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The Truth About U.S. Stock Investment

Shigenobu Kawada's " Training in U.S. Stocks Through the Media"

［Vol.31］ Delivered January 17, 2022

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*** Table of Contents ***

1. Market Review

2. This Week's Picked Articles

【Tokyo Stock Exchange Prime, 1,841 companies listed; stricter standards; aiming for turnover; over 80% move to the 1st Section, reforms still in progress】【 International students unable to come to Japan; entry restrictions prolong; implications for global talent】【“Why only Japan?” growing dissatisfaction; students unable to enter due to border controls; concern for international exchange】

3. Kawada’s Interesting Stocks

4. Investment Tips

5. A Quick Break: “FA Perspective”

6. Upcoming Activities

7. Q&A Corner

Next issue: January 31

Pace-setter Ending at 20,000,000 yen

Source: Financial Services Agency; Asset Allocation Simulation prepared by ExeTrust Co., Ltd.

*The figures above are simulations only and do not guarantee future investment results. Fees and taxes are not included.

Reading guide: Assumed yield and target year

3–4% would take over 30 years: this is the case for wrap funds and balanced funds

5–7% would take about 25 years: perhaps for stock funds outside the U.S.

8–10% would take around 20 years: a modest estimate of S&P 500 growth

S&P 500 performance history (dividends reinvested, 1970-2021)

Aim to reach 20,000,000 yen early through proper risk-taking

Kawada's message is extremely simple. To reach 20,000,000 yen, let your surplus funds work as efficiently as possible. For that, it is essential that the participants understand the meaning of risk and reward. Before reading the weekly newsletter, glance at this table to confirm the correct investment posture.

Now, start the countdown to reach 20,000,000 yen right away!

Online Salon “Aspiring Asset Formation Academy”

This online salon is for learning and mutual enlightenment to help you succeed in asset formation. It offers member-only seminars that go beyond what the popular newsletter “Training in U.S. Stocks Through the Media” can cover and lets you feel the appeal of U.S. stock investing.

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1 Market Review (January 10–January 14)

＜Major Indices＞

・Dow Jones -0.9%

・S&P 500 Index -0.3%

・Nasdaq Composite -0.3%

= Quick Version =

Following a pause in long-term yields, in the early part of the week growth stocks held up, but as cautious sentiment spread ahead of last year's Q4 earnings reports and bank stock results fell short of market expectations, leading to a two-week slide in profit-sensitive stocks.

= Slightly More Details =

Tech stocks saw a dip and then a solid start; with no new catalysts from Fed Chair Powell’s congressional testimony on Tuesday, concerns about monetary policy eased and the market rose.

Because December CPI came out roughly in line with expectations on Wednesday, fears that the Fed would need to tighten further eased, and long-term yields fell, helping the market extend gains. However, once yields stopped falling, investors paused ahead of corporate earnings, resulting in a lack of clear direction.

Friday's release of economic indicators like retail sales came in somewhat weak, and big bank earnings missed market estimates, prompting selling in banks and consumer-related stocks.

S&P 500 Chart — Past Year

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2. This Week's Pickup Articles

A section that selects information useful for asset formation from what I have gathered, ranks it, and comments with a highly personal perspective.

【1】Nikkei NewspaperTSE Prime, 1,841 companies listed; strict criteria aim for renovation and turnover; more than 80% from First Section migrate, reforms midstream1/12

• The Tokyo Stock Exchange will disclose the affiliation of all listed companies after the market restructuring on April 4. The de facto top-tier “Prime” will have 1,841 companies listed. More than 80% of TSE First Section will migrate to Prime, while the number moving to markets other than Prime will be less than 20%.

• In Prime, a market capitalization of 10 billion yen or more (roughly 25 billion yen in market cap in the currency sense) is required. For mid-sized companies with market caps in the hundreds of billions, there is a risk of delisting.

• To foster promising companies and raise turnover, a nationwide growth-activation policy is indispensable (Emeritus President and CEO Hideo Fujino of Monex Group). “Select about 100 top students for Prime, and set a mechanism that the lower-tier companies aim for; otherwise there is little meaning to the reform. Governance must be strengthened” (Yasuhiko Miyauchi, Chairman of the Japan Directors Association)—there are voices calling for stricter standards.

【Kawada’s Comment】

I had no particular expectations for Japanese equities, so I don’t claim any qualification to speak on this. Still, I covered it because this reform offers very important implications for Japan’s capital market. It confirms a large gap between a market attractive to investors and one convenient for issuers.

Raising the hurdle for “Prime” will push companies to seek stock-price growth and governance improvements. And those may not always be desirable from the perspectives of employees, business partners, and even regional or national interests. There is also concern that stricter standards will reduce Prime companies in regional areas. Will the day come when investors can buy Japanese stocks with confidence? It’s not relevant to me, though.

【2】Nikkei NewspaperInternational students cannot come to Japan; entry restrictions lengthen; impact on global talent1/10

• Due to border-control measures for COVID-19, international students cannot come to Japan, affecting university exchange programs and other arrangements. The decrease in students interested in Japan and in graduates from Japanese universities casts a shadow on Japanese companies’ global talent acquisition strategies. There is a need to flexibly consider who is allowed to enter.

• The UK and the US are recovering in terms of accepting foreign students. Australia also eased entry restrictions from December 15, 2021.

• Among foreign students who graduated from Japanese universities in 2019, fewer than 40% secured employment in Japan, about 10,000 people in total. If the “shutout” continues, foreign students’ departure from Japan will progress, inevitably affecting corporate talent acquisition.

【3】Nikkei Newspaper“Why only Japan?” Dissatisfaction rises: Students unable to come due to border controls; concerns about adverse effects on international exchange1/10

• Border controls for COVID-19 persist, and foreign students who cannot come are growing more frustrated. “Why doesn’t Japan accept them?” “Worries about learning delays and future job hunting.” As the home country’s young people are left stranded, concerns about adverse effects on future international exchange grow stronger.

【Kawada’s Comment】

These articles 【2】 and 【3】 are hard to swallow. Japan allows foreign students in, yet Japan has its own rules that prevent their entry. This only leads to losing friends. Japanese people already have few friends overseas, and with few information channels, misunderstandings can easily breed misunderstandings. This was an article about “self-imposed isolation” with those concerns in mind.

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3. Kawada’s watchlist stocks

From Kawada’s holdings and other US stock insights, I’ll introduce stocks that caught my eye.

This week’s stock

Intuitive Surgical ＜Ticker: ISRG＞

Intuitive Surgical, Inc.

Overview

Known more by its surgical-assistance robot “Da Vinci” than the company name. It began in 1995 after U.S. military research into remote battlefield care was transferred to the private sector, and started selling systems in 1999.

Surgical-assistance robot “Da Vinci”

Why the company is appealing

Pioneer in endoscopic surgical robots. Among current robots, it was the earliest to be widely marketed, and the brand is well established among medical professionals.

First appeal: Market size expansion. Background: broader indications for robot-assisted surgery, more hospitals adopting it, more doctors trained in the technique. The world market is expected to grow from about $3 billion in 2021 to about $16 billion by 2030 (more than fivefold).

Second appeal: Recurring revenue accounts for about three-quarters of total revenues. This is not a one-off product sale; it relies on consumables like scalpels and instrument replacements, maintenance, and software updates, providing stable income (the first appeal’s figure is just the core system market).

2021 Revenue (Q4 and full year, vs 2020)

The bottom line is recurring revenue as a share. Revenue by category: instruments and accessories, systems, and services; system sales account for about 30% of total.

Source: Intuitive Surgical’s latest disclosures

Third appeal: High profit margins. Replacement instruments cannot be bought from other companies. Once installed, continued replenishment is needed so pricing power becomes very strong.

Fourth appeal: Brand power and network among medical professionals. Unlike ordinary devices, only trained surgeons can use the Da Vinci robot; once accustomed, there is a strong tendency not to switch unless there is a compelling reason. The company has already supplied major hospitals worldwide, increasing the likelihood of adoption in affiliated hospitals compared to competitors.

Risks

In fact, key patents for Da Vinci expired in 2019. Therefore, similar surgical robots have been developed in Japan and China, and a robot named “Phoenix” was developed and sold in Japan.

With the emergence of such competitors, price declines and margin pressure may occur. However, as the company itself recognizes, surgical robots are not merely commoditized products; data from robot-assisted surgeries allow clinicians and hospitals to track patient satisfaction, speed, and efficiency by provider and region, and compare cases globally. This is a major differentiator rooted in the company’s leading global installations.

Thus, in the medium to long term, despite competitors’ products emerging, the company is expected to focus more on expanding into new markets (lower-cost versions and regional expansion) rather than converting existing customers.

Also, being a growth company, the stock may see short-term volatile movement.

ISRG basic data (Source: company data, Yahoo! Finance)

(As of Jan 14)

Share price $307.74

Market cap $123.2 billion

Total revenue $5.71 billion

Estimated P/E 61.0x

Stock yield -----

Headquarters: Sunnyvale, California

Listed: June 2000

5-year stock price chart

Chart provided by TradingView.com

(This column is intended only for general informational purposes and does not constitute an invitation to buy or sell any securities)

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4. Investment Tips

This section covers not only “investment methods” and “stock introductions” but also “interesting indicators and remarks” and “movements in society and politics.”

Online Salon: Researcher Report

In the online salon I host, the “Dreams Become Wealth” wealth-building school, members regularly share their insights on asset formation.

Mr. N is an engineer near retirement from a large company, at the “a-kan” stage. His career spans research labs, manufacturing, and international business. He has lived through Japan’s economic rise, the decline of Japan’s global presence, and Japan’s becoming left behind in real terms.

Last December 6 issue featured his own asset-building experience, “Case studies of financial instruments—Inventory of life”; this time is a sequel.

QQQ Analysis ~QQQ Growth Engine~

Research Report: Researcher N

This time’s report focused on the Nasdaq 100. His concerns were:

① In considering U.S. equity investing, the tech sector is extremely important.

② Among them, platform-type names are crucial.

③ Investment in Nasdaq 100, which has a large share of those platform names, can effectively realize investment gains.

④ Therefore, in a core-satellite strategy, Nasdaq 100 ETFs (QQQ) form the core.

Satellites that outperform QQQ

I think this aligns with Kawada’s thinking. For Researcher N, even when selecting satellite stocks, he would pick from Nasdaq 100 constituents. If those outperform Nasdaq 100, they can outperform the Nasdaq 100 index itself.

So, Researcher N attempted to identify stocks that outperform Nasdaq 100.

Only 30 out of 100 outperformed Nasdaq 100

What the study revealed is a shocking fact: in the past around two years, only about 30 of the 100 Nasdaq 100 constituents outperformed Nasdaq 100.

In other words, picking individual stocks carelessly may yield a 30% chance of beating the index. Moreover, many of those are GAFAM stocks.

Then wouldn’t it be more efficient to focus on scrutinizing GAFAM stocks rather than broad coverages?

That is Researcher N’s concern and stance in this study.

Below are key points according to the research material. Note: among GAFAM, Researcher N excludes Meta (FB) from investigation at his discretion.

Agenda

Purpose and method:

Select a group of stocks that outperform QQQ

GAFAM analysis

Background

Last time, QQQ was proposed as the core stock with individual stocks as satellites. Now the goal for individual stocks is to beat QQQ’s performance.

This year’s market focus:

U.S. elections

Tapering started; expected to end by end of March 2022

Several rate hikes planned within the year

Fed balance-sheet reduction (QT) in progress

Since late November last year, hyper-growth stocks have plunged

From January this year, stock prices have fallen due to lower P/E ratios

Contributors to stock prices: interest rates and earnings (ratio 7:3) are major

Purpose and method of this study

1) Purpose

To ride out the 2022 market which is expected to be difficult

Stock selection that is unaffected by influencers

2) Items to be carried out

Extract Nasdaq 100 stocks that outperform QQQ

Estimate FY2022 stock price using EPS (per share) and P/E

EPS (actual) × P/E (valuation)

   Confirm basics again (do the obvious things plainly)

3) Method

 Portfolio Visualizer used to extract stocks that outperform QQQ

Check earnings (EPS, breakdown)

 TradingView used to verify PER performance of selected stocks

 Seeking Alpha used for next-year EPS, P/E checks

EPS × P/E = stock price; estimate next year’s price

Stocks that outperform QQQ

1. Overview

① Study period: Jan 2020–Nov 2021 (1 year 11 months)

② Stocks studied: QQQ 100 constituents

③ Primary screening: QQQ CAGR during this period = 38.6%

Check CAGR using Portfolio Visualizer

Stockrow used to verify operating cash flow/revenue

Stockrow>Financial>Income (annual)

④ Secondary research

Using the results of primary screening, verify each year’s EPS and year-over-year EPS growth

Note: Excludes Chinese stocks, Brazilian and other foreign stocks, and XLNX (being acquired by AMD)

Reference: EPS Stockrow: diluted GAAP, Seeking Alpha, Yahoo Finance: diluted non-GAAP

Results: stocks with CAGR > 38.6% (outperforming Nasdaq 100 over 1 year 11 months)

Classification of stocks into “Group Names” is Researcher N’s own invention and discretion.

From 100 stocks, excluding foreign and M&A stocks, 30 outperformed Nasdaq 100.

Reference: Researcher N’s information sources (Ministry of Economy, Trade and Industry website)

Among Nasdaq 100 constituents, semiconductor players have substantial influence

The influence of semiconductor stocks among Nasdaq 100 constituents is large. The METI site is full of useful information, according to Researcher N’s advice.

World semiconductor market and major players (METI)

Outperform Nasdaq 100 again? Perhaps GAFAM?

Through the study, the researcher reconfirms the strength and potential of GAFAM. Below are the results after individually examining GAFAM.

1. Apple

EPS has steadily grown. The stock price has risen accordingly, so the P/E is not overly high.

For reference, the chart below is an enlarged portion of the lower graph. The blue line shows the P/E trend, while the lower step-chart shows quarterly EPS.

Apple’s stock price (orange) lagged the S&P 500 (blue) after 2020, but has rebounded in recent months.

In the most recent quarter (Q4 2021), iPhone revenue declined year over year due to semiconductor shortages.

Source: Seeking Alpha > AAPL > Momentum

Past quarterly results (blue) generally beat the consensus (black).

N researcher’s assumed stock price range

Apple’s latest price around $175 (as of 1/12). This aligns with N’s main scenario (center of the table below) given this year’s EPS expectation of $5.7.

If Apple’s AR/VR headset and autonomous vehicle launches begin to reflect in its valuation, they could push the valuation higher.

2. Amazon

P/E declined, offsetting EPS growth; 2021 formed a box range and dipped below the 200-day moving average. Next earnings’ EPS growth is key.

AMZN earnings

EPS: FY 2021 Jan–Sep; 37.03

Source:AMZN IR

Past quarterly results (blue) beat consensus (black), but recently costs such as logistics increased and missed estimates.

Reference EPS FY2021 40.93, FY2022 51.72

Source: Yahoo Finance

Source: Seeking Alpha >AMZN > Earnings > Earnings Summary

3. Alphabet (GOOG)

EPS rising, P/E gradually declines.

EPS growth outpaced P/E decline, so stock price rose.

P/E March 2021: 21

P/E January 2022: 25

Source: GOOG IR

Past quarterly results (blue) beat consensus (black).

Reference EPS FY2021 108.81, FY2021 112.36

Source: Yahoo Finance

Source: Seeking Alpha >GOOG > Earnings > Earnings Summary

4. Microsoft

EPS increases, but P/E roughly steady.

FY2021 saw strong stock-rise driven by EPS growth.

P/E March 2021: 23

P/E January 2022: 34

2022/1/8

Source:MSFT IR

Past quarterly results (blue) beat consensus (black).

Reference EPS FY2021 7.97   FY2022 9.20

Source: Yahoo Finance

Source: Seeking Alpha >MSFT > Earnings > Earnings Summary

5. Summary

The table below shows each GAFAM stock’s EPS and price growth rates (5-year, 10-year) and Researcher N’s impressions, excluding Meta.

Notes

According to FactSet, FY2022 EPS growth is 8–9%

Be mindful of a potential P/E drop due to interest-rate trends and the Fed’s balance-sheet reduction (QT)!!

A 5% weekly drop in the index occurs about 3 times per year; in December 2018, QQQ fell 15% in one month

In the January 2022 earnings releases, guidance may matter more than EPS!

Earnings release dates 2022

1/25 (Tue) 16:00 MSFT Microsoft Q2

1/27 (Thu) 16:00 AAPL Apple Q1

2/01 (Tue) 16:00 GOOG Alphabet Q4

2/01 (Tue) 16:00 AMZN Amazon.com Q4

【Kawada’s Comment】

If you take note of the points for each stock above and pay attention to the forthcoming results, they can offer investment clues. Among them, Microsoft appears the most stable; what about your investment approach?

GAFAM: past year’s chart

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5. Quick break: “FA Perspective”

A column where Financial Advisor Ryuichi Motohashi answers clients’ questions about asset management.

Q: Is there a mental attitude important for continuing asset management?

A: “Is asset management a marathon?”

Even those who start asset management with resolve sometimes quit halfway due to sudden market swings, even though their goal was to grow assets. Many abandon because the balance of assets becomes frightening.

To such people, I tell them that asset management is like running a marathon along a course you set yourself. You decide which route to take and where to take water or rest. This course-setting is akin to life planning.

If you ever feel you are pushing too hard, you can review your pace and, at times, stop to check the course. This could involve reducing the amount you regularly invest, changing asset allocations, or making partial withdrawals. A marathon of asset management can be managed flexibly without clinging to the initial plan.

But one important mental stance must be kept: a long-term venture once started should be completed without retirement. In risk-taking asset management, the market may swing up smoothly, down sharply, and there may be unexpected shocks. Don’t worry about the time; run your own route to your own goal with an enjoyable mindset.

If you’ve started asset management but due to a market crash think “Investing is scary…,” or “Investment isn’t for me,” please remember this!

When markets are good, beware of overconfidence; when markets change suddenly and you face unexpected shocks, keep pursuing your own goal and continue investing! Stay in the Market and Keep investing！

Mr. Ryuichi Motohashi

After graduating from university in 1998, began a career in finance at Yokohama Bank. Later, he moved to private banking at a foreign financial institution. The global financial crisis (Lehman) struck, and he decided to pursue being a financial advisor who communicates proper asset management. He built independence after about 20 years in finance. With zero credibility and connections, he studied overseas PB/FA business models and developed ideas to improve client experience.

Today, he operates as an independent financial advisor, not affiliated with any particular financial institution, focusing on asset formation support aligned with clients’ values.

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6. Future activity information

◇ Stock Voice: January 19 (Wed) 11:00–

◇ Nikkei CNBC:

January 19 (Wed) 8:18– live on air

January 25 (Tue) 10:15– studio

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New Series “Everything about Asset Formation Using U.S. Stocks”

Introduction

We will launch a series covering essential basics for asset formation. The overall structure is planned as follows.

1. What era are we living in? Part I–II

2. Independent Japanese people and asset formation essential for independence—Part I–III

3. Is the stock market only in the U.S.? Part I–IV

4. Differences between Japanese and American stock cultures

5. Important characteristics of the U.S. market

6. What is the S&P 500

7. Why is the U.S. strong

8. Recommended investment strategies — Core and Satellite Investment —

9. Core investment strategy

10. Satellite investment strategy

11. What should I buy

12. Information sources and investing

Episode 5Features of the U.S. market you should know — Fourth

U.S. inflation and stock prices

Inflation and stock prices: 1968–1983

The S&P 500 Index also declined in real terms

I often say U.S. stocks rarely fall and tend to rise above purchase price in long-term holdings. However, to be precise, there were periods when the U.S. stock market’s real value declined due to inflation.

Real buying power of the S&P 500 index is usually computed by dividing the nominal index by the Consumer Price Index. That is, even if the nominal index rose, if prices rose faster, the S&P 500’s purchasing power declined in that period.

Three high-inflation periods in the 20th century

In the past century, there were three episodes of high inflation in the U.S.—after both World Wars and the 1970s’ hyperinflation period.

From December 1916 to June 1920, the CPI rose at an annual rate of 18.5%. Subsequently a price collapse ended hyperinflation. CPI fell 15.8% from June 1920 to June 1921, causing a recession. During World War II, CPI growth peaked at 10.9% in 1942, then declined to 6% a year, 1.6% after two years, and 2.3% after three years.

Hyperinflation period (1968–1983)

During this period, CPI rose 186%, about 7.3% per year.

The U.S. Federal Reserve acknowledges that the cause of major inflation was policy allowing excessive money-supply growth.

The cause of the Fed’s failure was to rely on the Phillips Curve and believe that keeping inflation slightly high could achieve permanently low unemployment.

This idea proved wrong during the stagflation of the 1970s, when both inflation and unemployment rose and the economy stagnated.

The main factors behind inflation include the Great Society programs introduced by President Johnson in 1964 (the combination of Medicare and Social Security) and the rising costs of the Vietnam War.

Also, President Ford launched the “Whip Inflation Now” campaign in 1974. The WIN badge urged households to balance budgets, lower thermostat settings, and seek bargains, but it failed.

Carter’s administration faced economic stagnation, but the high inflation ended with Paul Volcker’s appointment as Fed Chairman. Volcker tightened the money supply, raised the Federal Funds rate, drove unemployment above 10%, and pushed the economy into a recession. Inflation peaked in 1980 and then declined for decades.

Not only did high inflation end, but after the 2007 global financial crisis, central banks around the world tried to raise inflation back to 2%, but failed. This low-rate environment was considered a new normal until the COVID-19 crisis.

Consumer price index: CPALTT01USM659NS&P 500 significantly deflated

Recent inflation rates rise sharply, reaching levels seen in the 1980s. We do not expect such persistence, but it is important to review how inflation erodes real stock prices historically.

This is a long-term nominal price chart for the S&P 500. The scale is logarithmic, so if the growth rate is constant, it rises linearly. During the high-inflation period, stock prices were flat.

S&P 500 index: 90-year chart (log scale)

S&P 500 price after inflation adjustment over the past 90 years

From Dec 1968 to Jul 1982, the real purchasing power of the S&P 500 declined by more than 60%. The red circle on the right marks the financial crisis drawdown; the S&P 500 fell as much as 56% at its deepest, similar to the real decline of 58.3% after inflation adjustment.

We optimistically assume the current price increases are temporary due to supply constraints.

Meanwhile, the market trend shows growth stocks shifting to value stocks. However, the fact of high inflation and its significant erosion of stock value—something many investors have not experienced—should be kept in mind.

FF rate (since 1954)Trend 

10-year government bond yieldFRED | St. Louis Fed

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