To begin, it may pay to define what a stock split is: A stock split is a simple mechanism that a listed company can employ to increase the number of issued shares while keeping its market capitalisation/ valuation the same.
There are a couple of reasons a company may elect to perform a stock split, the chief among them is to increase the liquidity (or accessibility/ tradability) of their stock.
The most popular stock split ratios are 2:1, 3:2, and 3:1. By way of example, if a hypothetical company were to perform a 3-for-1 stock split, its shareholders would be issued an additional two shares for every share they owned before the split. In conjunction with the split, the value of each share would be devalued to 1/3 of its pre-split value. Effectively, the total value of three shares after the stock split should be worth the same value as one share before the stock split.
A reverse stock split is when a company reduces the number of shares available while keeping its market capitalisation/ valuation the same. A company cannot simply remove shares as easily as it can issue new shares. Therefore, with a reverse stock split, a company is forced to revoke all existing shares and issue new shares, proportional to the reduction that the company is pursuing.
A primary reason a company performs a reverse stock split is to avoid being delisted from its stock exchange which may have set minimum share-price conditions on its listees.
Tesla (NASDAQ: TSLA) performed a 5:1 split of its stock in August 2020. At the time, TSLA shares were trading above US $1,300. Tesla CEO Elon Musk believed the EV Company’s shares were too expensive for retail investors, so he reduced its price via a stock split.
Microsoft (NASDAQ: MSFT) has been a serial stock splitter. Since listing on the Nasdaq in 1986, The Software Company has performed nine stock splits, the last occurring in 2003. Consequently, 100 MSFT shares in 1986 would now total approximately 30,000 shares.
The beleaguered General Electric (NYSE:GE) performed a 1:8 reverse stock split in July 2021. Before the reverse stock split, GE shares were teetering around US $12. The reverse stock split meant that GE shares began trading above US $100 per share, a threshold not crossed for a very long time.
You might think that the economic news might be slowing down this week after the week we have just had. Alas, that is not so; this week's forex market might be just as choppy with some critically important reports emanating from Japan, China, Europe, and the UK, in particular.
Due on Wednesday, US Retail Sales growth for October is anticipated to increase by 0.7%, the same as September's Retail Sales growth. However, with supply constraints potentially inspiring people to complete some Xmas shopping early, a surprise beat might be on the cards for this report.
Back over the Atlantic, the UK releases its CPI data for October. The YoY CPI for the UK currently stands at 3.1%, after edging down from 3.2% in September. Septembers CPI dip might be temporary, and several factors indicate that CPI could rise with Octobers data. Chief among them is the flow-on effect expected from the UK factory gate prices rise to 6.7% in September, from 6.0% in August.
On Thursday, it is Canada's turn to release CPI data. After Septembers data, Canada's inflation rate was running at an 18-year high of 4.4%. Market consensus is pointing toward a fifth straight increase in the CPI, to 4.6%, while TradingEconomics predicts an even more significant leap to 4.9%.
We end the week with Japan noting its CPI data for October. Sustainable price growth in Japanese consumer prices is in doubt moving forward. Last month, CPI hit 0.2%, after remaining below 0.0% since the latter half of 2020. However, Japanese businesses are largely absorbing the rise in their input costs, whether temporary or permanent, rather than passing them onto consumers.
Europe is home to some of the largest companies in the world, with market capitalisations in the hundreds of billions of dollars. However, these large European companies are not as well-known as they could be by investors outside of the Eurozone. Sexier, fast-growing US and Chinese tech stocks will generally hog media headlines and investor portfolios, shoehorning European stocks into investor blind spots. Yet, as Kiplinger has recently pointed out, overlooked markets, such as Europe, are ripe for investment opportunities.
Even the largest, most attractive companies in the Eurozone are relatively cheap compared to their US counterparts. Comparing the average Price/Earnings (P/E) ratios of European companies to US and Chinese companies can help demonstrate this assertion.
Stock Exchange: Euronext Paris
Market Cap: 396.2 billion USD
P/E ratio: 34.95
Comparison: Nike (NYSE: NKE), Market Cap: 264.8 billion USD, P/E ratio: 45.07
LVMH, short for Louis Vuitton Moët Hennessy, is Europe's largest stock. Headquartered in France, the Company has built and acquired a portfolio of more than 70 luxury brands over thirty years. It's safe to say that many of its brands are household names in Europe and worldwide. In addition to its namesake, LVHM also owns Sephora, Dior, Bulgari, and Tiffany and Co., helping the Company generate 44.2 billion euros in 2021 YTD.
The dynamism of LVMH's portfolio is the reason for the Company's positive outlook. LVMH expects to strengthen its market-share moving forward, just as it has done over the past couple of years. For the first nine months of 2021, the Group has recorded organic revenue growth of 11% compared to the corresponding period in 2019.
Stock Exchange: SIX Swiss Exchange
Market Cap: 362.8 billion USD
P/E ratio: 27.70
Comparison: Kweichow Moutai (SHA: 600519), Market Cap: 358.9 billion USD , P/E ratio: 45.75
The Swiss conglomerate is the Eurozone's second-largest Company and the largest food company in the world. Nestlé owns more than 2000 brands, including Fast-moving consumer goods (KitKat, Smarties, Häagen-Dazs, Mövenpick, Lean Cuisine, Maggi, Hot Pockets), supplements (Boost), pet-care (Purina, Friskies, Fancy Feast), and baby foods (Gerber, Ceralac).
Producing Fast-moving consumer goods exposes Nestlé to the risk inherent in the current bout of inflation currently occurring in the Eurozone. However, the Company is confident that its margins are padded and are expecting organic growth across the whole business to lift by 6% to 7% in 2021.
Stock Exchange: Euronext Amsterdam
Market Cap: 336.0 billion USD
P/E ratio: 51.57
Comparison: Cisco Systems (NASDAQ: CSCO), Market Cap: 236.1 billion USD , P/E ratio: 22.39
ASML is a Netherlands-based manufacturer servicing the semiconductor industry, supplying equipment and software to the likes of Taiwan Semiconductor Manufacturing (NYSE: TSM), Intel (NASDAQ: INTC), and Samsung Electronics (KRX: 005930).
At the start of 2019, ASML's P/E ratio was under 22.0. In two years, its P/E has more than doubled as the semiconductor industry, and its peripheries became a favourite of investors. In this way, ASML doesn't conform to the lower P/E comparison that the rest of this list does.
What ASML does have in its favour is almost complete domination of its industry. ASML is estimated to control 90% of the market for Semiconductor equipment and software. While ASML isn't predicting a lift in market share in the medium term moving forward, its main clients are expected to lift their investment in production lines significantly.
Stock Exchange: SIX Swiss Exchange
Market Cap: 335.5 billion USD
P/E ratio: 21.60
Comparison: Johnson & Johnson (NYSE: JNJ), Market Cap: 428.8 billion USD , P/E ratio: 24.49
Roche, another Swiss conglomerate, is Europe's largest healthcare company, generating 46.7 billion CHF in revenue in 2021 YTD.
Roche is at a critical juncture, as patent protection lapses for many of its legacy drugs. Herceptin, Avastin and Rituxan, which used to generate one-third of the Company's revenue, are all sliding in sales as off-patent brands hit the market.
However, several new drugs from the Company are hoped to bolster growth prospects moving forward. Drug development and approval are typically glacially slow. Yet, in one 2021 case, Roche has been approved fast-track approval by the US Food and Drug Administration for an Alzheimer's drug.
Stock Exchange: Euronext Paris
Market Cap: 257.0 billion USD
P/E ratio: 35.84
Comparison: Revlon (NYSE: REV), Market Cap: 550 million USD , P/E ratio: 38.87
L'Oréal is a French cosmetics, beauty, and consumer goods Company and the second-largest stock on Euronext Paris. A household name itself, L'Oréal, also owns Maybelline, Lancôme, and Garnier, among a handful of other brands. The cosmetics giant projected a "roaring 20s" in respect to 2021 revenue and has not disappointed YTD. Sales over the entire Group for 2021 are up by more than 18.0%.
Moving forward, the outlook for L'Oréal is potentially just as rosy, with the Group set to benefit from an uptick in demand from China consumers, as well as customers preferring a higher-margin direct-to-consumer (DTC) experience. L'Oréal has noted that DTC will account for 50% of its sales in the future. However, it hasn't set a timeline to achieve this milestone.
I like to refer to the current retail investing frenzy as a 'DIY investor revolution', powered by the likes of Robinhood Markets (NASDAQ: HOOD), Interactive Brokers (NASDAQ: IBKR), and BlackBull Markets. Within this revolution, we have seen retail investors adopt derivatives trading with a level of sophistication on par with 'professional' traders.
For those that haven't caught on to the revolution, I thought it would be a good idea to detail the basics of a couple popular derivatives. I hope to show what many retail investors have already found out for themselves; CFDs and Options are not all that complicated or mysterious.
Derivatives, such as CFDs and Options, are 'derived' from traditional financial instruments such as stocks, commodities, and foreign exchange. Typically, derivatives take the form of a contract that takes its value from an underlying asset, such as the spot price for one troy ounce of Gold (XAU/USD).
Derivatives are used by investors worldwide to take advantage of investment opportunities or hedge efficiently against uncertainty.
CFD stands for 'Contract For Difference'. As the name denotes, a contract's buyer and seller agree to compensate the other the difference between the current price of an asset and its future price.
The buyer of the CFD is said to be taking a long position in the underlying asset (i.e., believes the asset's price will rise). In contrast, the seller of the CFD is said to be taking a short position (i.e., thinks the asset's price will fall). If the price of the asset rises, the seller of the CFD will compensate the buyer. If the price of the asset falls, the buyer of the CFD will compensate the seller.
CFDs exist for various securities, including stocks, indices, commodities, and, most popularly, foreign exchange.
There is one primary reason investors choose to trade CFDs over other derivatives such as Options and Futures. With CFDs, traders can generally trade with greater leverage than other derivatives, allowing larger positions with smaller deposit sizes. Consequently, gains and losses can be magnified more easily when trading CFDs.
The handy thing about derivatives is that their titles aptly describe what they are and do.
An Options contract gives the buyer the 'right', but not the 'obligation' to buy or sell a set quantity of an asset from/to the contract's seller before a given expiration date.
Option contracts exist for various securities, the most popular being Indices and Stock Options (i.e., an Options Contract for 100 shares of Tesla (NASDAQ: TSLA)).
Options come in two flavours; Calls and Puts. Calls give the contract buyer the right to buy an asset, while Puts give the contract buyer the right to sell. Either way, the contract buyer will pay the contract seller a fee (known as the premium) to enter into the contract. Additional costs to the buyer can exist depending on other factors, but we can ignore them for clarity.
It is good to remember that generally, as secondary market instruments, the spreads on Options can be much smaller than the traditional assets on which they are based. Smaller spreads are one primary reason retail investors are attracted to trading Options.
When Trader X sells a Put contract to Trader Z, Trader Z buys the right to sell an asset to Trader X before the contract expires. Whether Trader Z exercises this right mostly depends on the movement in the price of the asset.
Trader X will pocket the premium paid by Trader Z as compensation for offering the Option.
Trader X has sold the Put contract because they believe the price of the underlying asset will rise. In contrast, Trader Z thinks the asset price will fall. Thus, if Trader Z is correct, they will be able to sell the asset to Trader X at the agreed contract price (known as the Strike Price) rather than the asset's current value (Spot Price). Effectively, Trader Z will pocket the difference between the lower Spot Price of the asset and the higher Strike Price stated in the contract.
If Trader X is correct, Trader Z will not exercise their right to sell the asset at the contract's Strike Price, and the Option will expire unexercised.
Q3 earning season is currently underway, and most high-profile companies are delivering revenue beats. Yet, Q3 revenue is not the only thing investors are watching. Investors are interested in revenue growth, customer acquisition, and pace of growth alongside the balance sheet. Inflationary and supply chain pressures that may affect the outlook of reporting companies are an additional concern for investors.
Tesla's Q3, 2021 earnings were, once again, record-setting for the Company. The Company is increasing sales and has stated it is on track to "achieve 50% average annual growth in vehicle deliveries" at a time when chip shortages are hampering other automakers ability to do so. Improving gross margins (up to 30.5%) was also a significant factor in Tesla performance in Q3.
TSLA shares since earnings report:
The popularity of Netflix's series Squid Game hadn't completely filtered into the Company's finances at the time of its Q3, 2021 earnings report. Yet, Netflix delivered a favourable report, with revenue coming in on par and subscriber growth beating expectations. Squid Game IP is estimated to be worth $900 million to Netflix and should help boost its Q4 earnings, which typically get a seasonal bump anyway.
NFLX shares since earnings report:
Johnson & Johnson's Q3 earnings-per-share beat expectations, with revenue climbing 10.7% from the previous corresponding period. J&J increased its (bottom-end) revenue guidance for the full year from $93.8 billion - $94.6 billion to $94.1 billion to $94.6 billion. J&J noted that its Covid vaccine would be responsible for $2.5 billion at years end and $502 million of its Q3 revenue.
JNJ shares since earnings report:
PG beat revenue estimates, increasing sales revenue by 5% over the last quarter, but expects to fall short of 2020 revenue. The consumer goods Company also noted that rising producer costs, particularly as it relates to shipping and raw commodity prices, has already had and is going to continue to have a larger-than-anticipated effect on its earnings. In response, PG has begun raising the prices of some of its premium products as a quick remedy to help offset its rising costs.
PG shares since earnings report:
There are plenty more juicy earning reports due next week.
“In my 45-year career as an investment counselor, humility did show me the need for worldwide diversification to reduce risk”.
The above quote is from Sir John Templeton, the founder of Templeton Investment (now morphed into Franklin Templeton Investments (NYSE: BEN). The advice to diversify is iterated in some form or another by financial advisors frequently, such as Forbes Advisor.
As such, it is prudent to understand the investment opportunities found across the world’s 60 stock exchanges before acting on the advice.
In today’s article, I would like to introduce you to the Stock Exchange of Hong Kong Stock (HKEX). The HKEX, with a market capitalisation of 6 trillion USD, is Asia’s third-largest stock exchange and the sixth-largest in the world. More than 2,500 companies are listed on the HKEX, half of which are mainland Chinese companies.
Chinese Companies list on the HKEX as an alternative to mainland exchanges, such as the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and US-based exchanges. With China and US relations strained as of late, The HKEX has reported an increase in enquiries from companies looking for an alternative exchange to primary Chinese and US exchanges.
As a financial hub of Asia, Hong Kong is equipped to help companies that list on the HKEX to access capital outside of mainland China, as Hong Kong is (slightly) regulatory distinct from the mainland.
The most widely used measurement of the HKEX is the Hang Seng Index (HSI). It is a weighted index that follows the 60 most significant and most liquid company shares on the HKEX. These 60 companies represent a little more than half the market capitalisation of the HKEX (55% to be accurate).
As one of Asia’s financial and technology hubs, it is no surprise that 36% of these companies operate in the financial industry, and another 26% are in information technology. In fact, nine of the top ten weighted shares in the companies operate in either (or both) of these dominant industries.
How well the HKEX has performed all depends on the period you use to evaluate the HKEX and its Hang Seng Index.
From the ten-year perspective, it has underperformed, up by only 30.2% from October 2011 to October 2021. Worryingly, the Index has retraced to approximately the 50% level on the Fib over this period. The HSI peaked at over 33,000 points in January 2018 before falling to its current level of ~25,500 points.
The above assertion that the HSI has underperformed is derived from its comparison to the Shenzhen 100 Index (SZSE), up by 110.6%, and the Hang Seng Composite Index (HSCI), up by 69.4%
The latest significant downward trend has been caused by tightening regulations that have affected some of the larger Chinese companies listed on the HKEX. As such, from the perspective of the Index YTD, the performance is much poorer, down 6.26% since opening on January 4, 2021.
As of September 2021, the five largest companies listed on the HKEX are:
1- The financial and technology conglomerate Tencent Holdings (HKG: 0700) is the largest listed company on the HKEX and the first Asian Company to hold a market cap greater than 500 billion USD. Currently, Tencent is valued at 609.4 billion USD, making it the tenth-largest company in the world
2- Industrial and Commercial Bank of China (HKG: 1398) (ICBC) is the second-largest listed company on the HKEX, with a valuation of 244.0 billion USD. The ICBC was established in 1984 by the CCP and has since grown to become the largest bank in the world by total assets owned (5.1 trillion USD).
3- Meituan Dianping (HKG: 3690), valued at 201.9 billion USD, is a Chinese-native shopping platform offering similar services to US platforms, Groupon, and Yelp, among a wide variety of other services.
4 & 5- Banking is obviously big business in China. China Merchants Bank and China Construction Bank are the fourth and fifth-largest company’s listed on the HKEX, valued at 198.8 billion USD and 186 billion USD, respectively.