March 2011 Duke CFO Survey
The Duke CFO survey is usually a good, quick read. Various CFOs are asked about capital spending and hiring over the next 12 months, how optimistic they are, what challenges they might face, and some are the most knowledgeable about the detailed budgets of their various companies and they should have a good handle on business outlook, hiring, capital spending, and what have you.
Check out the March 2011 results: http://www.cfosurvey.org/
- CFO optimism is at the highest level since early 2007
- Earnings growth (18%) and capital spending growth (12%) will be robust over the next year
- Employment growth will be modest
- Companies are increasingly concerned about inflation - 4% inflation instead of 1.5% would slash earnings by 48%
- Optimism is strong in Asia, except in China
- European optimism lags, but is still growing
More of the same
I don't have any crazy new insights, but a few themes come to mind that I have believed for a while now: (1) capital spending remaining pretty good, (2) companies not hiring en masse, and (3) inflation remains a huge concern.
I believe companies have cost cut their way to profitability and a lot of the recent capital spending has been pent-up demand from 2008 and 2009, when many companies postponed their capital spending programs. I also believe that profit margins have peaked and they're not likely to keep pushing higher with commodity prices running amok.
I'm bullish on the market long-term, but I don't see a sustained, high rate of growth until we work through our debt concerns, get unemployment in check, and regain lost consumer confidence. I'm currrently a believer of the "slow growth" scenario for the next 2-5 years. Note that I'm not calling for a crash of some sort (although it could potentially happen).
I've been worried about China since April 2010, when I noticed the soaring real estate prices in major cities. I've since learned that real estate in smaller cities and in more rural places is actually much more subdued, but I also believe that if real estate in China were to crash, prices would be hurt across the board, not just in the major bubble regions. I don't know how it's going to play out, but I'm concerned. My current favorite way to play China and emerging markets is through US multinationals who are successfully growing abroad.
Currently, I believe the market is ever so slightly overvalued. I'm concerned that it has run up so much since 2009, but I acknowledge the economy has indeed strengthened. Keeping with my "slow growth" theme, I am picking a bunch of dividend payers going forward (especially consumer staples). I've been at 140 picks for a while instead of my usual 180 to 190, so I think I can sacrifice space to make room for these very long-term picks.
I've always believed these types of companies outperform over a full business cycle and make for great defensive hedges against market declines, but I've shunned them for other picks I thought might give me more points. Now that I'm unable to be as active on CAPS, it's the perfect time to add these great companies. Dividend payers will fare well in a slow growth environment, so I expect modest outperformance out of these stocks in the next several years. Even if I'm wrong about the "slow growth" scenario, I can close these picks out on the next pullback (whenever that may be - 3 weeks or 6 years later) for positive points, since they decline much less in uncertain times.
This is not some declaration that I'm buying these up in my personal accounts - I still believe there are values to be had in the small cap ranks, despite the run up of small caps as a whole. If you want to double your money from here on out, I continue to believe small caps offer the best opportunities. Such values are much harder to find these days with the majority of small caps looking expensive, but I still think it's worth looking. So I shall...