You’ve probably heard about Pokémon Go, a mobile app that exploded onto the scene in July 2016. Simply explained, to play the game you download the app, peer into your phone and chase imaginary wild Pokémon, flinging Poké Balls at them, and visit PokéStops and gyms to reload and battle, as indicated by your GPS system. We all have fads from our past. I’ll date myself by listing the Rubik’s Cube and a serious addiction to Pac-Man.
This fad is interesting, creative and, from what I understand, addictive. It is also a great way to think about alternatives.
Investors are looking at the real world and choosing to chase something imaginary: growth. We have noted for some time that U.S. potential (or “trend”) growth is falling. Second quarter GDP growth was a paltry 1.2%, only about half of what was expected.1,2 Consumption is an area of the U.S. economy that looks strong, but this was offset by a third consecutive quarter of contracting business investment and a drop in government spending. The fact that U.S. growth is driven primarily by consumption rather than broad-based growth likely makes our economy more vulnerable to interest rate hikes or other exogenous shocks. More importantly, corporate profits are tied to GDP, and corporate profits have been stagnant since 2012. Revenue of S&P 500 companies has fallen five quarters in a row. While recent economic data has “surprised to the upside,” these positive surprises have come mostly from the consumer sector and the housing sector. Equity investors looking at stock indices appear to be chasing economic growth or revenue growth, but both are elusive.
The Pokémon Go craze is a case in point. Shares of the Japanese company Nintendo doubled between July 8 and July 19, adding almost $20 billion to the company’s market capitalization. Yet many observers noted that Nintendo does not directly own Pokémon Go, and only indirectly benefits from a share of ownership in the company that manages the brand.3 The company may benefit from the popularity of a product, but does the reward of a 100% increase in market cap align with the fact that there was no strategy or value added by the company itself? Perhaps not, as the subsequent decline in Nintendo’s stock price suggests.
It may seem like an extreme example of a unique case, but multiply that by hundreds of companies engaged in corporate buybacks or hitting earnings estimates through cost cutting instead of value harvested from a corporate strategy, and suddenly a broad pattern emerges that reflects the challenges companies and, in turn, investors may face in their quest for future growth.
This summer has been marked by the crosscurrents of geopolitics, changing interest rate expectations and the ebb and flow of economic data releases that cause increased volatility. The strategy of certain alternatives may better tie investor dollars directly to company growth strategies. For example, middle market company revenue has grown 6.7% over the past five quarters. You don’t need an app to see that.
1 Bureau of Economic Analysis.
2 Bloomberg consensus forecast for Q2 GDP advanced release was 2.5%.
3 “In ‘Pokémon Go’ Craze, How Much Profit Does Nintendo Capture?” The Wall Street Journal. http://www.wsj.com/articles/pokemon-go-fueled-nintendo-just-keeps-going-1468302369.
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.
Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.
All investing is subject to risk, including the possible loss of the money you invest.