This is the 66th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.Stocks vs Bonds
- the battle has begun
We continue to prefer to be primarily an owner rather than a lender. In 2024 we said that with the yields on 10-year U.S. Treasury securities approaching 5% we were tempted to buy some bonds. Yields have blown through 5% recently and stand at the highest level in over 19 years. We are not yet ready to buy long dated bonds (10 yr+) due to two main problems facing the bond market:
1) worsening federal deficits/debt
2) inflation remaining stubbornly in the 3%+ range
While these factors are also challenges for equities, U.S. companies continue to post strong profit growth well above inflation due to pricing power. Having said that, the expected returns from stocks for the next 10 years are substantially below the 15% they have earned over the last 10 years, and the expected returns from bonds are substantially higher than the mere 1% that they earned over the same period.
Over the past 10 years, our Focus List delivered a 17% net return, well above the S&P 500. Perhaps even more value added to our balanced account clients, however, was the avoidance of long-term bonds during this period
A Wobbly Stock Market
- can still offer opportunity
Over the last quarter, the S&P 500 has moved in a narrow channel, with a monthly standard deviation of half that of normal volatility. However, the volatility of individual stocks, relative to the volatility of the index, reached a record high in July. Since we value each stock in the S&P 500, we can exploit this volatility of individual stocks.
Our process assigns an “appropriate” P /E multiple to normalized EPS on each of the 500 stocks. This multiple is a function of several factors, including variability of earnings, growth, balance sheet, return on invested capital, and competitive position. Accenture (ACN), the world's largest management consulting firm, was added to our Focus List in the last quarter and is a good example of the process at work, highlighting potential value opportunities.
Accenture was trading at 10x earnings after its stock had been cut in half in the first six months of the year. Here is how the company then stacked up on key factors in our model:
Earnings variability: low as earnings increased each of the last ten years ·
Growth: 10% per year over the last ten years
Balance sheet: no net debt; $2 billion net cash
Return on Invested Capital: 24%
Competitive position: Massive global scale with 9000 clients with high switching costs, including most of the Fortune Global 500; 700,000 knowledge employees
Our model assigned a premium P/E to Accenture, not a discount, suggesting massive upside. The key competitive issue is whether ACN will be a victim of AI or a beneficiary. The company claims they will be a beneficiary advising large companies on AI adoption.
We use “probabilistic thinking” in situations like this. Although we cannot know whether management’s optimism is justified, the market price appeared to assign a near certainty that AI would hurt the company—an assumption we viewed as extreme. Even if we held only 50% confidence that Accenture would benefit from AI rather than be harmed by it, we believed the shares were undervalued. Over the last quarter since added to the Focus List, ACN has risen 47%, not counting income from its 5% annual dividend yield, yet it still trades at only 13x trailing EPS.
Focus List
Due to regulatory requirements, the Focus List is no longer provided on our website. However, we are happy to share if you contact the office.
Follow Up – from our letter one year ago
Slower growth, stubborn modest inflation, likely due in part to the tariffs, but no recession.
Growth with stubborn inflation above 3% continued, but no recession.
The impact of AI on corporate earnings and the economy overall is still in the early innings.
There is reason to believe that AI is still in early stages of development and especially impact.
NOTE: Now in addition to ALL our quarterly letters on our website is a tab with ONLY the Follow Ups.
About Hall Capital
HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com
HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101