Equity Market Comment-Oct 11, 2022
We know bear markets are no fun.
Such is why we devote as much time studying risk as we do to the ability of a firm’s managers to generate cash from assets, all the while placing the firm(s) on course for future growth in normalized and adjusted cash-based return on capital.
Our firms have strong corporate identities (market share) with sound financial structures, and financial back-up (calls on credit) should such ever be required. Their alliances with the debt community are deep.
Bear markets, whether financially or otherwise induced, test the mettle of not just corporate managers but us as well in the delineation of our cost of equity. And on that score, you should feel very much at ease, as almost a half-century of analysis can attest.
Our firms will (not might or should) bounce back to new highs when the current period is over, a forecast that cannot be made about so many other firms whose share prices in the bull market were exaggerated and are now facing a period of rising interest costs and tax rates.
For example, many firms have counted on the bull market and contributed lower cash payments to their pension plans. Such maneuvers artificially raised GAAP-based cash from operations, an activity for which we adjust. Higher tax rates will also be in the cards for many firms due to changes in tax laws; a topic addressed in our last report.
Unfortunately, investors have not yet distinguished between firms like ours and other firms, even those benefitting from tax credits under the Inflation Act.
KH
