How well did the Myth Buster do this year? We looked at Greek debt and predicted, as we have in previous years, that the euro would prevail. Despite grumbling, the euro has won out and Greek bond interest rates have fallen. As of mid-November, the yield on Greek bonds is 7.78% according to The Financial Times. In April, interest rates were 12.00%. The high for the year was over 19% in July. The success of the euro shows that playing by the rules is important for all countries. Greece’s economy remains in a slough of despond with unemployment at 25%. Despite the distress, the country is far stronger economically than it was earlier this year or for the last three years. The euro has won a big victory.
Strategic Vision Holds Sway
We looked at various companies making significant strategic moves. Among these, Procter and Gamble’s (PG) long-anticipated chopping off of less profitable brands stands out. Its stock is moving slowly, but, as of November the slide has reversed. The share price stood at $76 in mid-November, up from $68 in mid-September. The happy change is due partly to the market overcoming its occasional volatility and partly to P&G turning more profitable. The strategic move to tighten focus on core products is a sign of the times.
We also looked at battles in the fast food world. Yum! Brands, Inc. (YUM) is close to its 52-week low in share price. Since leaping into the gourmet war, Yum announced that it will spin off its KFC and Pizza Hut operations in China. According to the Wall Street Journal, KFC and Pizza Hut have not convinced Chinese customers that they are sufficiently upscale. The breakup of Yum into an American-based company and another in China follows the Procter & Gamble and Hewlett Packard (HPQ, HPE) trend. Companies need to stick to the knitting, to use a phrase from In Search of Excellence. Tighter focus should yield better results for the two Yums.
Yum and the other fast-food giants reveal an interesting strategic insight. All products have their limits – especially fast food. Hot dogs, pizza and hamburgers really cannot go upscale. The widely touted re-branding brought the big pizza competitors – Dominos (DPZ), Papa John’s (PZZA) and Pizza Hut – back to where they started. They shook up their offerings and clearly improved, but it all happened in a competitive environment. Now the pizza giants are -- pizza giants with new flavors. They did not undergo a metamorphosis to Northern Italian fine dining parlors. A powerful lesson is found in these two cases. Strategy, which defines where an organization is going, is critical. It is not all about marketing. People see fast food as fast food.
The Advance of the Mega Tech Giants
The year 2015 saw massive advances by America’s technology giants. Several gained hefty market capitalization in part from their products and services related to cloud computing. The mega technology leaders – Google (GOOG), Apple (AAPL), Microsoft (MSFT) and Facebook (FB) – have seized the basic fabric of technology’s tight relationship with American life. Control of the Internet, control of personal communication and control of the mobile world remains with these giants. Beyond telephones, television and desktop computers, these tech giants control how we communicate, how we purchase, how we work and how we are entertained. No wonder their combined market capitalization has risen by tens of billions of dollars this year to a total of $328 billion.
High technology is on the move, but so is low technology. Under “It’s As Plain as The Nose on Your Face,” we looked at Philip Morris (PM) and its uncanny ability to sell cigarettes and reap massive profits in an industry that is officially out of favor. International markets generated much of the sales increase. Shortly after we looked at the cigarette king, the Anheuser Busch – SAB Miller combination took shape, making a massive international beer company. Like Philip Morris, Altria (MO) and the new Budweiser - Miller conglomerate have pushed cigarettes and beer – popularly called sin products – to new and very profitable heights. The massive Budweiser – Miller deal is still under discussion as we finish this installment. Following a slight drop in September, the Anheuser-Busch InBev SA/NV (BUD) stock is moving upward.
VW and Mitsubishi
The Myth Buster took on a number of companies under “It’s as Plain as The Nose on Your Face.” The Volkswagen (VLKAY) scandal is still hurting the German powerhouse. Volkswagen has handled its unfinished ethical crisis better than Toyota (TM) and General Motors (GM) handled theirs. The company has suspended a number of employees, showing an effort to correct the situation. Since the stock dropped, it has leveled off since early October. Market capitalization is way down from early 2014. It will be a long road back.
Mitsubishi (MMTOF) is not one of the Myth Buster’s favorite companies. A recent posting on the JD Power website opens with, “Though it may come as a surprise to many, Mitsubishi dealers are still open for business. So far, the company has escaped the fate of similar automakers, such as Suzuki (SZKMF), that were forced to cease operations in the United States due to poor sales.”
The inflow and outflow of funds in financial markets always proves interesting. Early in the year, we looked at college endowment returns and discussed the use of hedge funds and the acceptance of increasing risk among large investment portfolios. The evidence shows that the risk embracing traits of hedge funds worry but also please fund managers. As an army of critics know, the returns generated by hedge funds have been low and the fees high. But investors like someone who manages risk. As is the case with investors committed to BRICS, real estate or gold, the hedge funds have carved out a piece of the landscape.
Overall, it appears that the Myth Buster has been on target with trends and outcomes. Next year, we will tackle a new set of intriguing and eye-opening myths.
Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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