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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA
21.jan.20

Signum Perspectives

Summary and Outlook for SIC

The S&P 500 Index returned 28.2% y/y in 2019, surpassing the gains of other U.S. markets, including the Nasdaq, which rose 21%, and Asia’s Hang Seng, which rose 20%.

A relatively more diversified portfolio is one that includes industries and/or regions, which is why it is important to include a good percentage of assets from international markets in any portfolio, especially as the IPyC has returned less than 5%, or slightly more than the rate of inflation, consistent with zero growth in Mexican Economy.

The International Quotation System (SIC), which is a Mexican Stock Exchange secondary market, recorded double-digit transaction volume growth and comprises around 1,000 indexed funds and more than 1,100 companies. Daily average liquidity for the last 12 months amounts to more than P$.1.309 bn not including ETf’s.

We put together a sample of 45 international companies that have consistently outperformed the S&P Index since July 2019. For the first 9 months of 2019, such companies reported solid results that topped consensus estimates by 7% with two exceptions: Boeing (BA) and Alphabet (GOOGL), which faced operating and corporate issues, namely, the 737 Max aircraft in the case of Boeing, and Google’s legal agreement with the French government, which implied USD$500 mn in extraordinary expenses.

These are followed, albeit to a lesser extent by Amazon, which has an aggressive growth model with an adverse impact on traditional commerce and the logistics industry and that is difficult to replicate and, and Mcdonald’s (MCD), one of the five most profitable companies of our sample, which suffered a leadership issue that involved the resignation of CEO Steve Easterbrook in 2019.

MCD is one of our top picks with a more than 10% weight in our portfolio.

Chinese companies also comprise a large portion of the sample due to the recent trade deal with the U.S.. Such companies include Alibaba (BABAN), Baidu, Inc. (BIDUN), JD.com (JDN), Tencent (TCEYHN) and MOMO (MOMON) with a 7.1% weight.

TSLA surprised with an inflection point in Q319, as the market had expected a net loss. The company not only reported positive numbers, but also met a vehicle delivery estimate of more than 200,000 that had seemed aggressive, and in Q419, it managed to open its Shanghai plant with the help of a 10% subsidy from the Chinese government for constituting domestic production.

The “Chinese Google” Baidu, Inc. is a similar case, turning its negative Q319 earnings trend around and proving to be one of the most artificial-intelligence-intensive technology companies which reaps benefits from the 5G network.

Likewise, Chinese e-commerce leader JD.com posted historically high earnings, while Netflix reversed poor Q219 seasonal results with a robust report despite pressure from relatively greater competition in the streaming sector.

In most cases, our SIC sample also beat 2018, supporting gains in Q419.

Walmart (WMT) is another company worth following in 2020 that has registered sales and earnings per share growth along with a ROIC above our sample.

SIC portfolio generates a higher return over the invested capital then its cost of capital (WACC).

Therefore, the economic value added of this portfolio is 4.5% considering a weighted average cost of capital of 7.5%.

Companies with a higher return than the cost of capital are Visa (V) and MasterCard (MA), The Home Depot (HD), which we believe is lagging the market; Nike (NKE) & Apple (AAPL), which are confirming their valuations, MCD and pharmaceutical company Bristol Myers Squibb (BMY) which has a price/earnings multiple of 10x, below the industry’s 15x.

With a price/earnings multiple of 22x in the case of the S&P 500, the international capital market is at end-2017 levels, prior to the trade tensions between the U.S. and China and also prior to Brexit.

The initial next-three-year trade agreement with China, mitigates the risks of a world slowdown; however, unresolved issues are BREXIT and low growth in Europe.

In sum, we reiterate our belief that a portion of the portfolio should be invested in international stocks in order to obtain superior returns owing to short-term growth challenges in Mexico. Indeed, the recent appreciation of the peso due to the rate spread opens up an entry point for dollar-denominated assets.

We will release our 2020 top picks after analyzing Q419 results and will avoid companies with overpriced multiples.



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