Paper Chase: Exciting Growth Opportunities in STEM and Wireless
February’s employment report was weaker than expected at 113,000 jobs created. The unemployment rate fell to 6.6%, but lack of labor force participation contributed in part to that. As we have repeatedly noted in the Paper Chase, bad weather is obviously factoring into these numbers.
It’s important to look at the labor report in context. The survey occurred during the mildest week of weather that month. Note the big increase in construction the week of the report, which corresponded with a reprieve from the terrible weather. Gains in manufacturing occurred while hours worked were down. The leisure and hospitality sectors saw gains, but the service sector saw losses. When the weather is bad, people stay home.
Going into 2014, if you were to align the economy against the S&P 500, there was certainly a valuation gap indicating an overvalued economy. The hope is that a growing economy will allow earnings and revenues to catch up to current expectations. Disappointment in the overall outlook (mainly due to emerging markets) caused stocks to temporarily fall.
The Fed is essentially on autopilot as deficit reduction is occurring. They are reducing the large quantity of treasuries they’ve been purchasing.
What I’m Doing
I still see buying opportunities everywhere, particularly with the emerging market selloff occurring with anything related to Turkey, India, Indonesia, South Africa or Brazil. Stocks are still the best value. International developed names are 15-20% discounted now, especially if you hedge the currencies back to the dollar. The currency decline of Turkey will actually allow them to put themselves on sale to the highest bidder, make the necessary corrections in their structural economy, and put themselves on the road to recovery.
The Paper Chase has thus far been all about equities with very little focus on fixed income. What I find curious is that while bond yields should rise due to a drop in bond prices (because of an expected rise in interest rates), the yields are actually down due to disappointment in a lack of growth in revenues and earnings. The rise in bond prices and thus a fall in yields is an indicator of investors moving from risky to less risky assets. That being said, the fair value of the 10 year is probably closer to 3.5%.
Wireless products and services are a $15.5 billion industry. There are 326.4 million wireless subscriber connections. There is a 102.2% wireless penetration; meaning many people now own more than one phone. 38.2% of households are wireless-only.
It’s not partisan or controversial to say there has only been slight growth in the economy over the past decade, and the markets are responding to actions of the Federal Reserve. A lack of private sector investment has led to less hiring. The mobile phone sector has been no different from the rest of the market.
91% of Americans own a cellphone, meaning the market is essentially saturated. This has resulted in price reductions across the board. Sprint’s acquisition of T-Mobile would be a game changer if it can get by regulators. The Department of Justice has seemed to show that four national competitors is about the right number in scrutinizing these types of deals.
All providers are competing on price, service and network capability. Under the older pricing and distribution models, the phones were heavily subsidized and consumers had to pay for service. Now, given the choice, consumers have chosen to pay more for the phone in exchange for a lower price in service.
The smart phone era is maturing. People are adding tablets where there is space, and we are just beginning to enter the world of wirelessly connected devices. This means there are still growth opportunities in the U.S. and overseas.
Developing STEM (science, technology, engineering and math) graduates are now becoming a joint venture between higher education and business. Many businesses need certain skill sets that students don’t have coming out of college. AT&T is partnering with Georgia Tech in developing a Masters in Computer Science using technology that will lower costs of a $40,000 degree to about $6,700.
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