Posts Categorized: Commentary

Making Sense of Blockchain Opportunities

Executive Summary: A blockchain taxonomy for investors. Blockchain technology is being used in a growing diversity of applications, offering a complex array of investment opportunities. While the technology is so new that any investment in it is speculative, patterns of use are emerging. In this report, we propose a taxonomy to enable investors to more… Read more »

August 2017 Equity Outlook: Tough Comparisons in 2018

Executive Summary Earnings Growth Set to Slow in 2018. S&P margins and earnings are now at record levels, while sales growth has accelerated in recent quarters. Likely reflecting tough comparisons, as well as anticipation of Federal Reserve interest rate hikes that could curb economic growth, the consensus expectation is for earnings growth to slow sharply… Read more »

Equity Outlook: US Equities on Track for More Gains in 2017

Executive Summary Accelerating Earnings Growth. With earnings reporting season about to begin, Q2 2017 S&P 500 operating earnings are forecast to rise 19% from year-ago levels, an acceleration from the 13% rate of growth in Q1 2017. Stable Earnings Expectations. Consensus 2017 S&P 500 estimates have been relatively stable — in contrast to the trend… Read more »

Governance and the Ungovernable: Implications of Blockchain Proliferation

Overview Theory and politics. The blockchain and related innovations represent a new and relatively complex set of potential investment opportunities. The technology has received significant attention from a range of individuals and institutions, from computer scientists to corporations to private equity groups. We outline the theory of the technology as well as the governance implications… Read more »

Global Equity Outlook: A Global Earnings Rebound

Executive Summary Climbing Out of the Trough. In the US, the Europe/Australasia/Far East (EAFE) region and in Emerging Markets, earnings seem on track to keep climbing out of the 2016 trough. Regional Preferences. Developed Markets look more attractive than Emerging Markets. Within Developed Markets, the EAFE region — and Europe in particular —looks more attractive… Read more »

Correction: Retail Automation – Stranded Workers?

In our May 18, 2017 report Retail Automation: Stranded Workers? we inadvertently attributed a reference to the potential labor savings of self-checkout systems to a Home Depot executive. We have removed the inaccurate reference. The corrected report can be downloaded here. We apologize for any inconvenience.

Retail Automation: Stranded Workers? Opportunities and risks for labor and automation

Executive summary (download full report here) The retail landscape is experiencing unprecedented change in the face of disruptive forces, one of the most recent and powerful being the rapid rise of automation in the sector. The World Economic Forum predicts that 30-50% of retail jobs are at risk once known automation technologies are fully incorporated…. Read more »

Exploring the Nexus of Philanthropy and Market-Based Solutions

We recently conducted interviews internally with Cornerstone Capital staff and externally with thought leaders in the finance and foundation fields to gather opinions about the nexus of market-based solutions (i.e., traditional for-profit investment via the capital markets) and philanthropy.

Climate Investing in 2017

The imperative for an effective response to climate change only grows following the hottest year on record. Climate investing faces risks in 2017, particularly from the incoming US administration, but nuanced opportunities exist for positive environmental and social impact coupled with attractive potential returns.

Extractive Company Values: Environmental & Social Issues as Indicators of Strategy Execution Potential

With a market cap of over US$6 trillion, the extractive sector encompasses over 5,000 companies. It provides raw materials for everything from energy creation to high-tech manufacturing to electronics. Even as the world starts to transition from greenhouse gas emitting commodities like oil and coal, natural resource extraction will remain essential. Smartphones and electric vehicles, for instance, require metals sourced from extractive operations around the world. Yet natural resource extraction is, by its very nature, environmentally destructive and socially disruptive — and managing the risks inherent in mining is of prime concern to extractive companies and the host countries in which they operate. Extractive companies’ success will be in part determined by their ability to position themselves for this future.

Food Safety: Is Whole Foods Prepared?

On October 20, the Detroit Health Department announced an investigation into two cases of Hepatitis A potentially linked to Whole Foods’ stores. Whole Foods contacted the Detroit Health Department to report one of the cases, while the second case has not been definitively linked to Whole Foods. While we view the reporting of this incident to health officials as positive, we have concerns about the grocery chain’s food safety preparedness given its exposure to prepared/ready-to-eat food and its lack of food safety disclosure.

Evolving Lifecycles in an ESG Materiality Matrix

For most sectors, the likelihood of adverse ESG events and their potential financial impacts evolve through a lifecycle. ESG lifecycles determine the time it takes for a sustainability issue to become relevant to a sector as well as the magnitude of the financial impact. We believe the ability to anticipate ESG lifecycles can enhance the investment decision-making process.

Antibiotics and Animal Health: Recent Data Points Highlight an Accelerating Move

US markets moving away from antibiotics; our thesis remains intact. In our October 5, 2015, report Antibiotics and Animal Health: Value-Chain Implications in the US, we posited that consumer demand could push food supply chain companies to phase out antibiotics beyond the level required by FDA guidelines. We are seeing this play out as a… Read more »

Women in an Automated World

Increasing automation will change the composition of the US workforce. Women face greater risk of job loss due to computerization, and “lower risk” jobs typically dominated by women pay less than low risk male-dominated jobs.

A Video Interview with BlackRock’s Edkins on “The Shareholder Alignment Frontier” (SAF)

We are pleased to share a recent video interview with Blackrock’s Michelle Edkins and Cornerstone’s John Wilson in which we discuss the value of the “Shareholder Alignment Frontier TM (SAF).” The SAF is a tool inside Cornerstone’s proprietary framework which was specifically developed to help companies make the business case for improved stakeholder relationships through shareholder engagement thus building value for the long term

Tracking our Thesis on Food Safety Opportunities: A Look at Neogen

As we discussed in our July 2016 report Food Safety: In a State of Transformation, the global food safety testing market is expanding. Our optimistic view on growth in food safety testing is supported by Neogen’s fourth quarter earnings release. Neogen is flagged in our report for having high exposure to the food safety theme.

A Voice in the Boardroom: Practical Guidance for Voting Proxies

“A Voice in the Boardroom” is written for organizations and individuals who want to use their voice as shareholders to influence companies, but are not sure how to get started. It is meant primarily for asset owners — endowments, foundations, family offices, individuals or others — who are long-term stewards of capital on behalf of themselves and others.

Food Safety: In a State of Transformation

The food industry is undergoing a transformation as it addresses food safety risks in an increasingly global, complex supply chain. A number of highly publicized cases of foodborne illnesses and product recalls have occurred in recent years; these events highlight vulnerabilities in the food safety chain that present opportunities and risks for investors.

Sector and Regional Strategy: Monthly Update

Executive Summary Sector implications of Brexit fallout. Uncertainty likely to prevail globally, at least until U.S. presidential election. Major corporate and consumer spending decisions potentially on hold, a negative for Information Technology, Industrials, and Consumer Discretionary (downgraded to Neutral). Low rates continue to pressure Financials. Regional strategy. Russia and Australia still rank at top of… Read more »

Regional and Sector Strategy: Monthly Update

Executive Summary Upgrade U.S. to Overweight from Neutral. Earnings estimate revisions turned sharply positive, adding to other favorable fundamentals including margins, share buybacks. Information Technology: Still Neutral; Earnings Outlook Remains Unfavorable. We downgraded Information Technology to Neutral last month reflecting, in part, negative earnings estimate revision trends and a deceleration in expected earnings momentum. Both… Read more »

Regional and Sector Strategy: Monthly Update

Our earnings momentum metric has been refined. In addition, we have also introduced a methodology for weighting ESG factors in sectors and regions. These modifications have resulted in an unusually large number of changes in recommendations.

Regional and Sector Strategy: Monthly Update

We remain Overweight Information Technology (largest weighting in Overweight North America region) and Consumer Discretionary (largest weighting in Japan, our other Overweight). We continue to avoid regions with heavy exposure to commodities, most notably Latin America (Underweight), South Africa and Russia (both ranked Neutral).

Country Valuation: An ESG Synthesis

Effective national governance (“G”) facilitates a country’s efficient transformation of environmental resources (“E”) into wealth. Both are strongly influenced by social factors (“S”). By way of example, France’s social objective of maintaining a rural economy necessitates heavy government intervention and likely detracts from its potential for economic development.

Supreme Court Ruling Highlights Clean Power Plan’s Potential

On February 9, 2016, the US Supreme Court (SCOTUS) granted a stay to the implementation of the CPP rule by the US Environmental Protection Agency (EPA). In our view, the intensity of the challenge from the states and certain industries, and the SCOTUS ruling that CPP should be halted while being litigated, demonstrates that the CPP has significant implications for the sector.

Tracking our Thesis on Nutritional Feed Additives

As we discussed in our October 5, 2015 report Antibiotics and Animal Health: Value-Chain Implications in the US, a confluence of regulatory action and heightened consumer awareness is exerting pressure on livestock producers to reassess their usage of antibiotics. Our optimistic view on specialty and nutritional feed additives is supported by Adisseo and Novozymes’ recent launch of a probiotics product.

Paris Agreement: Validates national and local actions

We view the Paris Agreement as accelerating the ‘race to the top’ in responding to climate change. Developed countries will need technologies and business models that de-carbonize their existing economies. Developing nations will focus on technologies that drive strong economic growth and improve living standards.

Japan’s Corporate Governance Reform: A Powerful Driver of Earnings Growth

Executive Summary A Shift in Corporate Priorities. For decades, Japan’s corporations were managed to protect market share, headcount and influence, all at the expense of profits. Today, driven by a shift in corporate priorities, pretax margins are at record highs even as economic growth has been lackluster. Two Phases of Reform. Even before some recent… Read more »

Global Earnings Synthesis

As a complement to our Regional and Sector Strategy: Monthly Update we introduce a new publication that will examine in detail the outlook for global earnings on a regular basis.

Thoughts on Paris and Shareholder Alignment

As world leaders, investors and members of civil society meet in Paris to forge a new global accord on climate change, we are seeing a greater appreciation for the value of  systematically analyzing Environmental, Social and Governance (ESG) factors not only at the policy level, but also as part of shareholders’ holistic assessment of corporate strategies. Beyond… Read more »

Regional and Sector Strategy: Monthly Update

We are becoming a little more cyclical once again. We are now upgrading the Industrials sector to Neutral from Underweight, largely reflecting improved valuation. We remain Neutral on the two sectors that are widely considered the most defensive: Consumer Staples and Health Care.

Tracking Our Thesis on Automation in Restaurants

In our March 2015 report The Economics of Automation: Quick Serve Restaurant Industry, we asserted that the twin threats of rising wages and increasingly volatile food prices suggested a more challenging environment ahead. While commodity inflation doesn’t appear to be a threat in the near term, increasing labor cost pressure has emerged as a major… Read more »

Antibiotics and Animal Health: California Raises the Bar

On October 10, 2015, California Governor Jerry Brown signed into law SB 27, a bill limiting the use of medically important antibiotics (MIA) in animal agriculture, thus going beyond federal policy as outlined by the FDA. This action increases our confidence in our thesis that the potential for more restrictive regulation (as seen with SB 27) and shifting consumer demand pose a risk to antibiotics sales for animal health companies.

The Future of Foundations: Impact at Scale?

Despite growing demand for sustainable and impact investment solutions and a body of evidence to support the effectiveness of sustainable investing from a strictly financial perspective, many investors are still unclear about the relationship between ESG factors and financial performance.

Alibaba: Uniquely Conflicted

With Alibaba’s first annual meeting scheduled for October 8, we conducted an examination of its corporate governance structure. We are not aware of another corporation that lists its corporate governance structure as a risk to shareholders. In fact, numerous concerns about the company’s corporate governance have been widely cited.

Four Questions for Alphabet

Google’s impending restructuring into a holding company called Alphabet doesn’t change the underlying business so much as make explicit the company’s dual-track nature. On one track, Google has a mature search/advertising business; on the other, an investment company with a focus on speculative technology investments and basic research. The new structure, intended to provide transparency to investors about the relative performance of each side of the business, will be welcomed by investors.

Flagship Report: The Networked Corporation

We introduce two proprietary tools to help companies make the business case for improved stakeholder relations through shareholder engagement, “The Networked Corporation” offers a proprietary framework to help companies integrate social and environmental issues into business strategy, using shareholder dialogue as a means of corporate learning about stakeholder concerns.

Learning from History: How do Historical and Forecast Electricity Prices Connect?

We believe that the rising electricity prices forecast by the US Energy Information Agency (EIA) in their Annual Energy Outlook 2015 do not account for the dampening effect of rapidly declining renewable energy costs and low financing costs. In particular, rooftop solar should act as a cap on the price that utilities will be able to charge retail customers while falling wholesale solar prices, set at a fixed price for up to 20 years, could reduce wholesale electricity prices for the long term.

Uber: Red Light, Green Light

The decision by New York City to drop a proposed bill that would limit growth of for-hire vehicle (FHV) companies – such as Uber and Lyft – attracted significant media attention. Based on prior analysis, we reiterate our view that the status of providers (i.e., employees versus independent contractors) poses a greater risk to FHV companies…. Read more »

Scenario: What if electricity prices fell?

US electricity prices have steadily increased in nominal terms over the last five decades. However, using history as a guide, we observe two distinct periods of falling prices driven by technology and government subsidies. We believe that a confluence of factors could once again result in structurally lower prices – with potential impact to power market participants.

Proxy Access: A Core Shareholder Right or the Latest Corporate Governance Fad?

The 2010 Dodd-Frank financial reform law required all companies to provide proxy access to shareholders, but the implementation of this rule has been tied up in court. A small number of companies have moved ahead, and this proxy season roughly 40 companies have made “proxy access” available to shareholders. Meanwhile, the New York City Pension System filed proxy access requests to 75 companies in May. Below we provide some background on the issue, in the form of responses to questions we’re frequently asked.

Regional and Sector Strategy: May Update

We are now underweight the most cyclically sensitive sectors: Industrials, Materials, Energy. While we upgrade the CEEMEA region to Neutral from Underweight — in large part because of an improved earnings outlook — this likely reflects a modest rebound in oil prices, which remain 40% below year-ago levels.

Updating the Global Equity Strategy Investment Clock

An Increasingly Cautious Near-Term Equity Outlook — Plotting our sector and regional equity recommendations on the face of an “investment clock” suggests an increasingly cautious near-term outlook for global equities. A Tilt Away from Cyclical Sectors and Regions — Last month, we tilted further from cyclical sectors and regions. As for sectors, we are underweight Energy and Materials, neutral Industrials. In terms of regions, we are underweight CEEMEA and Latin America.

Environmental Issues & Country Valuations: What Matters?

What Matters? — Some environmental issues that are the subject of popular focus — such as carbon dioxide emissions — do not appear to be statistically significant for global investors. Moreover, many countries’ environmental “health” has moved in the opposite direction of their economic development i.e., more pollution and higher per capita GDP.

The Economics of Automation: Quick Serve Restaurant Industry

Increasing cost pressure. Labor and food represent a significant portion of restaurants’ cost structure. While these inputs have been relatively predictable in the past, the twin threats of rising wages and increasingly volatile food prices suggest a more challenging environment ahead. It’s not clear that cost inflation can be consistently offset by raising menu prices, so companies are considering new strategies to protect margins . . .

Regional and Sector Strategy: March Update

Our regional strategy is unchanged. We continue to have a defensive tilt in our regional recommendations, and are Underweight the commodity-rich regions of CEEMEA and Latin America. Japan continues to be the top-ranked country. Over the past twelve months, share buybacks in Japan have been the largest of any country / region, the first time that country has been the global buyback leader since we launched the regional model in April 2014. We highlight changes in the Energy suggesting, perhaps, that stock prices in the sector have not fallen as fast as earnings estimates . . .

Towards Decent Jobs and Sustainable Business: the Long Road Ahead for Walmart

Walmart surprised the markets last week when it announced, along with its year-end results, a salary increase for 500,000 of its employees, raising company minimum wages to $9 per hour in April 2015 (bringing the average wage to $13) and $10 per hour beginning February 2016. The retail giant’s financial results were otherwise unremarkable, with… Read more »

Schneider Electric and the Power of Energy Efficiency

Schneider Electric (SU) published its annual results yesterday, posting a profit increase of 2.8% and revenue growth of 6.6%. With a 170-year history, starting in metallurgy, Schneider Electric is now betting on one core element of its strategy, across all its business lines: energy efficiency. Last November, the International Energy Agency reminded markets that energy… Read more »

A Closer Look at Alibaba’s Corporate Governance

The recent, apparently resolved conflict between Alibaba and the Chinese government agency SAIC over counterfeit goods raises questions about whether shareholders should have confidence in the future growth of the company. With a valuation of over 30 times earnings, the market is pricing in a high degree of conviction about the company’s future growth. In… Read more »

Regional and Sector Strategy: February Update

Our regional strategy is unchanged, even with a heightened focus on monetary policies and exchange rates in the past month driven, in part, by fears of deflation. We continue to have a defensive tilt in our regional recommendations, and are Underweight the commodity-rich regions of CEEMEA and Latin America. Our sector strategy is also unchanged and remains “less cyclical, more defensive.” We maintain our relatively defensive posture given pockets of economic weakness globally. We are Overweight Health Care in North America, the U.K. and Europe ex U.K. We are Underweight or Neutral Energy in the majority of regions….

Introducing the Global Equity Strategy Investment Clock

Cornerstone’s Global Markets Strategist Michael Geraghty offers an “investment clock” to help visualize the global economic cycle and flesh out the equity outlook implied by our sector and regional recommendations. Read more in “The Global Equity Strategy Investment Clock.”

Introducing the Global Equity Strategy Investment Clock

Developing a multi-class asset allocation model — that also incorporates Environmental, Social and Governance (ESG) factors — is a lofty undertaking. In this report, we take a first step by introducing our global equity strategy “investment clock”, which helps flesh out the equity outlook implied by our sector and regional recommendations….

“Legitimacy” in the Banking Sector

Earnings and valuation uncertainty – In a post Global Financial Crisis world, investors are questioning long-term earnings and valuation prospects for the banking sector. Tougher regulation, particularly on capital, liquidity and structure, are exerting pressure on the traditional banking business and clouding the outlook for investors….

Regional and Sector Strategy: January Update

This month we, upgrade Financials to Overweight from Neutral reflecting the combination of relatively attractive valuations and improving earnings momentum. In addition, Financials’ earnings estimate revisions are only modestly negative (i.e., downward revisions just outpace upward revisions), in sharp contrast to most other sectors where estimate revisions are strongly negative. Our regional strategy remains unchanged…..

The Social Costs of Business: Implications for Sector Strategy

Executive Summary The social responsibility of business — In pursuit of the goal of increasing profits, businesses incur costs to nurture relationships with key stakeholders: local communities, suppliers and their workers, the company’s own employees, customers.  Some of these costs are straightforward; others are tougher to quantify.  To be sure, many business‑stakeholder relationships have benefits too…. Read more »

Redefining Energy Utilities: The E.ON Revolution

On December 1st, the German energy utility company E.ON announced it would spin off its conventional energy generation, upstream and trading businesses, and focus on renewable energy, networks and customer solutions. E.ON’s current shareholders will receive shares in this new company, in addition to their holdings in the parent company. E.ON will keep a minority… Read more »

ESG Essentials – A Guide for Investors

There is increasing recognition globally that environmental, social and governance (ESG) factors are relevant and material for investment decisions. If you are involved in the world of finance, the words “sustainability” or “ESG” have either crossed your desk or are about to. For investors that are new to the topic, this report will serve as a primer that provides a basis for additional avenues of inquiry. For those that are already familiar with the subject, this report will act as a supplement and may offer new or different perspectives on the most critical issues.

Income Inequality: Market Mechanism or Market Failure?

Tools to assess corporate performance and enhance investment decisions Income inequality is a normal feature of a free market economy. However, in recent years, it has been on the rise in most developed countries and has reached relatively high levels, especially in the US. Extreme income inequality affects economic growth prospects and societal stability. It… Read more »