Category Archives: investing

Will FedEx’ Dividend Crash?

From time to time, Political Calculations will follow a single stock. To qualify as a stock we follow, we look for one major characteristic: the stock must be on the verge of a major potential change involving its dividend, when the question of whether the company will change its dividend is still up in the air.

Stock Market Chaos!

In 2018, that stock belonged to General Electric (NYSE: GE), which followed through on our prediction that it would cut its dividend by a large amount. In 2020, we identified Iron Mountain (NYSE: IRM) as a promising investment based on the hypothesis it would not cut its dividend despite its depressed stock price.

Last Thursday, 15 September 2022, FedEx (NYSE: FDX) came roaring onto our radar screen when, after the market had closed, the firm tossed out the earnings guidance it presented to investors just three months earlier, because of the deterioration of the U.S. and global economy's outlook over the summer.

The company's stock price was hammered in the next day's trading, falling over 21% from the previous day's close, its "biggest plunge ever". But although the firm withdrew its previous earnings guidance and announced plans to shutter retail stores, park its cargo transport aircraft, freeze its hiring and cut back labor hours of its staff, it left one big cash-preserving option unaddressed. FedEx' leaders haven't announced what they might do about the company's quarterly dividend.

The following chart illustrates how we see FedEx' options potentially playing out:

Fedex (NYSE: FDX) Adjusted Closing Stock Price per Share vs Trailing Year Dividends per Share at Dividend Declaration Dates from March 2002 through August 2022

Superficially, FedEx' current situation is similar to what we found for Iron Mountain back in 2020. The company's current stock price is well depressed, where a handsome reward awaits if its outlook improves and no dividend cut is needed, or a major dividend cut needs to be on the table because its outlook remains grim.

The chart shows FDX lived through a very similar experience back in June 2020 as faces the company today. Then, the company's executives were presented with similar options. If the company's prospects improved, leaving the dividend alone would see its stock price soar back to the level the long term relationship between it and the company's trailing year dividends per share would place it. If they didn't, a dividend cut of 61% would make sense given the level of its stock price.

Ultimately, the prospects for the global economy and FedEx rapidly improved in the following months, and investors who might have bought into the company at that time were well rewarded. But what would happen today?

If the "outlook gets better" scenario holds, given where its stock closed on Friday, 16 September 2022, our simple analysis suggest FDX could double in value. But if the "things stay grim" scenario is the right one, FedEx' board of directors could cut the dividend by as much as 64%.

We have one more bit of information to consider that may tell us which way FedEx' board will go. In June 2022, they boosted FedEx' quarterly dividend from $0.75 to $1.15 per share, a 53.3% increase. When they implemented that dividend, it was based on the company's earnings outlook from that time. The one they just trashed. Since they've thrown out that forecast, we think FDX' dividend is now also on the cutting board, with at least a 50% reduction up for consideration. That's despite the company's history in avoiding cuts to its dividends for its shareholding owners.

The only question is now is how long it will be before the board acts. In ordinary circumstances, the company could wait to announce a cut when it will next declare dividends in early November. In an economy with deteriorating prospects, it would be to their advantage to act much sooner than that.

References

NASDAQ. FDX Dividend History. [Online Database]. Accessed 17 September 2022.

Yahoo! Finance. FedEx Corporation (FDX) Historical Data. [Online Database]. Accessed 17 September 2022.

The S&P 500 vs Dividend Stock Funds

Morningstar's Amy Arnott wrote a column exploring whether dividend stocks provide shelter from a recession. It's a good article, and after reading it, we had a question. How would the S&P 500 (Index: SPX) compare with the three categories of dividend funds she discussed?

Those dividend stock fund categories include growth, growth and income, and income. In the following table, she gives some useful metrics for comparing how each type has performed during the past five years.

Morningstar: Risk and Returns for Three Dividend Strategies, 31 July 2022

The table presents the trailing twelve month dividend yield for each type of dividend stock fund, and also the five-year performance of each category for their Annualized Return, Standard Deviation (a measure of volatility), Sharpe Ratio (a risk-adjusted measure of investment return), and their Maximum Drawdown (the largest downward trend experienced from peak to trough).

We tracked down the same measures for the S&P 500. In the following chart, we've visually compared the index's dividend yield and 5-year annualized return with that of each of the dividend fund categories. We've also indicated the Sharpe Ratio for each in the column headings.

S&P 500 vs Dividend Growth, Growth + Income, and Income Fund Performance by Fund Type for Five Years Ending 31 July 2022

Although they have the lowest dividend yields, the S&P 500 and Dividend Growth fund categories provided the best total returns. That's also true after considering their Sharpe Ratio values, for which Arnott had indicated for the Dividend Growth category "posted the best combination of risk and return", beating the other two types of dividend funds. Speaking of which, Arnott recognizes that the dividend stock funds might have recorded better returns if not for having higher fees. She found that low-cost funds outperformed high-cost funds for overall returns.

The next chart compares the S&P 500's and the three dividend stock fund categories' standard deviation (volatility) and their worst recorded downward trend over the past five years.

S&P 500 vs Dividend Growth, Growth + Income, and Income Fund Volatility by Fund Type for Five Years Ending 31 July 2022

The standard deviation data for the S&P 500, Dividend Growth, and Dividend Income funds were all similar, with the Dividend Growth and Income fund recording the lowest volatility. Meanwhile, the S&P 500 clearly outperformed the other fund types by recording the smallest drawdown during the past five years, with Dividend Growth funds ranking second lowest. Dividend Income funds recorded the most adverse drawdown in the five year period ending on 31 July 2022.

Altogether, the data indicates the S&P 500 had the best overall performance, followed by Dividend Growth funds, then Dividend Growth and Income funds, and finally, Dividend Income funds.

References

Arnott, Amy. Do Dividend Stocks Provide Shelter From Recession? Morningstar. [Online Article]. 8 August 2022.

Morningstar. S&P 500 PR Risk Data. [Online Application]. Accessed 14 August 2022.

PortfoliosLab. S&P 500 Portfolio Trailing Twelve Month Dividend Yield [Online Application]. Accessed 14 August 2022.

Who’s Better at Picking Stocks: r/WallStreetBets or a Goldfish?

Michael Reeves has carved out a unique niche in the online world through his comedy-tech videos, combining his programming skills and love of modern technology with rapid fire jokes and satire.

In his latest production, he's taken on the world of meme investing, as represented by the favorite stocks pitched by top contributors to r/WallStreetBets, and pitted them against pure random selection, as represented by the stock picks of his pet goldfish. In the following 15-minute video (featuring some NSFW language and visual humor), he explains how he did it and presents his experimental results:

Our favorite part is when he pitches the "FISH" system to potential investors.

Reeves' experiment makes sense in the light of the real results of the Wall Street Journal's long-running investment dartboard challenge, in which the performance of stocks picked by professional investors competed against stocks picked by WSJ reporters who threw darts at the newspaper's stock listings to pick stocks at random. Superficially, it appeared the pros beat the darts, but that was because they benefitted from two secret advantages that were hidden in plain sight:

Professor Burton Malkiel of Princeton University, who for decades has been arguing that you can't beat the market, and a colleague found that the stocks the experts picked were risky. They were far more volatile than those the reporters picked using darts or the stocks that make up the S&P 500. When the stocks of the three groups are adjusted for risk, the returns of the experts fall precipitously below those of the dartboard or the index.

Professor Malkiel goes further. He argues that the unadjusted returns of the experts were higher because Wall Street Journal readers noted the selections after they were published and then bid them higher. Had the experts chosen their stocks on the day the stock picks were published instead of the day before, their return would fall a whopping 3 percentage points!!!

All in all, Reeves' goldfish-based investing system is a fun way to revisit those old results.

Previously on Political Calculations

Bitcoin Is Not Gold 2.0

It's not often we can use math to definitively shut down a claim being made to pitch an investment, but here we are.

The pitch involves the cryptocurrency Bitcoin (BTC). The claim, most famously made by the Winklevoss brothers in 2017, is that "Bitcoin is Gold 2.0". Here's a more recent clip of the brothers repeating their pitch on CNBC on 10 July 2019:

While they may be among the most prominent pitchmen for Bitcoin, they're far from alone in claiming Bitcoin has gold-like investing properties. Here's a selection of articles we turned up from 2013 through 2022 where analysts have made similar claims:

Let's address the elephant in the room. For Bitcoin to be Gold 2.0, it needs to share gold's top investing characteristic: it needs to provide an effective hedge against inflation by rising in value as inflation reduces real yields. Gold, or as BTC enthusiasts would describe it, Gold 1.0, does exactly that when real interest rates fall and become negative as the rate of inflation grows to exceed nominal interest rates. Here's the chart we featured in previous analysis showing the price of gold doing just that, rising in value as real interest rates decline in value and vice versa.

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

Now, here's a chart that presents the value of Bitcoin with respect to the same data for the inflation-adjusted yields of 10-year Constant Maturity U.S. Treasuries over the period from 17 September 2014 through 21 April 2022, covering nearly the entire period where we can identify that the claim that "Bitcoin is Gold 2.0" has been prominently made. Spoiler alert: Bitcoin is not Gold 2.0!

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

The chart of Bitcoin's "relationship" with real yields looks like something that could have been created on an Etch-a-Sketch. The value of BTC either moves sideways or up-and-down.

That observation aside, we see three main periods for Bitcoin's valuation history in this chart:

  1. 17 September 2014 to 7 October 2020. The price of Bitcoin in U.S. dollars has virtually no relationship with real interest rates, despite substantial changes in their value during this period. In math terms, the slope of the trendlines whenever real interest rates are changing in value is nearly equal to zero, because the value of Bitcoin isn't changing with them.
  2. 8 October 2020 - 6 January 2022. This is the period when the biggest changes in the valuation of Bitcoin has occurred, and we find that while Bitcoin's value has ranged all over the map from nearly $11,000 to a peak of $67,567 during this second period, it's matched against very little change in real interest rates. In math terms, the effectively vertical movement in Bitcoin's valuation is not defined with respect to changes in real interest rates. In practical terms, whatever moved Bitcoin prices during this time was unconnected to how inflation affected interest rates.
  3. 7 January 2022 - 21 April 2022. Shown as the green circles on the chart, we find once again there is little change in the value of Bitcoin even though real interest rates have substantially changed. Just like in the first period, the value of Bitcoin shows little to no, or dare we say, zero connection to changes in real interest rates.

For the record, we're just the latest to conclude that Bitcoin is not Gold 2.0, though perhaps the first to show it using tools available to middle and high school algebra students. Here is other analysis that finds Bitcoin lacks gold's most attractive investing properties for extra credit reading:

With respect to changes in inflation-adjusted interest rates, we've demonstrated the value of Bitcoin either moves sideways or up-and-down with little rhyme or reason, making it very different from how gold has performed during the period of their shared existence. Bitcoin is not Gold 2.0.

Previously on Political Calculations

References

Federal Reserve Economic Data. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Inflation-Indexed. [Online Database (Text File)]. Accessed 22 April 2022.

Yahoo! Finance. Bitcoin USD (BTC-USD), 14 September 2014 through 21 April 2022. [Online Database]. Accessed 22 April 2022.

How Gamestop’s Stock Price Was Squeezed

The story of how Gamestop (NYSE: GME) went from a value of $11.01 per share on 13 November 2020 to reach $325.00 per share on 29 January 2021 has become a stock market legend.

It has also become the subject of a fascinating academic study, where a new paper by Lorenzo Lucchini, Luca Maria Aiello, Laura Alessandretti, Gianmarco De Francisci Morales, Michele Starnini and Andrea Baronchelli investigated how social media contributed to the short squeeze that made GME into *the* prototype meme stock.

If you're not familiar with the story, here's the paper's summary of how the GME short squeeze was made, in which Reddit's r/wallstreetbets (WSB) plays a prominent role (we've added the bullet list formatting to make it easier to follow):

GameStop (GME) is a US video game retailer which was at the centre of the short squeeze in January 2021. The timeline of the events around the squeeze is summarized in table 1, and it unfolded as follows.

  • In 2019, Reddit user u/DeepFuckingValue entered a long position on GME, i.e. he bought shares of the GME stock, and started sharing regular updates in WSB.
  • On 27 October 2020, Reddit user u/Stonksflyingup shared a video explaining how a short position held by Melvin Capital, a hedge fund, could be used to trigger a short squeeze.
  • On 11 January 2021, GME announced a renewed Board of Directors, which included experts in e-commerce. This move was widely regarded as positive for the company, and sparked some initial chatter on WSB.
  • On 19 January, Citron Research (an investment website focused on shorting stocks) released a prediction that GME’s stock price would decrease rapidly.
  • On 22 January, users of WSB initiated the short squeeze.
  • By 26 January, the stock price increased more than 600%, and its trading was halted several times due to its high volatility. On that same date, business magnate Elon Musk tweeted ‘Gamestonk!!’ along with a link to WSB.
  • On 28 January, GME reached its all-time intra-day highest price, and more than 1 million of its shares were deemed failed-to-deliver, which sealed the success of the squeeze. A failure to deliver is the inability of a party to deliver a tradable asset, or meet a contractual obligation; a typical example is the failure to deliver shares as part of a short transaction.
  • On 28 January, the financial service company Robinhood, whose trading application was popular among WSB users, halted all the purchases of GME stocks.
  • On 1 and 2 February, the stock price declined substantially.

By the end of January 2021, Melvin Capital, which had heavily shorted GameStop, declared to have covered its short position (i.e. closed it by buying the underlying stock). As a result, it lost 30% of its value since the start of 2021, and suffered a loss of 53% of its investments, i.e. more than 4 billion USD.

While the paper's summary indicates a substantial decline in value, we'll point out that since it peaked at $325 per share, GME bottomed at $40.69 per share on 18 February 2022 before climbing back up to $300 per share on 8 June 2021, before dropping back toward the middle of that range. The following chart shows its stock price history:

GME Stock Price History: 12 October 2020 - 14 April 2022

That's all the "what happened", but it's the "why it happened" we find fascinating. The authors identify one key element in the postings of the WSB redditors that established their credibility, separating their postings from the ordinary run of the mill comments that dominate discussions on many other stock investing discussion sites, which they describe in the paper's introduction:

In this paper, we analyse discussions on WSB from 27 November 2020 to 3 February 2021 (table 1) and investigate how they translated into collective action before and during the squeeze that was initiated on 22 January and lasted until 2 February. Motivated by recent theoretical [10,11] and experimental [12] evidence that minorities of committed individuals may mobilize large fractions of a population [10,1315] even when they are extremely small [16], we investigate whether committed users on WSB had a role in triggering the collective action. To this aim, we operationalize the commitment of a user as an exhibited proof that the user has financial stakes in the asset.

We won't keep you in suspense. Here's the summary of what they found:

We show that a sustained commitment activity systematically pre-dates the increase of GameStop share returns, while simple measures of public attention towards the phenomenon cannot predict the share increase. Additionally, we also show that the success of the squeeze operation determines a growth of the social identity of WSB participants, despite the continuous flow of new users into the group. Finally, we find that users who committed early occupy a central position in the discussion network, as reconstructed by WSB posts and comments, during the weeks preceding the stock price surge, while more peripheral users show commitment only in the last phases of the saga.

The last part is to say that the early influencers who effectively established their credibility continued to be influential within the network. We think that continued influence is attibutable to their success, which had the short squeeze of GME's stock not occurred, would have led other WSB participants to discount the information value of their postings. People with opinions about a company's investment worthiness are a dime a dozen on a stock discussion board, but people who back up their talk with hard evidence of their bets that go on to pay off were granted credibility.

Much of the authors' study focuses on the dynamics between this "core" group of GME redditors and others who were on the periphery of the investing activity, which they describe as a "behavioural cascade" event. The core group attained a critical point of credibility, sweeping up peripheral redditors who transitioned from observers to participants as the short squeeze cascaded into a legendary event.

Update

As for the hedge fund that lost billions on its attempted short of GME, the firm is considering returning what's left of the capital it controls to its remaining investors as its future with its current structure is in doubt. The fund lost 39% of its capital in 2021, with another 21% of losses to date in 2022. It's management would launch a new fund to replace it.

Reference

Lorenzo Lucchini, Luca Maria Aiello, Laura Alessandretti, Gianmarco De Francisci Morales, Michele Starnini and Andrea Baronchelli. From Reddit to Wall Street: the role of committed minorities in financial collective action. Royal Society Open Science. Volume 9, Number 4. 6 April 2022. DOI: 10.1098/rsos.211488.