working capital

I’m a big fan of working capital, i.e., current assets on the balance sheet minus current liabilities. That’s because it can reveal a great deal about the power relationships among a company, its suppliers and its customers. It’s particularly important today in the retail industry, if it’s correct, as I think it is, that:

–many more aggressive–and, by and large, more successful over long periods–retailers found themselves when the pandemic began to wind down last year with too much inventory of stay-at-home merchandise for which demand had begun to wane, and

–much of this had been bought at very high prices, and with lower-than-normal ability to return much (any?) of it.

Also, as I’ve mentioned before, I think merchants are determined not to carry this problem into 2024–which is how I read the super-aggressive promotions of all sorts of good that I find myself seeing over the past few weeks. Three reasons for this urgency: merchandise has a finite, and continuingly contracting, shelf life; the cost of carrying the inventory has risen from zero-ish, along with sort-term interest rates; and the faster a problem is in the rear view mirror, the sooner Wall Street will forget it.

In the most general terms, working capital accounting goes like this:

–the company orders products from a supplier. When they are received, those items appear on the asset side of the balance sheet as Inventory. If the buyer has to pay up front (unusual, but sometimes happens), the Cash account is reduced at the same time by the appropriate amount. If payment is in the future, the obligation is recorded on the liabilities side as a Payable. The asset and the liability balance one another out.

–when the item is sold, the Inventory carrying value for it is reduced (any profit/loss will flow back onto the balance sheet through the income statement, but let’s not worry about that). If payment is immediate, Cash is increased by the appropriate amount. If payment is in the future, an increase in Receivables is recorded.

One tried-and-true measure of company power is Receivables (i.e., financing provided by the company) vs. Payables (financing suppliers have provided to the company) . Big Payables/small Receivables is the better situation–although this figure can be distorted, particularly with retailers, when consumer credit cards are involved. I’ve found this to be very reliable, though, especially in business-to-business situations.

Another indicator is annual inventory turns, that is, annual sales divided by average inventories. A pharmaceutical distributor might turn its inventories 30x/year, a supermarket 20x, Target maybe 7x, a jeweler or a furniture store (if there any of the latter left) maybe 1x, a whiskey distiller only once every five-six years.

To some degree high turns vs low is a matter of investor taste. I’m a fan of high turns, for instance, but detractors argue that high turns go with low margins (true, I think) and no defenses against competition (an old-school idea I disagree with). The issues with low turns are: the cost of carrying inventories + the time it takes to adjust one’s offerings. The offset is that margins are typically much higher.

What am I looking for now as consumer discretionary firms adjust to the post-pandemic world? I’m expecting–and I’m seeing–high sales, margins maybe half the pre-pandemic level, along with shrinking inventories and lower overall borrowings. Even though I don’t think the market appreciates it, I see this as the first sign of a return to health.

economics, macro and micro, and the stock market

Microeconomics is about individual economic actors–people, families, companies…and the way they interact with/compete with each other. Macroeconomics, typically using elaborate computer models, tries to describe the expected state of major forces–the working population, businesses, governments of all stripes–that are likely to give genera; shape to the economic path of a given country. For most countries, there’s a third branch of economics–international–which tries to describe the economic interaction among different countries as expressed through trade and associated currency/interest rate fluctuations.


There isn’t any generally-accepted framework for international economics, and for US stock market investors, the main issue I see is the relative strength of the dollar vs. other currencies. Currency movements are crucial, in my view, to understanding most non-US markets, but not so important domestically.


This is what most brokerage house economists in the US focus on–forming a high-level view of how the overall economy is likely to move over the coming year or so (yes, even though something like half of the profits of publicly-listed firms come from foreign operations), and the implications of changing interest rates and accelerating/decelerating growth on profits.

Market strategists use this top-down input to make predictions about the overall direction of the domestic stock market and of the profits of publicly-traded corporations. My experience is that this entire process takes a lot of computing power and mental effort, and still doesn’t work so well.

The consensus view a year ago, for example, was that recession–and a sharp (-20% or so) decline in stocks–was in the cards for 2023. The S&P 500 did spend a couple of days in the red in early January, but only then, and has turned in a return (including dividends) of 20%+ so far this year.


Microeconomics, on the other hand, is the essence of securities analysis. It’s about how firm vs. firm and industry vs. industry competition transpire. There’s a wealth of academic literature in this subject, but until very recently it has not been the road to tenure or renown in academia. Yes, Michael Porter of Harvard Business School has been fabulously successful over many decades, but much of his renown, I think, has been for his skill in recasting the academic corpus into language a layman can understand.

Another plus for micro is that I think there’s been a steady decline in the quality of securities analysis done by brokers over the past decade or so. If this perception is correct, you and I are no longer metaphorically arm wrestling against Superman but against some guy in the mall parking lot.

My tentative view of 2024 is that it will start out as a sideways year for stocks. My guess is that themes like changes in the global auto industry will be important, as will poking through the rubble of stocks/sectors pounded into the ground this year. 2024 may also be the first time in decades where it makes sense to look at stock markets in Europe and Asia, both for multinationals and for smaller, domestic-oriented growth stocks. Japan, for example? Getting reliable information about non-US firms will be crucial, though.

I think there are real questions about Utilities, Energy and Real Estate. Maybe Banks, too. To me, though, the biggest imponderable is what does it say to the investment world if the party of Lincoln puts up as its candidate for president a man who tried to overthrow the government in 2021? What will capital flight look like if Trump were to win?

Russell 2000 Growth vs. Russell 2000 Value

I saw an interesting chart in the Financial Times today. It showed the relative performance of the Russell 2000 Growth index vs. the company’s 2000 Value index over the 45 years I’ve been involved in stock market investing.


the numbers

The Russell 1000 tracks the performance of the largest US-based stocks by market cap.

The Russell 2000 tracks mid-cap, US-based stocks. It’s a much better gauge of domestic US economic activity than the 1000, which includes all the mega-cap multinationals.

The Russell 3000 = Russell 1000 + Russell 2000.

growth subindices vs. value subindices

The value-tilted Russell subindices contain the lower price/sales and price/book value stocks. The growth-tilted contain the higher price/sales and price/book value names.

the FT chart

The chart shows that from 1980 until now, growth outperforms value year after year, except for 2000-2006. The turn into the 21st century featured the collapse of the internet bubble, recession, Brad Pitt and Jennifer Aniston marrying and massive layoffs of value managers who had been underperforming for a brutally long time.

Many of these value stalwarts became hedge fund managers during the ensuing, short burst of value outperformance that followed.

what I find interesting

–the extensive period of growth outperformance

–the ability of the aforementioned hedge fund managers to survive in such a hostile environment. My two thoughts: brilliant marketing skills, employing lots of financial leverage

–this is a US phenomenon, not paralleled elsewhere in the world.

more tomorrow

questioning the Reagan/Thatcher revolution

Not really a surprise, except that this is in a non-wonky general news article in the New York Times.

As I see it, the general idea of the 19800s neoliberalism Reagan and Thatcher expounded–following German philosophical and social thought of the first half of the 19th century (Hegel, Marx, Schopenhauer)–is that there is no such thing as a social/public good–meaning things that governments typically provide and use to justify their existence. Potable drinking water, for instance, or electricity, or transport or education. Better to let the private sector, which can do all of this much more efficiently, provide all that. If this is so, the most important role for government is to shrink itself, to reduce/remove regulations and cut taxes on the wealthy, clearing the way for entrepreneurs to do their thing.

There were initial successes, as entrepreneurs dragged US industry into the second half of the 20th century. And nearly half a century on, heavily government-protected industries like autos are still a mess.

On the other side of the ledger, though, real economic growth has shrunk to almost zero; we have Third-World roads, bridges and public transport; 20% of adults are functionally illiterate; book banning; private company-spawned opioid addiction; Clarence Thomas-like acceptance of lavish gifts from wealthy private “friends”…

One of the ironies in all this is that economics 101 says experience shows that as people get wealthier, they become increasingly risk-averse, so they’re the last people you should give extra money to if you want to provide economic stimulus.

Anyway, I think it’s interesting that counterrevolutionary thought appears to be in the air.

earnings for Target (TGT)–sales down, margins and earnings up

As I’m writing this, the stock is up about 17% on the news.

So you know where I stand, I’ve owned the stock for a long time. I just added some a day or two ago, on the idea that the company’s had been (uncharacteristically) pummeled by Walmart’s over the past year and was trading at a huge PE multiple discount to WMT. I figured that sooner or later we’d see some mean reversion. To be clear, I didn’t expect it to start so soon …and that I’d have a chance to add more.

how I read the quarter

During the three month period, overall sales were down, year-on-year. Discretionary items were down, staples and own-brands up. Margins were up significantly, as well.

I don’t think this is a story of shoppers who had traded down to WMT during the pandemic trading back up again. The strength of own-brand sales argues strongly against this.

Instead, I think the market–abetted by limited information released by TGT management–very substantially underestimated the extent of the losses incurred by TGT by overstocking/overpaying for pandemic-era consumer electronics and other stay-at-home goods to put on the shelves during covid. Of course, coming 100% clean would have made it that much harder and more expensive to recover from this mistake. The numbers say to me that it’s just in the past quarter that TGT has finally gotten these excess inventories under control. Getting past this negative is also why it would be reasonable to expect the company to make higher profits on lower sales during the holiday season–no more big-ticket item sales at no profit or at a loss.

At some point–who knows when–it’s also possible that in a period of economic strength customers will do what they typically do in expansions and trade back up to the retailers they frequented when they were feeling more flush. This would presumably be good for TGT and neutral-ish for WMT, which would presumably lose customers to TGT but gain back a bunch from the dollar stores.