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Random gleanings from the world of business, investments and economics: September 6-9, 2016

“Investing should be like watching paint dry or watching grass grow.”

 – Paul Samuelson

 This week “watching paint dry” nailed it.   We’re referring to the earnings calendar.  How slow will it be in the week after Labor Day?  The biggest earnings story on Wednesday will be Valspar, the paint company.

Always interested in “boring” companies (boring can be profitable), and hoping to derive some knowledge from watching paint dry, we did a little Labor Day homework on Valspar.   They’re on it for sure.  And Sherwin-Williams is on them.

What you may not have known about Valspar:

  • Valspar was founded in 1806, in Boston, by Augustine Stimpson who partnered with Lawson Valentine. Eventually the paint company became Valentine and Company.  (Spoiler alert:  the first syllable of Valentine is the first syllable of Valspar.)
  • In the 1860’s the Valentine Company hired chemist Charles Homer, brother of Winslow Homer. Charles Homer invented modern varnish.

Valspar varnish (the firm’s original flagship product) was the first clear varnish ever sold. The catchy advertising jingle was, “Will not turn white”. The name “Valspar” was coined by L. Valentine Pulsifer.

  • (Pulsifer would be a great name for a rap music artist.)
  • Charles Lindbergh’s airplane the Spirit of St. Louis was coated with Valspar. His fame helped build the brand’s market share.
  • Valspar is now based in Minneapolis, has 10,000 employees in 25 countries and is the sixth largest paint and coating company in the world.
  • Unvarnished truth: the stock is up 40% this year.  The chart below shows Valspar’s price year-to-date.  You might go a lifetime without seeing another chart quite like this one:

2016.09.06 pic6

  • Is Valspar a good investment now? It is probably too late to buy the stock because…
  • …In March of 2016, Sherwin-Williams made an all-cash offer for Valspar. Shareholders approved the merger of the two companies.  The paint companies will merge early 2017… sometime around Valentine’s Day.  Valspar’s earnings are unlikely to move the share price much.

We’ll spare you a similar deep-dive into Kroger (earnings due Friday) except to say is the second largest retailer in America and the fifth largest retailer in the world.  Earnings will be closely watched by all who follow the grocery industry.

Chart of the Week

2016.09.06 pic8Earnings matter because stocks trade at “multiples” to earnings.  An earnings multiple is called the price-to-earnings ratio, or P/E.   The P/E is one of many measures of a stock’s value.  Mark Hulbert (Hulbertratings.com, as published in MarketWatch), points out that judging a stock’s value with the P/E ratio can be confusing because the “E” in the equation can be measured either looking backwards or forwards.  Today:

  • Looking backwards, the market (S & P 500) is trading at 25.1 x earnings.
  • Looking forward the market is trading at 16.4 x expected earnings.
  • The historical average? 6 x earnings, according to Robert Shiller at Yale University.

So depending on your point of view, the market is either 40% overvalued today (looking backward) or 5% overvalued (looking forward).

Mark Hulbert points out that the historical forward-looking forecast is really only 11 x earnings, therefore by any measure, he believes, today’s market is significantly overvalued.

Comment:  No easy answers, but the numbers shouldn’t be ignored by investors.

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The Week Ahead

Economics – A Quiet Week

Tuesday, September 6:  ISM Non-Mfg Index

Thursday, September 8: Jobless Claims, EIA Petroleum Status Report

Earnings – Kroger will be most closely watched

 Tuesday, September 6: Marvell Technology, Hain Celestial, Dave and Busters

Wednesday, September 7: Valspar

Thursday, September 8:  Liberty Broadband, Navistar, Barnes and Noble

Friday, September 9:  Kroger, Mattress Firm

Watching the Tape is a compilation of news, observations and views written and edited by Bill Kibler, Senior VP, FinTrust Investment Advisors. Information is provided by sources believed to be reliable, but FinTrust  is not responsible for accuracy.  The information herein is not a recommendation to buy or sell any security.  Past results are no indication of future performance.