Bonds Take Over the Stock Market, At Least for Now
By Jim Pearce
The big story last week was the somewhat unexpected announcement that legendary bond trader Blll Gross is leaving PIMCO – the company he founded forty years ago – for Janus Capital Group, the Denver-based mutual fund manager that saw its stock price jump almost 40% on the news. While Gross’s departure from PIMCO wasn’t that much of a surprise – his flagship Total Return Fund has been performing poorly for the past couple of years so there have been rumors circulating lately that he might retire now that he has reached the age of 70 – the jump to Janus did come as a bit of a shock.
And while the sharp increase in value of Janus’s stock is understandable since Mr. Gross still commands reverence within the bond trading community, the corresponding sag in bond prices was a bit puzzling. The conventional wisdom is that there will be substantial liquidations from the $220 billion Total Return Fund now that Mr. Gross is no longer managing it, thereby forcing PIMCO to dump a large quantity of bonds on the market all at one time.
There is also speculation that many of Mr. Gross’s institutional clients – of which there are many – will sever their longstanding relationships with PIMCO and follow him over to Janus. I’m sure there are some that will do that out of loyalty to the man that made them all very rich until recently, but I suspect many of them will view this event as a convenient opportunity to formally part ways with their old friend by simply choosing to leave their money right where it is.
The truth of the matter is that Mr. Gross’s reputation has taken several major hits lately, not all of them related to his inaccurate market predictions since turning bearish on the bond market two years ago. Former colleagues have accused him of bizarre behavior, including being instructed not to look him in the eyes when passing him in the hallways. I don’t know if that is true or not, but the fact that nobody is jumping up to deny it is kind of interesting.
More significant was the defection earlier this year by longtime confidant and well respected thought leader Mohamed El-Erian, who left PIMCO for Allianz after clashing with Mr. Gross on a number of issues. Mr. El-Erian is generally regarded as a brilliant and affable market analyst, so his departure from PIMCO should have been more troubling to its clients than the future absence of Mr. Gross. If so, then it is likely that much of the money that would be inclined to defect elsewhere has already done so.
It doesn’t take much to spook the markets these days, so news like this is given more credence than it really deserves. The movement of a person from one money management firm to another, and the associated shuffling of assets between various mutual funds, should have no long term impact on the financial markets since it results in no net gain or loss in invested capital. However, it is worth noting that the stock and bond traders who get paid commissions based on volume certainly have no motivation to dispel these errant notions.
The bottom line is this: the stock market is playing a waiting game, looking for proof that our economy can continue to grow without the assistance of Quantitative Easing from our Fed, and in the face of mounting international hostilities that threaten to morph into something more than just a typical regional conflict.
Meanwhile, the tech sector continues to gradually push forward, with momentum shifting from Apple two weeks ago to Alibaba last week, and to who knows which beneficiaries of market sentiment in the weeks to come. If you are looking for some up-and-coming tech stocks to add to your portfolio, please take a look at our recent additions to the STI Next Wave Portfolio, where some of the superstars of the future are lying in wait.
NASDAQ Composite Index:
Friday, September 26 = 4,582.90
Year to Date = + 8.9%
Trailing 7 Days = – 1.6%
Trailing 4 Weeks = – 1.7%
Equity Trades Portfolio Update: Symantec
By Rob DeFrancesco
Symantec (SYMC) last week announced that Michael A. Brown was appointed permanent CEO. He had served as interim president and CEO since March. More than 100 qualified candidates were reviewed and more than 30 were actively vetted, according to the company.
Brown joined Symantec’s board of directors in July 2005 following the company’s merger with VERITAS, and previously served as CEO of Quantum, where under his leadership revenue doubled to $6 billion. According to Symantec, Brown will share the company’s strategic plan with investors and customers within 30 days.
After years of mismanagement and scores of useless acquisitions, Symantec is slowly beginning to turn the corner, reporting fiscal first quarter (June) revenue growth of 1.5% and implied billings growth of 3%. Enterprise subscription revenue (excluding Norton) rose 7% and accounted for 16% of total revenue. As more revenue is recorded on a subscription basis, Symantec benefits from better visibility.
The recent separation of the sales force into two teams covering new business and referrals is starting to pay off in terms of improved performance, particularly in North America. Renewals in fiscal Q1 were especially strong.
The company is now focused on optimizing certain no-growth businesses (such as Norton) for margin while at the same time investing for growth in five key segments: back-up appliances, mobile, advanced threat protection (ATP), managed security services and data loss prevention (DLP).
Symantec is the #1 provider of back-up and recovery solutions, counting 99% of the Fortune 1000 as customers. Also holding the top spot in DLP, Symantec is considered best of breed and has a larger market share than the next three competitors combined.
During the past two quarters, Symantec has introduced nearly two dozen new or improved products and is on track to release almost two dozen more by the end of fiscal 2015 (March). In fiscal Q1, Symantec’s back-up appliances business grew 35% due in part to the recent move to nearly double the capacity of its enterprise offering to 148 terabytes from 76 terabytes, which has enabled the company to target the upper mid-market, effectively doubling its total addressable market in this segment.
In the fast-growing cybersecurity segment, Symantec is late to ATP, so is playing a bit of catch-up when it comes to targeted attacks. The company’s Managed Security Services-ATP managed service, released in June, reduces the time it takes to detect and respond to security incidents thanks to integration between its own endpoint security solutions and products from its network of third-party vendors. Symantec is on schedule to soon release a new incident response service covering targeted attacks along with an intelligence service offering threat visibility and analytics.
While the company continues to innovate and introduce new products, the new management team (including CFO Thomas Seifert, former CFO of Advanced Micro Devices) knows there are some poor-performing products left over from past acquisitions that could be offloaded in order to help improve operating results. This is part of the overall goal of getting operating margin back up to 30% by fiscal Q4.
While the topic of acquisitions is a touchy one for Symantec because past management teams made so many bad purchases, Seifert, speaking in early September at the Citi Global Technology Conference, said the company would consider M&A to fill technology gaps in the portfolio, not just to buy revenue.
The market reaction was muted to Brown being named the permanent CEO. There is a general sense that his strategy would be more of the same. But given the recent improved results, this could be a good thing. Symantec now has a management team in place that can begin to put together more consistent (and positive) operating results.
At this point, the company’s goal to get annual revenue growth back up to at least 5% seems to be an ambitious one: the consensus revenue estimates for fiscal 2015 and fiscal 2016 indicate growth of 0.3% and 1.6%, respectively.
However, through a combination of new products, improved sales force productivity and smart M&A, Symantec has the ability to surprise to the upside over the coming years. We’ll soon get a clearer picture of the longer-term outlook when Brown unveils his overall strategic plan and will revisit the story then.
Symantec remains a Buy in the Equity Trades Portfolio up to $22.