Stop the Short-Term Hysteria

 

Larry Fink, CEO of Blackrock, the world’s largest asset manager, is criticizing the chief executives of U.S. companies. In a letter Mr. Fink wrote this week, “Today’s culture of quarterly hysteria is totally contrary to the long-term approach we need.” Mr. Fink said CEOs should demonstrate progress against strategic plans rather than focus on small deviations from earnings estimates.

I couldn’t agree more.

In my opinion, quarterly reports should not be created to measure a company’s progress toward meeting or exceeding analysts’ estimates. Rather, quarterly reports should demonstrate management’s progress regarding new products, improved productivity, and employee expansion. The wild gyrations in a company’s stock price caused by a slight sales or earnings miss are unwarranted in many cases.

The short-term hysteria needs to give way to long-term progress.

And I have some ideas on that front too.

Over the last decade, $6.2 trillion was distributed to shareholders by 460 of the S&P 500 companies. About 53% of the total was stock buybacks, another 36% was in dividends, and the remainder included special distributions, according to William Lazonick, professor at the University of Massachusetts.

Buybacks are a great way to increase earnings per share for the benefit of top executives’ stock option plans. But I believe executives should be investing those funds in creating new products, increasing productivity, and hiring and educating higher quality employees.

Stock buybacks and distributions are not the best use of corporate funds because they do not contribute to the company’s growth—rather, management should use the funds to increase sales and revenues and expand their companies.
 

This is an excerpt from Cabot Benjamin Graham Value Investor, which features the very best undervalued stocks to buy right now. Chief Analyst J. Royden Ward tells you exactly which undervalued stocks to buy and when to take profits. This advisory is ideal for conservative investors.

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