Monthly Archives: March 2020

How are you going to pay for that? Youve seen it a hundred times: some serious-looking pundit with glasses and a suit interrogates some over-eager politician who actually wants to do something meaningful with their elected position. They recite some jargon about taxes and savings, bicker briefly with the pundit, and then the segment ends. The pundit is proud to have done their job holding this politician accountable to fiscal responsibility; what could be more important? After all, there isnt an infinite supply of money. Except, in a very important sense, there is.

Lets go back in time. Prior to 1933, the U.S. dollar, like most currencies, was on the gold standard, limiting the amount of money the U.S. could create. However, this is no longer the case.

Today, the United States is the sole issuer of the U.S. dollar. As a fiat currency, it is inconvertible into any real resource. In 1946, then-chairman of the New York Federal Reserve, Beardsley Ruml, published an article declaring that, as a result, our Federal Government has final freedom from the money market in meeting its financial requirements. This is stated in plain English in the articles title: Taxes for Revenue are Obsolete.

This may be surprising; it certainly contradicts mainstream discourse about spending. Concerns about debt or inflation are still valid, and it is still reasonable to debate by how much government spending should exceed tax revenue. But there is no physical restriction on the amount of money the U.S. can spend.

If the federal government wants to pay you $100, they can tell your bank to increase the number in your bank account by 100. There is no need for physical dollar bills or borrowing money; all that is required is an update in your banks computer system and now you are $100 richer. The opposite occurs when you pay taxes; you give a bank account to the government and they subtract from the number in your account. There is no exchange of actual dollar bills here, but money is removed from circulation nonetheless. The government creates money by spending and destroys it by taxation, and it does both without worrying about the supply of coins and bills. This means there is no physical restriction on the amount of money it can create.

The implications of this process are profound and far-reaching. No longer do politicians have to play the how do you pay for it game; the government can simply create new money. The government may want to tax to reduce inflation resulting from an increase in the money supply, but this does not prevent them from spending it in the first place. The true constraint on government spending is resources. Can the U.S. government buy everyone a Ferrari? Sadly no, because there are far less than 327 million Ferraris in existence. But if there were 327 million Ferraris up for sale, it would theoretically be possible for the federal government to buy them all and give one to every American.

Recently, Bernie Sanders proposed universal childcare and pre-K plan that he claimed would be paid for by a wealth tax on the richest Americans. Can we achieve universal child care? If there are enough people willing to work in child care to meet the demand, yes. But reducing the number in Jeff Bezos bank account will not create new child care resources. It may be necessary to increase taxes to deal with the economic effects of this increased spending, but taking dollar bills from billionaires is not necessary for spending in the first place.

The taxpayer money myth is the antiquated belief that taxes fund government spending, and the existence of this idea is an existential threat to progressive policy. This myth legitimizes harmful ideas such as welfare recipients mooch off of taxpayers and makes cutting welfare programs much more popular. The myth establishes taxpayers as a privileged class. If taxpayers fund the government, then it follows that they should decide what the government does after all, its their money. As a result, the most marginalized and disadvantaged people are seen as the least worthy recipients of government assistance while the rich and powerful rig the levers of power to receive favor after favor.

It all comes down to protecting wealthy interests. The rich and powerful oppose universal healthcare because it would prevent employers from using the threat of a lack of healthcare access to coerce their employees; programs like universal healthcare transfer power from the rich to ordinary people. Of course, they would never say that theyre willing to let poor people die to protect their own interests. They complain that it will raise middle-class taxes, which is equivalent to stealing peoples hard-earned money. Why should taxpayers pay for other peoples healthcare? Progressives can try to respond to this objection, but we dont have to. We can reject the premise of the question altogether by realizing that we already have the resources to provide healthcare to all Americans, we just need to make them accessible to everyone.

The progressive movement in the United States should stop playing the where is the money game. If we are serious about getting things done universal healthcare, basic income, solving climate change we need to reject the taxpayer money myth in its entirety. We waste the power of the federal government by not taking advantage of all of the resources at our disposal to make our lives better. If we spend our time scrounging around for tax dollars, we will never accomplish what needs to be done. Lets start getting things done.

Matthew B. Gilbert 21 is a Computer Science concentrator in Adams House. His column appears on alternate Thursdays.

Editors Note: Due to editorial changes regarding the novel coronavirus, this articles publication was delayed.

Continue reading here:

The Myth of Taxpayer Money | Opinion - Harvard Crimson

The Center for Public Integrity is a nonprofit newsroom that investigates betrayals of public trust.Sign up to receive our stories.

This week marks Sunshine Week, when civic groups and media organizations, among others, promote openness in government.

But as federal agencies respond to the escalating threat of the COVID-19 coronavirus, many government operations are likely to be slowed including the processing of Freedom of Information Act requests that could detail the governments coronavirus efforts.

Itll exacerbate an already cloudy situation for the publics access to government records: From 2012 through 2018, the backlog of pending FOIA requests grew by more than 80 percent, according to a new Government Accountability Office report.

GAO attributed this in part to a 30 percent increase in the volume of requests.

GAO also noted that several agencies, including the Department of State, have not updated their regulations to reflect changes in FOIA law from 2016. The law specified that agencies should amend their rules within six months. As of last month, the State Department told GAO that it was reviewing a draft of new regulations.

Two conservative organizations, Cause of Action Institute and Americans for Prosperity Foundation, released another report on Monday about how federal agencies treat instant messaging under FOIA and the Federal Records Act. Thirteen of the 16 federal agencies they surveyed do not preserve instant messages as a matter of policy, which may violate the records act and almost certainly prevents requesters from getting copies of those messages under the FOIA.

The Department of Justice, which advises federal agencies government-wide on how to interpret and implement the FOIA, has a rosier view of the state of government openness.

At a pre-Sunshine Week event last week, Principal Deputy Associate Attorney General Claire Murray, who is also DOJs chief FOIA officer, said that agencies had made a small dent in the backlog of FOIA requests during fiscal 2019, taking in more than 850,000 requests and processing more than 875,000.

Murray praised both the ideals that inspired the FOIA democracy and self-government, exercised by informed citizens and the civil servants who implement it. She noted the increasing volume and complexity of FOIA requests, but otherwise her prepared remarks did not allude to areas where improvement is needed.

Last week, Reuters reported that the Department of Health and Human Services had treated numerous high-level meetings about the coronavirus as classified and had excluded staffers who lacked a security clearance.

This raised the possibility that the agency would also withhold information about these meetings from its responses to FOIA requests concerning coronavirus. While the meetings were held in a room reserved for classified information, administration officials insist that they do not treat them as classified.

Link:

Access to government information: another coronavirus casualty? - Center for Public Integrity

The coronavirus pandemic will limit in-person voter participation in the two states holding down-ballot elections Tuesday.

Illinois and Ohio election officials last week encouraged voters to cast ballots by mail. Both states also are holding presidential primaries, as are a couple of other states.

Headlining the congressional races is whether one of the few anti-abortion Democrats in Congress can survive a rematch against the more liberal challenger who almost unseated him in 2018. Eight-term Rep. Dan Lipinski , a member of the Blue Dog Coalition of Democrats who emphasize fiscal restraint, is opposed by Marie Newman, who lost 51%-49% to Lipinski two years ago, in the Chicago-area 3rd District.

Heres a look at all the races to watch:

Senate: Dick Durbin, the No. 2 Senate Democrat, is unopposed in the primary and will be heavily favored in strongly Democratic Illinois to defeat the winner of a five-candidate Republican primary.

3rd District (parts of Chicago and suburbs; Clinton 55%-40%): While Lipinski and Newman disagree on abortion, health care has emerged as a bigger issue during the campaign. Lipinski has criticized Newmans support for a Medicare for All government-run health-care system as unworkable. A Lipinski ad said hes working to lower prescription drug prices while Newman backs an extreme plan to eliminate private health insurance.

Newmans backers include Chicago Mayor Lori Lightfoot, Rep. Alexandria Ocasio-Cortez (D-N.Y.), and EMILYs List, which aids Democratic women who support abortion rights. Newmans TV ads have noted Lipinskis vote against the Affordable Care Act.

Unlike the 2018 primary, which was a 1-on-1 race, this years primary is a four-candidate contest that includes Rush Darwish, a Palestinian-American businessman whos had success in fundraising. Darwish has accused Newman of adopting progressive positions on health care to further her political ambitions. An anti-Lipinski vote spread out over multiple candidates could help the incumbent win again, perhaps with a plurality of the vote.

In the 2018 primary, 51% of the 3rd District primary vote came out of suburban Cook County, where Newman won narrowly, and 42% came from Chicago, where Lipinski won more decisively. The rest of the vote comes from suburban DuPage and Will Counties.

6th District (Chicago suburbs; Clinton 50%-43%): Republicans Jeanne Ives and Jay Kinzler are seeking to oppose Rep. Sean Casten (D), who unseated Peter Roskam (R) in 2018 in a district thats been drifting away from the Republicans. Ives, a former state legislator and Army veteran who challenged the incumbent Republican governor in the 2018 primary, has raised more than five times as much in campaign funds as Kinzler and is backed by some Republican members of the Illinois congressional delegation.

13th District (Champaign, Decatur, most of Springfield; Trump 50%-44%): Betsy Dirksen Londrigan, a businesswoman and former congressional aide, should advance to a rematch with four-term Rep. Rodney Davis (R), the ranking member of the Committee on House Administration. Davis won their 2018 contest by less than 1 percentage point.

14th District (Chicago suburbs; Trump 49%-45%): Seven Republicans are vying to oppose first-term Rep. Lauren Underwood (D), who unseated Republican Randy Hultgren in 2018.

They include Jim Oberweis, a state senator and wealthy dairy executive whos waged previous unsuccessful bids for federal office. Illinois Conservative PAC, a super political action committee that formed in early March, aired ads attacking Oberweis conservative credentials. The super PAC hasnt yet disclosed its donors.

State Sen. Sue Rezins supporters include Rep. Adam Kinzinger (R-Ill.); Value in Electing Women PAC, which advocates for more Republican women in Congress; and the Republican Main Street Partnership PAC, which says it represents the governing wing of the Republican Party.

Ted Gradel, a businessman who was a college football kicker at Notre Dame, aired a TV ad that showed him kicking footballs as he advocated for term limits and tax cuts.

Underwood, who has a background in health care, has been a high-profile advocate of protecting and strengthening the ACA.

15th District (Danville, Charleston, Mattoon; Trump 71%-25%): The winner of a four-candidate Republican primary will be a shoo-in in November to succeed retiring Rep. John Shimkus (R). The top candidates probably are Mary Miller, a farmer and educator, and Darren Duncan, the treasurer of Vermilion County in Danville.

Miller is the preferred candidate of the House Freedom Fund, which is the political arm of the strongly conservative House Freedom Caucus, and of Reps. Elise Stefanik (N.Y.) and Cathy McMorris Rodgers (Wash.), who are helping lead the Republican Partys efforts to elect more women to Congress. In one TV ad, Miller said she was running in part to put an end to godless socialism. Duncans platform includes opposition to abortion and gun control and support for Trumps border wall.

Photo by Al Drago/Bloomberg

Rep. Joyce Beatty (D-Ohio) is facing a primary challenge.

1st District (part of Cincinnati; Trump 51%-45%): Kate Schroder, a former vice president for the Clinton Health Access Initiative, and Nikki Foster, a former Air Force combat pilot in Iraq and Afghanistan, are seeking the Democratic nomination to oppose Rep. Steve Chabot (R) in a mildly Republican-leaning district in southwestern Ohio. Schroder is better-funded. Chabot is the top Republican on the Small Business Committee.

3rd District (most of Columbus; Clinton 67%-29%): Rep. Joyce Beatty (D), the chairwoman of the House Financial Services Diversity and Inclusion Subcommittee, is opposed in the primary by Morgan Harper, a lawyer who formerly worked for the Consumer Financial Protection Bureau. Harpers backers include Justice Democrats, a liberal activist group.

We can continue down the path of the status quo, dominated by corporate interests that are willing to let our lives and our communities suffer. Or we can organize together and fight back, Harper said at a candidate forum in February.

Beattys ads have highlighted her opposition to Trump and her work on health care and prescription-drug pricing and havent mentioned Harper.

To contact the reporter on this story: Greg Giroux in Washington at ggiroux@bgov.com

To contact the editors responsible for this story: Bennett Roth at broth@bgov.com; Kyle Trygstad at ktrygstad@bgov.com

Go here to see the original:

What to Look For in Illinois and Ohio Congressional Primaries - Bloomberg Government

Weekly Reports | Mar 13 2020

Weekly Broker Wrap: fiscal stimulus; A-REITs; food & beverage; BNPL; and aged care.

-Supermarket, food and electronics sales may derive boost from fiscal stimulus package-Short-term uplift in sales not enough to counter structural headwinds for landlords in regional shopping centres-Asaleo Care, Freedom Foods likely to benefit from recent stockpiling-Surge in unemployment likely to drive bad debts higher for Zip Co and Afterpay-Aged care sector likely to be materially impacted if coronavirus outbreak escalates

By Eva Brocklehurst

Fiscal Stimulus

In response to the growing risk of coronavirus on the economy the Commonwealth Government has responded with a stimulus package designed to get consumers spending and circumvent a rise in unemployment.

The $17.6bn package includes a $750 payment to pensioners and others on government payments, along with apprenticeship support, wage subsidies for small business and instant asset write-offs for business.

Citi calculates the stimulus may boost retail sales in supermarkets, food and electronics by 1-2% in the June quarter. The broker is not convinced the asset write-offs will benefit retailers much.

The broker expects very limited benefit for soft goods such as apparel and footwear while retailers such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)) may experience a spike in IT sales. The broker also suspects, given uncertainty is at an early stage, a portion of the hand-out will be saved.

JPMorgan notes that small-medium enterprises tend to run relatively high wage costs relative to sales, as they are largely concentrated in the services sector. Hence, in assessing the degree of support from the package, the broker finds it reasonable, given the fall in service consumption that could be expected.

JPMorgan still believes, ultimately, any such redistribution of income from government/business sectors to households gets saved and this will not help economic growth in the immediate term, although it may limit labour market damage.

Morgan Stanley still envisages the potential for a second, broader stimulus at the May budget. The broker considers the initial fiscal response should stabilise the economy, although a recession is still possible.

The broker considers the most important role of government at this stage is to support the labour market, as this is where severe second-round impacts can occur and stymie an eventual recovery. Further measures are expected from the state governments, albeit on a smaller scale.

The broker also expects the Reserve Bank of Australia will cut the cash rate again in April to the effective lower bound (0.25%), with an increasing probability that quantitative easing will be implemented.

A-REITs

Macquarie notes a limited direct benefit for the listed property sector (A-REITs) from the fiscal stimulus. The broker expects around half of the consumer support will be spent quickly, although experience with 2019 tax rebates suggests the initial boost was subdued.

If the entire fiscal package for consumers is spent in retail, this would equate to a 1.4% uplift to 12-month annual retail sales but Macquarie suspects this is unlikely outcome. The broker continues to believe a short-term uplift in sales is not enough to change the structural headwinds that landlords in regional shopping centres face.

The broker prefers those stocks with high rental income and strong balance sheets in the sector, such as Dexus ((DXS)), Charter Hall Retail ((CQR)) and Investec Australia Property ((IAP)).

Food & Beverage

Amongst Citi's coverage of Australian food and beverage stocks, a2 Milk ((A2M)) stands out as it has strong partnerships that should lead to more reliable supply to China. Asaleo Care ((AHY)) and Freedom Foods ((FNP)) may also benefit from recent supermarkets stockpiling, that should also reduce the level of promotional discounting in these categories.

Those with relatively higher gearing include Blackmores ((BKL)) and Freedom Foods, although Citi points out these are not particularly high compared with companies in other industries.

Most of the de-rating from this latest correction has been in Freedom Foods and Treasury Wine Estates ((TWE)). Citi expects the former to re-rate with increased capacity utilisation, while more clarity is needed around the coronavirus impact on Treasury Wine sales before it can re-rate.

The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE

Link:

The Wrap: A-REITs, BNPL And Aged Care - FN Arena News

A former top official from President Recep Tayyip Erdogan's government on Wednesday unveiled his much-anticipated new political party, DEVA, with a programme centred upon fiscal reforms and social freedoms.

Ali Babacan, a former Turkish deputy prime minister who broke ranks with Erdogan last year, presented his Democracy and Progress Party- whose Turkish initials DEVA mean 'remedy' -as a liberal democratic and pro-Western political organisation in his launch speech addressed to supporters and founders of the party in Ankara.

The rule of law in our country is always crumpled, justice is wounded, Babacan said. Our democracy is weak. Our people cannot raise their voice no matter how high they shout.

Babacan also unveiled a 132-page-long party programme, which mostly focuses on the restoration of fundamental rights and freedoms, including the press freedom, and education in mother tongues, a central demand by the Kurdish nationalist movement in Turkey.

DEVA's programme also included a call to return to a parliamentary democracy from the current executive presidential system, and promised a new constitution based on strong separation of powers.

In order to solidify his arguments on freedom of speech, Babacan said that under his rule, young people in Turkey would be able to use social media platforms without fear of arrest.

You could tweet or like [things] without fear,"he said.

Many Turkish citizens are currently being investigated or sentenced for insulting the Turkish president on Twitter in the years since the attempted coup of 2016.

Babacan also built his speech around a call for fiscal reforms in the country.

Under his economic leadership in the 2000s, the country saw immense growth, but he later fell out of Erdogans favour due to disagreements on the fundamentals of the free-market economy.

We will realise the so-called fiscal rule that [some] didnt allow us to do, Babacan said in an apparent criticism of Erdogan, who defends his unorthodox economic policies.

DEVA's launch event seemed to have resonated in other parts of Ankara where Erdogan made an address to his colleagues atthe ruling Justice and Development Party(AKP).

If you pay attention, [you would see] that every so-called entity that is being presented as new only confirms the need for AK Party, and other than that it is useless, Erdogan said.

On the foreign policy front, DEVA's party programme calls for stronger ties with NATO, the European Union and the United States and committed itself to resolving differences with Turkeys allies in diplomatic ways.

It also says that the territorial integrity of Syria and Iraq would have utmost importance for a DEVA government in the future.

Go here to see the original:

Babacan's new party vows Turks can tweet without fear of arrest - Middle East Eye

This is a picture of a storm as it is building up over an uncultivated agricultural field and some ... [+] wind turbines in the horizon. It was shot at a location in the eastern part of the Netherlands.

This week, were highlighting three stocks to buy that have been dragged down by the current market turmoil. These stocks are for great companies whose valuations are a little high. If those valuations decline, investors should scoop up these quality businesses. The Home Depot (HD), The TJX Companies (TJX), and ICON PLC (ICLR) are this weeksLong Ideas.

Market Fears Drive Overreactions

The global outbreak of the coronavirus has rattled the market. Investors and analysts alike are concerned about its impact on the global economy. The S&P 500 recently had itsworst weeksince October 2008 while entering correction territory at thefastest rate in history.

World leadersandexpertsbelieve the outbreak will get worse, which could lead to further downside in the market. However, its not all bad news for investors. Over the long-term, market corrections present great money-making opportunities, as Warren Buffett says be greedy when others are fearful.

Focus on ROIC It Drives Valuations

The winners both during and after a market crash,as I have shown, tend to be companies that earn a high return on invested capital (ROIC). Furthermore, there is astrong correlationbetween improving ROIC and increasing shareholder value. To that end, I began my search looking for companies with consistently high and/or rising ROICs.

In addition to high ROICs, the firms below have a history of risingcore earnings[1],economic earnings. and positivefree cash flow. Each of these companies are high-quality, value-creating businesses. However, as Figure 1 shows, their price-to-economic book value (PEBV) ratios show that the market still expects a significant amount of growth from them. PEBV compares the current valuation of a company to its zero-growth value. A PEBV of 1 would mean that the market expects the companys cash flows to stay flat into perpetuity.

Figure 1: Three Stocks Worth Buying If Prices Correct Further

Three Stocks To Buy After Prices Fall

MyStock Rating Methodologyconsiders a PEBV below 1.6 but above 1.1 to be attractive and a PEBV below 1.1 but above 0 to be very attractive. These companies are still less expensive than the S&P 500 (SPY) with a PEBV of 2.6 but more expensive than the stocks I typically recommend. As global fears send markets falling further, it could present an opportunity to get these quality businesses without paying a premium.

ICON, PLC (ICLR) Attractive Rating

ICON, PLC (ICLR) was recently upgraded to attractive (from neutral) after I parsed its 2019 20-F (filed on February 27, 2020). I first made ICON a Long Idea inMay 2017. The company remains a leading contract research organization (CRO) and a drop in price presents a great buying opportunity.

Over the past decade, ICLR has grown revenue by 12% compounded annually and core earnings by 16% compounded annually, per Figure 2. The firm has increased its net operating profit after-tax (NOPAT) margin year-over-year (YoY) in seven of the past 10 years and its 2019 NOPAT margin of 15% is up from 11% in 2009. ICLR has improved its ROIC from 16% in 2009 to a top-quintile 25% in 2019 and has generated $859 million (9% of market cap) in cumulative free cash flow over the past five years.

Figure 2: ICLRs Revenue & Core Earnings Since 2009

ICLR Revenue And Core Earnings

In 2019, ICLR had -$26 million in earnings distortion that caused GAAP earnings to be understated. Notable unusual expenses in ICLRs 20-F include:

These unusual expenses were partially offset by:

Only by removing these unusual expenses and gains can I evaluate the core earnings of ICLRs operations. In total, I identified $0.48/share (7% of GAAP EPS) in net unusual expenses in ICLRs 2019 GAAP results. After removing this earnings distortion, ICLRs 2019 core earnings of $7.27/share are higher than GAAP EPS of $6.79.

I define "hidden" expenses and gains in the same manner as Harvard Business School & MIT Sloan in this recent paperon the topic. More details on exactly what I mean by "hidden" versus reported results are here.

ICLRsEarnings Distortion Score(as featured on CNBC Squawk Box)is currently In-Line, which means I expect it to report in-line with consensus expectations. Earnings Distortion Scores provide investors with a short-term look at the likelihood a firm will beat/miss consensus expectations. Longer-term, I focus on my overallRisk/Reward Ratings, which take into account a firms historical profitability and the level of expectations baked into the current stock price. As noted above, ICON PLC earns an attractive Risk/Reward rating, which means it provides quality risk/reward going forward, even if its not more likely to beat consensus expectations in the coming quarter.

Economic Earnings Growing Faster Than Core Earnings

Core earnings account for unusual gains and expenses included in GAAP net income. To get the full picture of a companys operations and hold management accountable for capital allocation, I also analyze balance sheets to calculate an accurate ROIC andeconomic earnings, the truestdrivers of shareholder value.

Some notable adjustments to ICLRs balance sheet include:

After all adjustments, I find that ICLRs economic earnings grew 20% compounded annually over the past five years and 18% compounded annually over the past decade.

Shares Starting to Look Cheap

At its current price, ICLR has a price-to-economic book value (PEBV) ratio of 1.3.

The expectations baked into ICLRs valuation remain low relative to the firms historical growth and expected industry growth. Even if I assume ICLR simply maintains margins and grows NOPAT by 7% compounded annually (in-line with projected industry growth) for the next decade, the stock is worth $189/share today 45% above its current price.See the math behind this reverse DCF scenario.

Leading Profitability Amongst Competitors

As I pointed out in my original Long Idea, ICLRs lean cost structure and operational efficiency give it a competitive advantage over peers. Such an advantage is still present today. Per Figure 3, ICLRs ROIC and net operating profit before-tax (NOPBT) margin rank well above its publicly traded competitors (as listed in thefirms 20-F). I use NOPBT margin in the below comparison because being domiciled in Ireland provides a unique tax advantage for ICLR.

Figure 3: ICLRs Profitability Leads Competition

ICLR Profitability Vs. Peers

The TJX Companies (TJX) Attractive Rating

I first featured The TJX Companies (TJX) as a Long Idea inApril 2018. The company remains a best-in-class off-price retailer that is worth a close look after a market downturn.

Since 2009, TJX has grown revenue by 7% compounded annually and core earnings by 12% compounded annually, per Figure 4. TTM core earnings are up 5% over fiscal 2019.The firms profit growth can be attributed to its rising profitability, as its NOPAT margin has increased from 5.5% in 2009 to 8.2% TTM while its ROIC improved from 12% to 19% over the same time.

Figure 4: TJXs Revenue & Core Earnings Since 2009

TJX Revenue And Core Earnings

TJXs Earnings Distortion Score is currently In-Line, which means I expect it to report in-line with consensus expectations. As noted above, The TJX Companies earns an attractive Risk/Reward rating, which means it provides quality risk/reward going forward, even if its not more likely to beat consensus expectations in the coming quarter.

Economic Earnings Growing Even Faster

I analyze balance sheets to calculate an accurate ROIC and economic earnings and made the following adjustments to TJXs balance sheet:

After all adjustments, I find that TJXs economic earnings grew 13% compounded annually over the past decade.

Shares Are Almost a Bargain

At its current price, TJX has a price-to-economic book value (PEBV) ratio of 1.4.

At its current valuation, TJX investors benefit from a 1.8% dividend yield and 23 consecutive years of dividend growth. A market correction would make this high-quality company an even better stock.

The expectations baked into TJX remain low relative to the firms historical growth and consensus estimates. If I assume TJX can improve margins to 9% (from 8% TTM) and grow NOPAT by just 6% compounded annually for the next decade, the stock is worth $70/share today 70% above its current price.See the math behind this reverse DCF scenario.

TJX Bucks the Retail Apocalypse Narrative

In a retail environment where the weak are getting increasingly left behind, The TJX Companies has proven its staying power. Apart from the improving profitably noted above, TJX reported fiscal 2019 was its 24thconsecutive year in which comparable store sales grew year-over-year. The firms ability to grow comparable store sales for over two decades is a testament to TJXs value proposition to consumers and the ability to efficiently manage its operations.

As Rod Sides, vice chairman of Deloitte, and its U.S. retail and distribution sector leaderstated, off-price stores can help provide price relief during a more challenging economy. But, even in times of economic growth, these stores still do well. For a significant portion of the population, price and value are important from an income standpoint, and off-price is therefore very relevant and successful.

The TJX Companies has leveraged this success to achieve leading profitability in its industry. Of the 11 Discount Stores under coverage, TJX earns the highest ROIC and NOPAT margin.

Management Now Incentivized to Create Shareholder Value

TJX has achieved its past success despite not properly aligning executives interests with shareholders interests. Not anymore. Beginning in fiscal 2019, TJX introduced a newexecutive-compensation planthat seeks to balance growth, profitability, and returns.

Under this new plan, TJX added ROIC as a performance modifier to its long-term performance share program, which made up the largest portion of executives long-term incentives. ROIC was chosen to reinforce attention to capital investments and generating returns.

Going forward, if TJX fails to meet its ROIC performance goals, executives long-term performance share awards will be reduced by 20%. While I would recommend TJX use ROIC as more than just a modifier, I still applaud the compensation committees decision to hold executives accountable for prudent stewardship of capital. This improved compensation plan, along with TJXs strong fundamentals earned it a spot in FebruarysExec Comp Aligned with ROICModel Portfolio.

The Home Depot (HD) Attractive Rating

The Home Depot (HD) was recently upgraded to attractive (from Neutral). HD has long been on my radar, but its premium valuation has turned me to cheaper stocks. Further declines in this stock would make me an avid buyer.

Over the past decade, the company has grown revenue by 4% compounded annually and core earnings by 13% compounded annually, per Figure 5. The firm has increased its NOPAT margin every year since 2009 and its TTM NOPAT margin of 11% is up from 5% in 2009. HD improved its ROIC from 9% in 2009 to a top-quintile 32% TTM and generated $43.5 billion (17% of market cap) in cumulativefree cash flowover the past five years.

Figure 5: HDs Rising Core Earnings Over Past Decade

HD Revenue And Core Earnings

HDs Earnings Distortion Score is currently Miss, which means I expect it to miss upcoming consensus expectations. However, HD has proven resilient when missing expectations in the past, as investors focus on the long-term profit growth achieved by the firm. Looking over the long-term, The Home Depot earns an attractive Risk/Reward rating, which means it provides quality risk/reward going forward, even if its not more likely to beat consensus expectations in the coming quarter.

Economic Earnings Are Growing Too

I made the following adjustments to HDs balance sheet:

After all adjustments, I find that HDs economic earnings grew 20% compounded annually over the past decade and 16% compounded annually over the past two decades.

Shares Nearing a Buying Opportunity

At its current price, HD has a price-to-economic book value (PEBV) ratio of 1.5.

Even at its current valuation, HD investors still benefit from a 2.9% dividend yield and seven consecutive years of dividend growth. A market correction would make this high-quality company an even more attractive stock.

Best of all, the expectations baked into HDs stock price remain conservative. If I assume HD can improve margins to 12% (from 11%) and grow NOPAT by just 6% compounded annually for the next decade, the stock is worth $241/share today 46% above its current price.See the math behind this reverse DCF scenario.

Industry Leader with Leading Profitability

From Home DepotsInvestor Presentation, HD is the #1 home improvement retailer in the United States, Canada, and Mexico. Furthermore, the firm estimates it has captured just 15% of its total U.S. market opportunity of ~$650 billion.

My research indicates HD has leveraged its industry leading position to achieve greater profitability over its peers. Of the five Home Improvement Products & Services Retailers under coverage, HD has the highest ROIC and second highest NOPAT margin. HDs profitably looks particularly impressive against its closest peer, Lowes Companies. Per Figure 6, HDs NOPAT margin is nearly two times greater than LOWs while its ROIC is nearly three times greater.

Figure 6: HDs Profitability Advantage Over LOW

HD Profitability Vs. LOW

Executives Interests Aligned with Shareholders Interests

Its no coincidence that HD has significantly improved margins, profits, and ROIC over the past decade, its executives are paid to do so. In fiscal 2007, Home Depot added an ROIC performance goal to its long-term incentive plan. The firmsproxy statementnoted the decision to add ROIC was based on the Companys desire to focus management on the efficient use of capital. Since adding ROIC to its executive compensation plan, HD has improved ROIC from 15% in 2007 to 32% TTM.

In its latest proxy statement, HD disclosed that one half of executives performance based share awards are contingent upon achieving a target three-year average ROIC goal. The performance share award makes up anywhere from 29-33% of executives total compensation. HDs executive compensation plan lowers the risk of investing in the company as I know its executives are incentivized to create true shareholder value. This compensation plan, along with strong fundamentals earned HD a spot in FebruarysExec Comp Aligned with ROICModel Portfolio.

Macro Conditions Bode Well for HD

Going forward, macro-economic data suggests continued growth for Home Depot and the home improvement industry in general. According to data from the American Housing Survey andHome Depot, over 50% of homes in the U.S are over 40 years of age, and nearly 80% of homes are over 20 years old. Home Depotnotesthat home improvement spend per home increases with the age of the home.

Additionally, homeowners have greater capacity to improve their homes than any time in history. CoreLogic, an industry data provider,reportedthat homeowner equity reached all-time highs in the first half of 2019 while homeowner equity has more than doubled since the housing recovery began. Home equity allows homeowners greater financial freedom when undergoing a home improvement project and bodes well for the home improvement industry.

The Importance of Quantifying Expectations

At the end of the day, declines in these companies stock prices would change very little about the strength of their businesses. When searching for value, its important to understand theexpectations already baked into a stock price. My Company Valuation Modelsincorporate all the data from financial filings to truly assess whether a firm is under or overvalued and provide an accurate representation of the risk/reward in a stock.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.

[1]My firms Core earnings are a superior measure of profits, as demonstrated in InCore Earnings: New Data & Evidencea paper by professors at Harvard Business School (HBS) & MIT Sloan. The paper empirically shows that my data is superior to IBES Street Earnings, owned by Blackstone (BX) and Thomson Reuters (TRI), and Income Before Special Items from Compustat, owned by S&P Global (SPGI).

View post:

The Home Depot, The TJX Companies, And ICON PLC: Three Safe Stocks In A Stormy Market - Forbes