We live in a celebrity-obsessed culture. In case you didn’t know it, Peyton Manning lost the Super Bowl. I thought that was a forgone conclusion because, based on the media hype beforehand, the game was Peyton Manning against the entire Seattle Seahawks defense. When I turned on the game I discovered that there were in fact ten other offensive guys on the field with Manning, and evidently there is an entire 52-player football team in Denver called the Broncos.
The NBA recently had a big game that matched up Lebron James vs. Kevin Durant, two of the league’s best players. After seeing the pre-game hype for that contest one could understand my shock when I turned to the game and there were ten – not two – grown men on the basketball court. It turned out it was the entire Miami Heat team playing against the entire Oklahoma City Thunder team, James’ and Durant’s teams respectively. But if you only listened to the report of the game afterward, you would have never known anyone else was there.
This obsession with only the few top players is nothing new to professional sports, but it has spread to the college level. If you were so inclined you could have spent your day Wednesday seeing what potential future celebrity football players are coming to your school next year. As silly as that may seem, the phenomenon has also seemingly hit the stock market, which has to be even sillier.
Apple Inc. reported earnings and beat expectations on both revenue and earnings. Their guidance was in line with market expectations, all in all a very good report, except for one thing: They sold fewer iPhones than expected. They still beat expectations on total revenue because they also sold more iPads than expected. Still, the stock dropped in price. Evidently there are investors out there wishing to invest only in iPhones and not in the whole Apple team.
Gilead Sciences, a pharmaceutical company, reported and beat expectations all around and gave future guidance that was better than expected. They were a little vague on the prospects for a new star drug, so their stock dropped in price.
I could go on and on with similar examples thus far in the quarter. This is a very common market fascination. In sports it is a little different. If LeBron James has a bad game and the Miami Heat still win, it is seen as proof that they are a good team. They are not just a one-man show. Shouldn’t it make sense that if a company beats expectations in a quarter when their star product didn’t have its “best game,” then that is proof of the overall strength of the company?
One would think, but right now Wall Street seems to be in a “glass is half-empty” mood. The fact is that earnings season has gone pretty well; revenues are up year-over-year for S&P 500 companies, as are earnings. This quarter has been at least as good if not better than the two previous quarters that were greeted with gleeful appreciation.
Wednesday night I had the pleasure of listening to George Friedman, PhD., the founder and chairman of Strafor Global Intelligence. They research the geopolitical world and give insight into trends that could benefit or threaten investors. He confirmed my view of this recent downturn – that none of the excuses being bantered about make any sense. The truth is that markets sometimes move in inexplicable ways and then we search for some explanation because that makes us feel better. He suspected that the real reason for the weakness in the market thus far this year is nothing more than profit-taking.
In other words, markets do not go up in straight lines. Football and basketball are team sports. Teams win games and teams win championships. Not even the great Michael Jordan could win a championship without teammates who could help him. Seattle won the Super Bowl because, at least on that night, they were the better team. Teams are always bigger than any one player. Apple beat expectations because it is a very good company with a diverse product line. It is bigger than just the iPhone. The same goes for Gilead, and many other companies that have had their reports nit-picked by people who are simply in the mood to sell. Prudent investors understand that in the long term it is the whole that matters, and like any good team, the whole is often greater than the sum of its parts.
Chuck Osborne, CFA