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August 17, 2015 BARRON’S 9

Enjoy theRide IN HIS CLASSIC BOOK ON DEATH AND MOURN-

ing, When Bad Things Happen to Good People, Harold Kushner pondered why tragedies befall those undeserving of them. After this earnings season, investors are likely staring at their portfolios and won- dering the same thing.

Let’s be frank—this earnings season has been brutal. It’s not that stocks havebeenmissing their numbers—70%of the companies in theS&P500havebeaten analysts’ forecasts this quarter—it’s thatwhat theydelivered justwasn’t goodenough for investorswhohadbeenhoping for evenbetter news.Walt Disney (ticker: DIS), for instance, had the gall to suggest that some subscriberswere cancelingESPN.Highflyingbio- techBiogen (BIIB) cut sales forecasts for itsmost popular drug. Many highflying stocks hit the ground. It would be easy to look at the wreckage and see the

foreshadowing of tough times ahead, especiallywith big-pic- ture issues likeChina’s currency devaluation and a possible FederalReserve rate hike roilingmarkets. The fact that the S&P500 hasweathered the painmay in fact suggest the op- posite: That despite appearances to the contrary, themarket is rewarding andpunishing stocks based on theirmerits, not macro forces, suggesting a strongermarket going forward. This quarter, stocks in the S&P 500 have, on average,

dropped on the trading day after their earnings releases, following three straight quarters of post-release gains, ac- cording to Bespoke Investment Group data, with much of the pain saved for aWho’sWho of corporateAmerica. Take Biogen andDisney, whose 22% and 9%declineswere their largest since the depths of the financial crisis in 2008. In- surerBaidu (BIDU), specialty coffee-makerKeurigGreen Mountain (GMCR), andmedia conglomerate 21stCentury Fox (FOXA)were among the other companies that suffered their largest losses inmore than three years since the start of this earnings season.

What went wrong? Part of the problem is popularity. Disney, Baidu, Keurig, and Biogen were all among last year’s top-performing stocks,making themattractive to per- formance chasers. Large-stock mutual funds took massive positions in media stocks—the fifth-most popular industry group, according toCredit Suisse data—and biotechnology, themost popular overweight by far. Butwith somany peo- ple in the stocks simply because they performed well, the smallest bit of bad news sent everyone scrambling for the

exits at the same time. “This is what happens when the stock is widely held by weak hands,” says Ralph Coutant, a portfolio manager at Matarin Capital Management. Strangely, the S&P 500 has been remarkably quiet, de-

spite the turmoil in individual stocks. Despite the large losses in some very well-known stocks—and shock waves sent through themarket byChina’s devaluation—themar- ket’s fear index, known as theVIX, peaked at 20 on July 9, the first trading day of earnings season, and has dropped back down to ultralow levels since.

It would be easy to look at the disconnect between the S&P 500 and its components and see it is a sign of trouble ahead.But there is another explanation as towhy themarket has been relatively stable: Stocks have become increasingly less likely to move in the same direction as the S&P 500. There’s ameasure for this—implied correlation. Implied cor- relationmeasures howmuchoptions traders expect anygiven individual stock to trade in lock-step with the benchmark. In bad times, implied correlation surges higher, ap-

proaching 100%, as it did during the financial crisis, when it didn’t matter what you owned, everything was falling. When implied correlation falls, it means that investors are more inclined to trade each stock according to its ownmer- its. Andwouldn’t you know?Lastweek, implied correlation fell below 43% for the first time since 2008. What thatmeans in practical terms is that stocks are fly-

ing every which way but their moves are canceling each other out, resulting in an index that barely moves, says MKM Partners derivatives strategist Jim Strugger. It means, for instance that stocks in the same sector can head in opposite directions depending on the news.Kohl’s (KSS), for instance, plunged 9% last Thursday, when it reported earnings and sales that fell short of the Street consensus. Nordstrom (JWN), however, beat forecasts and raised guid- ance. Its shares jumped 4.3% on Friday. Expectmore of the same, Strugger says. Periods of low

market volatility, such as the one that begun at the end of 2012, tend to last five years, whichmeanswe’re only about halfway through. Thatmeans continuing volatility for indi- vidual stocks. If Strugger is right, single stocks, not the market, will be the placewheremoneywill bemade or lost. “If you’re a stockpicker,” Strugger says, “you should look

at this and salivate.” 

[email protected]

Despite appearances to the contrary, the market is rewarding and punishing stocks based on their merits.

Streetwise

byBen Levisohn

32 BARRON’S August 17, 2015

SPEAKINGOFDIVIDENDS n byMichael Vallo

TheDownsideofGoogle’sShake-Up THE PROSPECT OF A DIVIDEND FROM GOOGLE,

with its $70 billion cash hoard, has long excited investors. In March, hopes of a dividendwere raisedwhenGoogle (ticker: GOOGL) tappedWall Street veteranRuth Porat as its new chief financial officer. And Porat’smeremention of capital returns in a July conference call—albeit a decidedly vaguemention—was enough to stoke those hopes further. But last week’s reorganiza- tion of Google, while largely greeted as a positive for shareholders, could also signal that a forthcoming dividend is unlikely. The restructuringwill see the creation

of a newparent company, Alphabet, which will contain Google as well as the various “moonshot” divisions that Google has added over the years. Those include busi- nesses developing robots, self-driving cars, cures for diseases, and nanoparticles.Each companywill bemanagedby its ownCEO, with Google co-founders Larry Page and Sergey Brin leading Alphabet. The new structure has been likened to

a tech version of Berkshire Hathaway (BRK.A),WarrenBuffet’s conglomerate of wide-ranging businesses including insur- ance, apparel, fast food, and railroads. The increased transparency of the new struc- ture is a benefit to shareholders, but if Google intends to followBerkshire’s lead, it could also mean slim pickings for in- come-seeking investors. Berkshire offers no dividend and buys

back shares sparingly. Instead, the vast majority of its cash is reinvested and used for acquisitions. “Google has always ad- mired that structure from the very begin-

ning,” says Axiom Capital Management analyst Victor Anthony. “So I think it is a structure they will mimic from a capital- return perspective.” Like Buffett, having thrown open the

doors on investments, Page and Brin can now beg for patience from investors and quell the demand for a payout. There’s more than the restructuring

working against the possibility of a divi- dend. Strong second-quarter results have taken some of the pressure off of the tech giant to return cash, making investors more enthusiastic about growth prospects. The company also faces an antitrust suit in Europe that could result in a fine of up to $6billion, another reason not to start doling out dividends.

Dividend action was subdued last week,with only oneStandard&Poor’s 500 company boosting its cash returns to shareholders. Leggett & Platt raised its quarterly dividend by a penny, or 3%, to 32 cents per common share. Though the increasewas slight, the company added to its impressive history of hikes, bringing its streak to 44 years. L&P (LEG)was founded 132 years ago

when J.P. Leggett invented a spiral-steel- coil bedspring and partnered with C.B. Platt. Today the Carthage, Mo.–based manufacturer is the largestmaker of resi- dential furniture components, carpet cush- ion, office furniture components, and auto- motive seat-support systems. The company’s $1.28 annual indicated

dividend is worth about $175 million, or

more than 72% of the free cash flow the company is expected to generate this year. Shares rose nearly 3% following the announcement. At a recent $48.44, they sport a 2.64% dividend yield.

Funeral-services providerServiceCor- poration International (SCI) enlivened its capital returns last week with both a dividend hike and an increased buyback of its shares. The nation’s largest network of funeral

homes and provider of cemetery and memorial services raised its quarterly by 20%, to 12 cents from 10 cents. The Houston-based company has boosted its dividend

seven times since April 2011. SCI has grown significantly through

acquisitions in recent years, buying its largest peer, StewartEnterprises, in 2013, and swiftly amassing smaller competitors in what has long been a highly frag- mented industry. The stock is up nearly 40% this year, and analyst sentiment is bullish. Though coverage is limited to just six analysts, the stock is unanimously rated a Buy. SCI also authorized $385 million in

buybacks with no specific timeline. The repurchase plan is on top of the $15 mil- lion remaining from a previous authoriza- tion. The 48-cent annual dividend isworth a little over $96million, or just 26% of the $369million in free cash flow the company is expected to generate this year. Shares yield 1.52%. 

Dividend Payments, pageM55

“Google has always admired [BerkshireHathaway’s] structure from the very beginning.” —VictorAnthony AxiomCapitalManagement

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