- Many forces act to drive stock price movements over the short and long term.
- Ultimately, in the long run, the total returns from your stock portfolio are driven by the performance of the underlying businesses and the valuations you bought the stocks at.
- So, focus on business fundamentals and make sure your chosen stocks have stable and growing profits and reasonable debt levels.
Five things that can drive powerful stock movements are news, sentiment, profits, valuation, and debt levels.
In the short run, the stock price can be driven by news.
M&A activities are a common example. Depending on how positive (or not) the market feels about the stocks related to the M&A activity, the stocks may fall or rise meaningfully on the day of the news announcement.
As a side note, many acquisitions, especially large ones, require integrations of complicated businesses and cultures, and more often than not lead to underperforming stock prices, at least over the next year or two after the purchase…
Other common examples are earnings release or guidance revision. Depending on the results of a company’s earnings release that may include changes in the management’s outlook for the company, the underlying stock could go up or down.
Since 2018, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) stock has been in consolidation mode, which should pique the interest of long-term investors.
Long-term market-beating performance
Warren Buffett has been a great long-term investor and has generated excellent total returns over many years. From 1965 to 2018, BRK’s book value per share (“BVPS”) compounded at 18.7% per year, while the stock compounded at 20.5% per year, which more than doubled the S&P 500 total returns of 9.7% per year.
The Berkshire Advantage
The Top-Notch Insurance Operations
Berkshire’s well-run underlying insurance business generates float as a source of low-cost capital. In The Outsiders written by William N. Thorndike, Jr. that discusses “eight unconventional CEOs and their radically rational blueprint for success”, the author explained that
Over time, Buffett evolved an idiosyncratic strategy for his insurance operations that emphasized profitable underwriting and float generation over growth in premium revenue. This approach, wildly different from most other insurance companies, relied on a willingness to avoid underwriting insurance when pricing was low, even if short-term profitability might suffer, and, conversely, a propensity to write extraordinarily large amounts of business when prices were attractive. (Page 179)
CVS Health (NYSE:CVS) was substantially undervalued before the 7% pop on Wednesday. It remains a strong buy for long-term investors.
Why the Pop?
CVS reported its Q2 results on Wednesday. And the stock appreciated 7% because the business performed better than expected with the company beating its own Q2 adjusted earnings per share (“EPS”) guidance by 10%. As a result, it also boosted its full-year guidance modestly by about 1.8% to $6.89-7.00.
Additionally, the Aetna integration and debt reduction have been progressing well.
Adjusted revenues increased 36% to $63.4 billion, adjusted operating income rising 55% to $4 billion, adjusted EPS rising 12% to $1.89, and cash flow from operations climbing 82% to $5.3 billion. The large spike in revenues and operating income is attributable to the Aetna acquisition, which was closed on November 28, 2018.
The Leveraged Balance Sheet
The Aetna acquisition resulted in CVS’s leveraged balance sheet. At the end of Q2, CVS’s net debt arrived at $61.3 billion, leading to a D/E of 99.6% and a debt-to-assets ratio of 28%.