a sign of this thinking can be seen in the 9% drop in the FTSE Nareit All Equity REIT index since the beginning of the year.)

You can choose from different REIT opportunities based on various types of properties. Since the ESG movement is penetrating every sector and asset class, sustainable investors now have many options while choosing REITs. In 2020, 98 of the largest 100 REITs reported publicly on their ESG efforts, according to an industry association.

Here’s criteria to keep in mind –

• Go green: Many REITs now tout net zero carbon emission operations at their properties and have added sustainability infrastructure to buildings, like solar panels and EV charging. Others lease land to solar projects, like Power REIT (PW). The Invesco MSCI Green Building ETF (GBLD) is dedicated to REITs with climate efforts.
  
• Affordable housing: Social-purpose REITs aim to help with America’s housing crisis by buying and preserving rental properties for working class Americans. For example, the Housing Partnership Equity Trust provides homes to nearly 3,000 households, charging rents that are, on average, at or below 60% of the area median income (AMI). These mission-focused REITs tend to be private, but small investors seeking impact can explore publicly-traded REITs that focus on affordable housing for median-income renters or those that maintain manufactured home communities.
  
• Health and Safety: Check if the properties owned by your REIT have healthy building certifications like Well Building Standard and FitWel.
  
• Pro tip: Check out REIT industry leaders from ESG reporting firm GRESB.

'Tis the season to show me the money

Corporate earnings season is when publicly-traded companies reveal their financial performance in the previous quarter. Investors await this detailed breakdown to gain better insight into how business is going and decide whether the stock’s current price is appropriate. This practice of evaluating a company’s health and value based on earnings is known as fundamental analysis.

This week is a busy one with 104 of the S&P 500 companies reporting their numbers, including tech giants Apple, IBM, Microsoft, Intel, and Tesla. You’ll notice a flurry of stock trading activity and headlines around the announcements. It can be confusing for new investors, which is why we’ve started building a cheatsheet. Here are 5 phrases you’ll likely hear:

Earnings per share or EPS: This is company profits (also called net income) divided by the total number of shares held by investors. If the business posts a loss, as many growth companies do, you’ll see a negative EPS or loss per share. Diluted EPS takes into account new shares that may need to be issued in the future for anyone promised some, like debtors or company executives.

Growth rate: Described as a percentage, this is the change in earnings or revenue from the same quarter a year ago. This perspective tells you whether leadership is getting things right or wrong.

Consensus estimates: Wall Street’s many financial analysts predict company quarterly earnings, and investors use the average of their forecasts to best position themselves. After earnings are announced, shares usually jump or fall based on whether the news was better than expected (often described as “beating expectations”) or disappointing.

Cash flow: The cash flow statement tracks how money is moving in and out of a business. “Free cash flow” is what’s left over from the profits after all expenses have been covered, like employee salaries or equipment maintenance. This is an indicator of how much potential the firm has to invest in itself and grow.

ESG and other factors: Earnings calls also give companies an opportunity to cover other topics and while these topics can vary widely, we have seen a real uptick in reporting on ESG-related targets and commitments. In fact, it was reported that in one quarter last year, a record 150 members of the S&P 500 index mentioned “ESG” during their earnings calls. As this trend continues, we expect ESG-related information to become more and more commonplace on quarterly earnings calls.

Earnings calls can be useful tools to learn directly from the company's leadership about their financial strength and whether their future direction aligns with your values. We hope this list of terms helps you to understand some of the language used on these calls and by those reporting on this quarterly information as you consider where to invest.

Before you go -

A collective of 35 Japanese companies, including Honda, are working to make humble algae a replacement for fossil fuels and plastic fibers. Guess we should’ve paid more attention in high school biology class…