◼ FINANCE Bloomberg Businessweek May 4, 202022
● Inthecoronavirusera,Germany’spassionforcash is cooling
becauseoffearsabouthandlingdirtybillsMein Liebling
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Germany—industrial powerhouse, Europe’s big-
gest economy, and home to the Continent’s financeTHEBOTTOMLINE Investorscan’tleanoncompanies’recent
earnings or guidance. That may force them to focus on the more
relevant issue of long-term profit potential.this before”—about which businesses will survive—
says David Russell, vice president for market intelli-
gence at TradeStation, an online brokerage.
Aswath Damodaran, a valuation expert at New
York University’s Stern School of Business who began
blogging at the start of the last financial crisis, is
impressed by how investors have handled themselves
this time. “I know that it is fashionable to talk about
how inefficient and volatile markets are but this cri-
sis, in many ways, has been surprisingly orderly and
markets have dispensed punishment judiciously, for
the most part,” he wrote in an April 24 post.
There was plenty of craziness in stocks from their
February peak to their March trough. Good compa-
nies were pulled down along with bad ones. Since
then, though, investors have tried to winnow the
wheat from the chaff. Amazon.com Inc., which lost
nearly a quarter of its value in the selling wave, has
since risen 38% and touched a record. Health-care
giant Johnson & Johnson is up 36% from its recent
low. Meanwhile, big banks such as Citigroup Inc. are
not far above their cyclical bottoms, reflecting ongo-
ing concern about loan losses. “It might take a day,
a week, or three weeks, but eventually the market
mechanism separates good from bad,” says Dubravko
Lakos-Bujas, chief U.S. equity strategist and global
head of quantitative research at JPMorgan Chase & Co.
Looking well past the current year’s earnings is
something investors should do always, not just when
there’s a pandemic going. Quarterly earnings guidance
is at best a crutch. “If you want to get an investment
edge, company guidance doesn’t buy you anything,”
says Erika Karp, founder and chief executive officer
of Cornerstone Capital Group.
That’s where long-term analysis comes in. Most
of the value of a growing company “comes from the
aggregate cash it will generate in the years 2023-2050
and beyond,” Win Murray, research director at fund
manager Harris Associates, wrote in a February news-
letter. Hypothetically, he wrote, if 2020 cash flows fell
to zero but later years were somehow unaffected, a
company’s market value “should only fall by 4%-5%.”
Investors are focusing less than usual this quar-
ter on which companies beat and which compa-
nies fell short of earnings expectations, says Savita
Subramanian, an equity and quant strategist at Bank
of America Securities. The way the game is ordinarily
played, company executives steer analysts toward
anearnings-per-sharenumberthatthey’reconfi-
dentthey’llbeabletobeat,sosurpassingexpecta-
tionsis infactexpected.Thisquarter,theday-after
stock-market underperformance by companies that
fall short of expectations is only one-third the nor-
mal amount, she calculates.
That tolerant reaction is a good sign. “There’sa growing disillusionment” with management of
earnings expectations, Subramanian says. “People
realize it’s a game.” It’s a game with pernicious con-
sequences: A survey of financial executives by Duke
University published in 2005 found that a majority
of them would avoid initiating a project with a pos-
itive long-term value “if it meant falling short of the
current quarter’s consensus earnings.”
Of course, it’s appropriate to focus intently on
the short term if a company is at risk of failing.
Bankruptcies are already beginning to spike. But
most big, publicly traded companies will survive.
“My mantra is: depression-like shock, no depres-
sion,” says Joseph Brusuelas, chief economist at RSM
Global, an audit, tax, and consulting firm. Those that
make it past the pandemic could actually benefit in
the long run from a reduction in competition, says
Harris Associates’ Murray.
If you spot a company whose stock price looks high
in comparison with its projected earnings over the
next year, it could be a sign of a bubble—or it could
be evidence that investors are looking beyond that
12-month cutoff to better days ahead. �Peter Coy,
with Claire Ballentine▼ 2020 total return
through April 28 of the
20 largest members of
theS&P500*Amazon 25%
Walmart 8 %
Microsoft 8 %
Johnson&
Johnson 4 %
HomeDepot 0 %
Intel -1 %
UnitedHealth -2 %
Pfizer -2 %
Verizon -4%
Apple -5%
Procter&
Gamble -5%
Alphabet -8 %
Visa -9 %
Merck -10%
Facebook -11%
Mastercard -11%
Berkshire
Hathaway -17%
AT&T -19%
JPMorgan
Chase -30%
Bank of America -32%