It Seems Likely that Grandma and Grandpa are Getting a Much Smaller Raise Next Year
In 2023, Social Security recipients received the highest COLA in more than 40 years, 8.7%. At the same time, the entire U.S., including those retired, was impacted by the highest annual inflation in over 40 years. The result is the increased pay impacted recipients differently. Those with a higher percentage of variable costs or expenses, especially where inflation was worst, such as rent, travel, or fuel did not benefit as much, if at all. Those with a greater percentage of fixed costs may have found themselves with more money at the end of each month.
Consumers in the U.S., including Social Security recipients, have not had their purchasing power eroded as much during the first seven months of 2023, as they experienced in 2022. Social Security cost of living adjustments (COLA) are based on a formula that will cause the increase paid next year to rise almost by a third of what it rose at the beginning of 2023.
While not yet official, the new forecast comes after the release of July’s Consumer Price Index (CPI), and is largely based on little change over the next 45 days.
How is a COLA Calculated?
Ignore for a moment the inflation rate percentages you see in the news headlines. The 12-month CPI is calculated by using the set cost of a basket of goods during the month, divided into the cost of the same basket a year earlier. SSA COLA is calculated by the average price of the basket July, August, and September, and dividing it by the average of these months a year earlier. The CPI used in this case is not the CPI-U (all urban consumers) typically reported in the news, but instead, CPI-W (Urban Wage Earners and Clerical Workers). CPI-W is calculated on a monthly basis by the Bureau of Labor Statistics. The most recent release was August 10, 2023.
COLA increases are rounded to the nearest tenth. The adjusted benefit payments are effective as of the first month of the new year.
What to Expect
Social Security recipients could see a 3% bump up next year, based on July’s CPI data, and the current stagnation in the level of inflation. A 3% COLA would raise an average monthly benefit of $1,789 by $53.70 and the maximum benefit by $136.65 per month.
Retired Americans who find Social Security a nice addition to 401(k) or 403(B) investment returns or ample pensions may find themselves with a few extra dollars to take road trips or treat themselves to dining out, or gifts for grandchildren. But investors looking for industries that may benefit from the fatter checks older Americans will receive may find that there is little difference in spending for the majority.
In its recent survey of retirees, the Senior Citizens League found that more than 66% of those that completed its survey have postponed dental care, including major services such as bridges, dentures, and implants. Another 43% said they have delayed optical exams or getting prescription eyeglasses. Almost one-third of survey participants said they have postponed getting medical care or filling prescriptions due to deductibles, out-of-pocket costs, and unexpected bills.
Persistent high prices aren’t the only challenge. Findings from the survey suggest more than one in five Social Security beneficiaries (23%) report they paid tax on a portion of their benefits for the first time this past tax season.
Take Away
When economic numbers are released, they are of interest to a expansive variety of economic stakeholders. This includes investors determining how new statistics will impact corporate earnings, economists deciding how it could impact the Fed’s next move, equity analysts reviewing their industry and companies in the sector, the young couple looking to furnish a new home, and those past their working years that are in general more vulnerable.
The CPI number from July and those that will be reported for August and September will have a noticeable impact on the high percentage of elderly in the U.S. come January 2024.
Q2 Revenue of $42.4 Million; Income from Operations of $5.0 Million; Adjusted EBITDA of $13.8 Million or 33% of revenue
Generated $2.7 Million of Operating Cash Flow
DENVER, Colo., Aug. 9, 2023 /CNW/ – Medicine Man Technologies, Inc., operating as Schwazze, (OTCQX: SHWZ) (NEO: SHWZ) (“Schwazze” or the “Company”), today announced financial and operational results for the second quarter ended June 30, 2023.
Second Quarter 2023 Summary
For the Three Months Ended
$ in Thousands USD
June 30, 2023
March 31, 2023
June 30, 2022
Revenue
$42,375
$40,001
$44,263
Gross Profit
$24,519
$23,033
$25,156
Income from Operations
$4,957
$5,650
$9,036
Adjusted EBITDA1
$13,814
$14,525
$15,021
Operating Cash Flow
$2,683
$(880)
$(13,486)
______________________________
1 Adjusted EBITDA represents earnings before interest, taxes, depreciation, and amortization, adjusted for other income, non-cash share-based compensation, one-time transaction related expenses, or other non-operating costs. The Company uses adjusted EBITDA as it believes it better explains the results of its core business.
Management Commentary
“We continued to execute on our ‘go deep’ retail strategy in the second quarter, demonstrated by our acquisitions of Everest Apothecary in New Mexico in June, as well as Standing Akimbo and Smokey’s in Colorado,” said Nirup Krishnamurthy, CEO of Schwazze. “Although it is early in the integration process and these stores have yet to ramp, in July we began to recognize synergies from bulk purchasing, introducing new product assortment, and leveraging best cultivation practices to improve yields, among other improvements. We expect to realize additional benefits as we further integrate our assets in the months ahead.
“The cannabis market environment in Colorado and New Mexico remains a challenge due to pricing pressure and license proliferation in key markets. However, we are beginning to see early signs of wholesale pricing stabilization in Colorado and are hyper-focused on customer acquisition and experience, while maintaining our brand standards and margin through targeted promotions for customers. Through these efforts, we increased market share in both Colorado and New Mexico, demonstrating the effectiveness of our operating playbook and acquisition strategy, as well as our ability to execute in a competitive environment.
“Looking ahead, we will continue to run a lean operation while implementing the Schwazze retail playbook across our markets to expand our customer base, increase labor and price optimization, and improve customer loyalty and brand penetration. We are well positioned to continue driving strong adjusted EBITDA margins and consistent cash flow generation in 2023.”
Recent Highlights
Completed the acquisition of Everest Apothecary in June, increasing the Company’s New Mexico operations to 32 dispensaries, four cultivation facilities, two manufacturing facilities and over 400 employees statewide.
Appointed Nirup Krishnamurthy as Chief Executive Officer.
Acquired two Colorado retail dispensaries from Smokey’s Cannabis Company.
Acquired Standing Akimbo, the largest medical cannabis dispensary in Colorado, and opened the Company’s first medical dispensary in Colorado Springs under the Standing Akimbo banner.
Ecommerce penetration in New Mexico and Colorado grew approximately 45% and 15%, respectively, compared to the first quarter of 2023 when the program was first launched.
Experienced 17% sequential growth of new customer loyalty members in the second quarter of 2023.
Second Quarter 2023 Financial Results
Total revenue in the second quarter of 2023 was $42.4 million compared to $44.3 million for the same quarter last year. The decrease was primarily due to lower wholesale revenue resulting from a 25% year-over-year decline in wholesale pricing and the proliferation of new licenses in key New Mexico markets, partially offset by growth from new stores compared to the prior year period.
Gross profit for the second quarter of 2023 was $24.5 million or 57.9% of total revenue, compared to $25.2 million or 56.8% of total revenue for the same quarter last year. The increase in gross margin was primarily driven by efficiency gains across retail, cultivation, and production, partially offset by the aforementioned wholesale pricing pressure.
Operating expenses for the second quarter of 2023 were $19.6 million compared to $16.1 million for the same quarter last year. The increase was primarily due to the four-wall SG&A increases associated with 27 additional stores in Colorado and New Mexico that are still ramping, as well as an increase in stock-based compensation. This was partially offset by efficiencies implemented throughout the Company’s operations.
Income from operations for the second quarter of 2023 was $5.0 million compared to $9.0 million in the same quarter last year. Net loss was $6.6 million compared to net income of $33.8 million for the second quarter of 2022, primarily driven by a $35.2 million change in the non-cash accounting revaluation of the derivative liability related to the Company’s convertible note.
Adjusted EBITDA for the second quarter of 2023 was $13.8 million or 32.6% of revenue, compared to $15.0 million or 33.9% of revenue for the same quarter last year. The decrease in adjusted EBITDA margin was primarily driven by lower revenue and higher SG&A associated with new stores that are still ramping, partially offset by improved gross margin.
As of June 30, 2023, cash and cash equivalents were $19.9 million compared to $38.9 million on December 31, 2022, while operating working capital increased by $5.8 million to $10.0 million during this period. Total debt as of June 30, 2023, was $155.4 million compared to $127.8 million on December 31, 2022.
Schwazze CFO Forrest Hoffmaster added, “In addition to our focus on top line growth, supply chain efficiencies and cash generation, we are capitalizing on our hyper-regional retail strategy with a series of cost optimization programs that are improving our cash position and margins. We have begun to see the benefit of these initiatives and expect to drive further improvements in the months ahead.”
Conference Call
The Company will conduct a conference call today, August 9, 2023, at 5:00 p.m. Eastern time to discuss its results for the second quarter ended June 30, 2023.
Schwazze management will host the conference call, followed by a question-and-answer period. Interested parties may submit questions to the Company prior to the call by emailing ir@schwazze.com.
Date: Wednesday, August 9, 2023 Time: 5:00 p.m. Eastern time Toll-free dial-in number: (888) 664-6383 International dial-in number: (416) 764-8650 Conference ID: 70252888 Webcast: SHWZ Q2 2023 Earnings Call
The conference call will also be broadcast live and available for replay on the investor relations section of the Company’s website at https://ir.schwazze.com.
If you have any difficulty registering or connecting with the conference call, please contact Elevate IR at (720) 330-2829.
About Schwazze
Schwazze (OTCQX: SHWZ) (NEO: SHWZ) is building a premier vertically integrated regional cannabis company with assets in Colorado and New Mexico and will continue to take its operating system to other states where it can develop a differentiated regional leadership position. Schwazze is the parent company of a portfolio of leading cannabis businesses and brands spanning seed to sale.
Schwazze is anchored by a high-performance culture that combines customer-centric thinking and data science to test, measure, and drive decisions and outcomes. The Company’s leadership team has deep expertise in retailing, wholesaling, and building consumer brands at Fortune 500 companies as well as in the cannabis sector.
Medicine Man Technologies, Inc. was Schwazze’s former operating trade name. The corporate entity continues to be named Medicine Man Technologies, Inc. Schwazze derives its name from the pruning technique of a cannabis plant to enhance plant structure and promote healthy growth. To learn more about Schwazze, visit www.schwazze.com.
Forward-Looking Statements This press release contains “forward-looking statements.” Such statements may be preceded by the words “may,” “will,” “could,” “would,” “should,” “expect,” “intends,” “plans,” “strategy,” “prospects,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other words of similar meaning in connection with a discussion of future events or future operating or financial performance, although the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future events or performance, are based on certain assumptions, and are subject to various known and unknown risks and uncertainties, many of which are beyond the Company’s control and cannot be predicted or quantified. Consequently, actual events and results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation, risks and uncertainties associated with (i) regulatory limitations on our products and services and the uncertainty in the application of federal, state, and local laws to our business, and any changes in such laws; (ii) our ability to manufacture our products and product candidates on a commercial scale on our own or in collaboration with third parties; (iii) our ability to identify, consummate, and integrate anticipated acquisitions; (iv) general industry and economic conditions; (v) our ability to access adequate capital upon terms and conditions that are acceptable to us; (vi) our ability to pay interest and principal on outstanding debt when due; (vii) volatility in credit and market conditions; (viii) the loss of one or more key executives or other key employees; and (ix) other risks and uncertainties related to the cannabis market and our business strategy. More detailed information about the Company and the risk factors that may affect the realization of forward-looking statements is set forth in the Company’s filings with the Securities and Exchange Commission (SEC), including the Company’s Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q. Investors and security holders are urged to read these documents free of charge on the SEC’s website at http://www.sec.gov. The Company assumes no obligation to publicly update or revise its forward-looking statements as a result of new information, future events or otherwise except as required by law.
MEDICINE MAN TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS For the Periods Ended June 30, 2023 and December 31, 2022 Expressed in U.S. Dollars
June 30,
December 31,
2023
2022
(Unaudited)
(Audited)
ASSETS
Current Assets
Cash & Cash Equivalents
$
19,872,099
$
38,949,253
Accounts Receivable, net of Allowance for Doubtful Accounts
6,179,662
4,471,978
Inventory
33,821,282
22,554,182
Notes Receivable – Current, net
–
11,944
Marketable Securities, net of Unrealized Loss of $1,816 and Loss of $39,270, respectively
456,099
454,283
Prepaid Expenses & Other Current Assets
6,203,056
5,293,393
Total Current Assets
66,532,198
71,735,033
Non-Current Assets
Fixed Assets, net Accumulated Depreciation of $7,007,889 and $4,899,977, respectively
31,128,357
27,089,026
Investments
2,000,000
2,000,000
Goodwill
75,968,130
94,605,301
Intangible Assets, net Accumulated Amortization of $24,981,817 and $16,290,862, respectively
168,892,605
107,726,718
Note Receivable – Non-Current, net
1,313
–
Other Non-Current Assets
1,222,805
1,527,256
Operating Lease Right of Use Assets
23,213,504
18,199,399
Total Non-Current Assets
302,426,714
251,147,700
Total Assets
$
368,958,912
$
322,882,733
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable
$
12,105,250
$
10,701,281
Accounts Payable – Related Party
6,073
22,380
Accrued Expenses
6,398,115
7,462,290
Derivative Liabilities
6,538,485
16,508,253
Lease Liabilities – Current
4,026,595
3,139,289
Current Portion of Long Term Debt
6,583,334
2,250,000
Income Taxes Payable
14,113,477
7,297,815
Total Current Liabilities
49,771,329
47,381,308
Non-Current Liabilities
Long Term Debt, net of Debt Discount & Issuance Costs
148,861,810
125,521,520
Lease Liabilities – Non-Current
22,096,232
17,314,464
Deferred Income Taxes, net
178,031
502,070
Total Non-Current Liabilities
171,136,073
143,338,054
Total Liabilities
$
220,907,402
$
190,719,362
Stockholders’ Equity
Preferred Stock, $0.001 Par Value. 10,000,000 Shares Authorized; 86,994 Shares Issued and
86,994 Shares Outstanding as of June 30, 2023 and 86,994 Shares Issued and 86,994 Shares
Outstanding as of December 31, 2022.
87
87
Common Stock, $0.001 Par Value. 250,000,000 Shares Authorized; 71,730,449 Shares Issued
and 70,590,451 Shares Outstanding as of June 30, 2023 and 56,352,545 Shares Issued and
55,212,547 Shares Outstanding as of December 31, 2022.
71,730
56,353
Additional Paid-In Capital
201,116,605
180,381,641
Accumulated Deficit
(51,103,785)
(46,241,583)
Common Stock Held in Treasury, at Cost, 920,150 Shares Held as of June 30, 2023 and 920,150
Shares Held as of December 31, 2022.
(2,033,127)
(2,033,127)
Total Stockholders’ Equity
148,051,510
132,163,371
Total Liabilities & Stockholders’ Equity
$
368,958,912
$
322,882,733
MEDICINE MAN TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND (LOSS) For the Three and Six Months Ended June 30, 2023 and 2022 Expressed in U.S. Dollars
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
Operating Revenues
Retail
$
38,098,957
$
38,138,799
$
73,919,068
$
64,664,515
Wholesale
4,274,483
6,080,843
8,333,408
11,288,231
Other
1,660
43,750
123,560
88,200
Total Revenue
42,375,100
44,263,392
82,376,036
76,040,946
Total Cost of Goods & Services
17,856,050
19,106,944
34,824,320
39,946,995
Gross Profit
24,519,050
25,156,448
47,551,716
36,093,951
Operating Expenses
Selling, General and Administrative Expenses
8,838,936
6,666,044
19,054,847
13,521,755
Professional Services
487,860
1,516,544
1,675,224
4,101,016
Salaries
7,389,172
7,240,368
13,154,165
12,537,145
Stock Based Compensation
2,845,691
697,842
3,060,235
1,688,925
Total Operating Expenses
19,561,659
16,120,798
36,944,471
31,848,841
Income from Operations
4,957,391
9,035,650
10,607,245
4,245,110
Other Income (Expense)
Interest Expense, net
(7,890,439)
(7,489,205)
(15,636,294)
(14,791,459)
Unrealized Gain (Loss) on Derivative Liabilities
1,468,083
36,705,764
9,969,768
23,288,292
Other Loss
–
–
–
7
Unrealized Gain (Loss) on Investments
–
(5,264)
1,816
(13,813)
Total Other Income (Expense)
(6,422,356)
29,211,295
(5,664,710)
8,483,027
Pre-Tax Net Income (Loss)
(1,464,965)
38,246,945
4,942,535
12,728,137
Provision for Income Taxes
5,142,559
4,405,962
9,804,737
5,665,856
Net Income (Loss)
$
(6,607,524)
$
33,840,983
$
(4,862,202)
$
7,062,281
Less: Accumulated Preferred Stock Dividends for the Period
(2,353,883)
(1,766,575)
(4,383,277)
(3,510,019)
Net Income (Loss) Attributable to Common Stockholders
$
(8,961,407)
$
32,074,408
$
(9,245,479)
$
3,552,262
Earnings (Loss) per Share Attributable to Common Stockholders
Basic Earnings (Loss) per Share
$
(0.15)
$
0.65
$
(0.16)
$
0.07
Diluted Earnings (Loss) per Share
$
(0.15)
$
0.24
$
(0.16)
$
0.03
Weighted Average Number of Shares Outstanding – Basic
60,538,317
49,178,494
57,999,461
49,178,494
Weighted Average Number of Shares Outstanding – Diluted
60,538,317
133,481,667
57,999,461
133,481,667
Comprehensive Income (Loss)
$
(6,607,524)
$
33,840,983
$
(4,862,202)
$
7,062,281
MEDICINE MAN TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2023 and 2022 Expressed in U.S. Dollars
For the Six Months Ended
June 30,
2023
2022
(Unaudited)
(Unaudited)
Cash Flows from Operating Activities:
Net Income (Loss) for the Period
$
(4,862,202)
$
7,062,281
Adjustments to Reconcile Net Income (Loss) to Cash for Operating Activities
Depreciation & Amortization
10,826,289
1,553,817
Non-Cash Interest Expense
1,992,280
2,165,366
Non-Cash Lease Expense
3,316,171
4,705,059
Deferred Taxes
(324,039)
–
Change in Derivative Liabilities
(9,969,768)
(23,288,292)
Amortization of Debt Issuance Costs
843,025
843,025
Amortization of Debt Discount
4,088,319
3,590,017
(Gain) Loss on Investments, net
(1,816)
13,813
Stock Based Compensation
3,060,235
776,917
Changes in Operating Assets & Liabilities (net of Acquired Amounts):
Accounts Receivable
(923,614)
(1,689,914)
Inventory
(5,937,100)
3,924,172
Prepaid Expenses & Other Current Assets
(909,663)
(5,219,898)
Other Assets
304,451
(185,589)
Change in Operating Lease Liabilities
(2,661,202)
(8,873,051)
Accounts Payable & Other Liabilities
(3,853,458)
5,922,458
Income Taxes Payable
6,815,662
(1,163,770)
Net Cash Provided by (Used in) Operating Activities
1,803,570
(9,863,589)
Cash Flows from Investing Activities:
Collection of Notes Receivable
10,631
–
Cash Consideration for Acquisition of Business, net of Cash Acquired
(15,834,378)
(56,875,923)
Purchase of Fixed Assets
(4,704,093)
(7,076,116)
Purchase of Intangible Assets
–
(2,825)
Net Cash Provided by (Used in) Investing Activities
(20,527,840)
(63,954,864)
Cash Flows from Financing Activities:
Payment on Notes Payable
(750,000)
–
Proceeds from Issuance of Common Stock, net of Issuance Costs
397,116
1,280,660
Net Cash Provided by (Used in) Financing Activities
(352,884)
1,280,660
Net (Decrease) in Cash & Cash Equivalents
(19,077,154)
(72,537,793)
Cash & Cash Equivalents at Beginning of Period
38,949,253
106,400,216
Cash & Cash Equivalents at End of Period
$
19,872,099
$
33,862,423
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest
$
10,931,090
$
9,004,575
MEDICINE MAN TECHNOLOGIES, INC. ADJUSTED EBITDA RECONCILIATION (NON-GAAP) For the Three and Six Months Ended June 30, 2023 and 2022 Expressed in U.S. Dollars
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
Net Income (Loss)
$
(6,607,524)
$
33,840,983
$
(4,862,202)
$
7,062,281
Interest Expense, net
7,890,439
7,489,205
15,636,294
14,791,459
Provision for Income Taxes
5,142,559
4,405,962
9,804,737
5,665,856
Other (Income) Expense, net of Interest Expense
(1,468,083)
(36,700,500)
(9,971,584)
(23,274,486)
Depreciation & Amortization
3,865,190
2,960,603
10,478,004
5,506,627
Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) (non-GAAP)
$
8,822,581
$
11,996,253
$
21,085,249
$
9,751,737
Non-Cash Stock Compensation
2,845,691
697,842
3,060,235
1,688,925
Deal Related Expenses
733,718
1,656,529
1,929,520
3,913,463
Capital Raise Related Expenses
–
41,312
35,068
605,632
Inventory Adjustment to Fair Market Value for
Purchase Accounting
–
246,613
–
6,507,047
Severance
185,681
44,537
304,117
49,102
Retention Program Expenses
115,000
–
395,632
–
Employee Relocation Expenses
26,468
332
52,175
19,110
Other Non-Recurring Items
1,085,005
338,050
1,477,028
334,632
Adjusted EBITDA (non-GAAP)
$
13,814,144
$
15,021,468
$
28,339,024
$
22,869,648
Revenue
42,375,100
44,263,392
82,376,036
76,040,946
Adjusted EBITDA Percent
32.6 %
33.9 %
34.4 %
30.1 %
MEDICINE MAN TECHNOLOGIES, INC. OPERATING WORKING CAPITAL RECONCILIATION (NON-GAAP) For the Periods Ended June 30, 2023 and December 31, 2022 Expressed in U.S. Dollars
For the Third Time This Year, Investors Get to Peak Behind the “Smart Money” Curtain
What’s smart money doing?
If retail investors weren’t always eager to know what hedge fund managers, corporate insiders, and others building positions in a stock have been doing, shows like CNBC’s Closing Bell, news sources like Investors Business Daily, and communities like Seeking Alpha would get far less attention. Next week, the most followed institutional investors are expected to make their quarter-end holdings public. This will usher in a lot of buzz around the surprise changes in holdings and even short positions in celebrity investor portfolios.
Popular SEC Filings
The most popular SEC filings from the supposed “smart money” that small investors look to for ideas are:
Form 13D – This is a filing that is required to be made by any person or group that acquires 5% or more of a company’s voting securities. The filing must disclose the person’s or group’s intentions with respect to the company, such as whether they plan to take control of the company or simply invest in it.
Investors may recall Elon Musk’s accumulation of Twitter shares was incorrectly filed on form 13-G which is for passive investors. He later had to amend his filing on 13D as his accumulation of shares was discovered to be predatory.
Form 4 – This is a filing that is required to be made by any officer, director, or 10% shareholder of a company when they buy or sell shares of the company’s stock. The filing must disclose the number of shares bought or sold, the price per share, and the date of the transaction.
This is the filing that the public used to discover that in 2021, Mark Zuckerberg sold Meta (META) shares (Facebook) almost daily for a total of $4.1 billion. The same year Jeff Bezos sold $8.8 billion worth of Amazon (AMZN) stock, mostly during the month of November.
Both of the filing types mentioned above are as needed, they don’t have a recurring season. However, another popular filing is form 13-F, these much anticipated filings occur four times each year.
Form 13F – This is a quarterly report that is required to be filed by institutional investment managers with at least $100 million in assets under management. The report discloses the manager’s equity and other public securities, including the number of shares held, the CUSIP number, and the market value.
Investors will pour over the quarter-end snapshot of the account and measure changes from the prior quarter, especially from investors like Warren Buffett, Bill Ackman, and Cathie Wood for insights. When Michael Burry filed his 13-F in mid May 2022, he had a position showing that he was short Apple (AAPL). Headlines erupted across news sources, and this certainly had an impact on the tech company’s stock price as other investors questioned its high valuation against any positions they may have had.
The Consistency of the 13-F
The SEC 13-F is a regular filing for large funds. Interested investors can generally mark their calendars for when a funds 13-F will be released. The SEC requires a quarterly report filed no later than 45 days from the calendar quarter’s ends. Most popular managers wait until the last minute, as they may not be so eager to share their funds positions any sooner than needed. This means that most 13-F filings are on February 15 (or before), May 15 (or before), August 15 (or before), and November 15 (or before). In 2023, August 15th is next Tuesday. During the second quarter of 2023 there seemed to have been significant sector rotation, and a reduction in short positions among large funds. This will make for above average interest.
Famous Investors that file a Form 13F
The legendary investor Warren Buffett is the CEO of Berkshire Hathaway. His company’s Form 13F filings are closely watched by investors around the world.
Warren Buffett, last filed a 13-F on May 15, 2023
Ray Dalio is the founder of Bridgewater Associates, one of the world’s largest hedge funds. His company’s Form 13F filings are also very popular with investors.
Ray Dalio, founder of Bridgewater Associates, last filed a 13-F on May 15, 2023
Michael Burry is the investor who famously bet against the housing market in the lead-up to the 2008 financial crisis. His company’s Form 13F filings are often seen as positions of a highly regarded contrarian.
Dr. Michael Burry, last filed a 13-F on May 15, 2023
Cathie Wood is the CEO of ARK Invest, a firm that invests in disruptive technologies. Her company’s Form 13F filings are often seen as a bellwether for the future of technology. Wood is always open and transparent about her funds holdings. This may explain why she is among the earliest filers after each quarter-end.
Cathie Wood, last filed a 13-F on July 10, 2023 for the second quarter ended June 31, 2023
Drawbacks to Using Form 13F
While Form 13F filings can be a valuable source of information for investors, it isn’t magic. And if it is going to weigh heavily as part of an investor’s selection process, some drawbacks should be considered.
The information is delayed: Form 13F filings are not real-time information. They are usually filed 45 days after the end of the quarter, so the information is already outdated by the time it is available to the public.
The information is not complete: Form 13F filings only disclose the top 10 holdings of each fund. This means that investors do not have a complete picture of the fund’s portfolio.
It is not always clear if a position is based on expectations for the one holding, or should be viewed in light of the full portfolio, balancing risk and potential reward. For example, an investment manager may be bullish on tech and long a tech megacap with a lower than average P/E ratio and as of the same filing, short a similar amount of a tech megacap with a higher P/E ratio. The fund manager may be bullish on both, and the nature of the positions may indicate an expectation that the P/E ratios are likely to move toward a similar ratio. If there is just a focus on one side (long or short), the investor may read the intentions or expectations wrong.
Take Away
As earnings season fades, the third week in August will provide a mountain of information on what institutional investors were doing during the second quarter. This is a great place to find ideas and understand any changes in flows.
Investors should be cautioned that this is only a June 30th snap shot, and these holdings may have changed days later.’
Equity Research Allows Investors to More Confidently Step Away from the Growing Index Valuations
Hedge Fund Managers Michael Burry and Bill Ackman have expressed deep concern over indexed funds for a years and for different reasons. Burry primarily fears a bubble growing, and Ackman agrees but also fears investors are giving away control to parties that may not have their best interests at heart. Both make understandable cases. Below we discuss the overall concerns and how an individual investor who shares their concerns may “hedge” their portfolio against these risks.
Michael Burry
“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Michael Burry told Bloomberg News in August of 2019. “Orphaned” presumably refers to a lack of attention now paid to this market segment.
Burry’s concerns centered around the idea that the rise of passive investing could lead to distortions in the stock market. He believed that as more and more investors put their money into indexed funds, the valuations of the companies included in those indices might become disconnected from their underlying fundamentals as fund managers were required to own the index at the established weighting. In his view, this could create a bubble-like situation where certain stocks are overvalued due to indiscriminate buying driven by the popularity of index funds.
While many view this hedge fund manager, made most famous by the movie The Big Short, as a pessimist, it is easy to think of him as an optimist finding opportunity, even where there could be trouble.
As he discussed then, the rush into indexed funds has punished small cap value stocks. Burry also highlighted, “There is all this opportunity, but so few active managers.”
Bill Ackman
“We believe that it is axiomatic that while capital flows will drive market values in the short term, valuations will drive market values over the long term. As a result, large and growing inflows to index funds, coupled with their market-cap driven allocation policies, drive index component valuations upwards and reduce their potential long-term rates of return,” according to Bill Ackman in a statement which agrees with Burry’s thoughts. Bull Bill Ackman also sees another risk.
In a letter to shareholders earlier this year, the activist investor, and big boss at Pershing Square Capital, made the point that the passive funds not only follow indexes but encourage active managers to stay close to the index where investors pay for active management, but get index-like results because the fund company fears shareholder reaction if returns deviates sharply from the index benchmark.
More telling is Ackaman’s fear of proxy votes and other governance taken out the hands of the masses and bestowed on so few. Ackman believes that passive managers like Vanguard, BlackRock, and State Street hurt investors by concentrating corporate power in a small group of players “who get larger by the minute.” With 20% or more of fund flows headed to an indexed fund or ETF, Ackman wonders who will “look out for one another’s interests?”
Actively Managed and Self-Directed Investing
The Nasdaq 100 index just reorganized in order to lessen potential risks to being overweighted in a few stocks. Surrounding this event and through the years there has been no shortage of discussion around index bubbles and why some see indexes as an eventual train wreck:
“Is There an Index Fund Bubble?” (Bloomberg, September 4, 2019)
“The Index Fund Bubble Is Coming” (The Motley Fool, January 23, 2020)
“Is the Index Fund Bubble About to Burst?” (Investopedia, March 11, 2021)
“The Index Fund Bubble Is Real, and It’s Going to Burst” (MarketWatch, April 20, 2022)
“The Index Fund Bubble Is Even Bigger Than You Think” (Barron’s, May 23, 2023)
And there is also fear in the consolidation of power into the hands of a few fund companies that could impact all of us more subtly.
While index fund investing is growing in popularity and has been rewarding, investors can prepare by scaling down these investments and making their own selections, weighting their portfolio in a way that makes more sense in light of the risks to them. This could include seeking managed funds with a manager that has a good track record over the years, but it also may mean adding stocks that are not well represented in major indexes. Investors like to use Morningstar for fund selection, for stocks information including excellent research on what Burry termed “small-cap value stocks,” and other small and microcap offerings is likely found on Channelchek.
Informed Decision-Making: Equity research reports provide detailed analysis and insights about a company’s financial performance, industry trends, competitive landscape, and growth prospects. Investors may save weeks putting together enough information to believe they understand an opportunity enough to make a decision.
Valuation Insights: Research reports will include valuation models that estimate a company’s intrinsic value. This can help investors understand whether a stock is overvalued, undervalued, or fairly priced, guiding their buy, sell, or hold decisions. Some research will actually provide an analyst’s price target.
Risk Assessment: Equity research reports assess the risks associated with an investment. This could include factors like regulatory changes, industry volatility, management quality, and financial stability. Understanding these risks helps investors manage their portfolios effectively.
Industry and Market Trends: Research reports not only focus on individual companies but also provide insights into broader industry trends and market dynamics. Investors can gain a better understanding of how macroeconomic factors might impact their investments.
Company Performance Analysis: Detailed financial analysis in these reports helps investors understand a company’s revenue streams, profit margins, debt levels, and growth potential. This information is crucial for evaluating a company’s overall financial health.
Competitive Landscape: Equity research reports often compare a company’s performance to its competitors. This analysis helps investors gauge a company’s competitive position within its industry.
Long-Term Investment Strategy: Investors with a long-term perspective can benefit from equity research by identifying companies with strong growth potential, sustainable competitive advantages, and solid management teams.
Industry Diversification: Research reports can make it easier for investors to diversify holdings by defining the category the company is in and even highlighting opportunities in various sectors or industries.
News Interpretation: Equity research reports can provide context and interpretation for press releases and other news including, earnings releases, and developments related to the company. This helps investors understand the potential impact on the stock price.
Investor Growth: For novice investors, equity research reports can provide valuable insights into how professionals analyze stocks and make investment decisions, enhancing their investment knowledge over time.
It’s important to note that equity research reports are typically produced by financial analysts working for brokerage firms, investment banks, or independent research firms. Investors should exercise critical thinking and compare and contrast multiple sources of information.
Take Away
Credible professional investors make the case that the surging assets in index funds are leading to a bubble. There is also concern that control is taken out of the hands of individuals and placed in the hands of a few large companies whose corporate interests may not match individual investor interests.
Taking back control of the management of one’s portfolio may seem daunting, but quality equity research is a tool that can serve to help the selection process while at the same time increasing the self-directed investors’ understanding of what is important to watch. Channelchek is a no-cost platform leading the way in North America, providing company-sponsored research on small and microcap stocks.
Individual stock investors may also wish to consider attending NobleCon19, in December. This investment conference is widely recognized as the place investors go to discover small emerging companies that they may act upon through their traditional brokerage account. Discover more about about NobleCon19 here.
DLH delivers improved health and readiness solutions for federal programs through research, development, and innovative care processes. The Company’s experts in public health, performance evaluation, and health operations solve the complex problems faced by civilian and military customers alike, leveraging digital transformation, artificial intelligence, advanced analytics, cloud-based applications, telehealth systems, and more. With over 2,300 employees dedicated to the idea that “Your Mission is Our Passion,” DLH brings a unique combination of government sector experience, proven methodology, and unwavering commitment to public health to improve the lives of millions. For more information, visit www.DLHcorp.com.
Joe Gomes, Managing Director, Equity Research Analyst, Generalist , Noble Capital Markets, Inc.
Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
3Q Results. DLH posted revenue of $102.2 million from $66.4 million last year. Excluding FEMA (negative $5.1 million impact), revenue last year was $71.6 million. GRSi contributed $34.4 million towards revenue which indicates core business decreasing $3.8 million y-o-y. Net income for DLH was $1.7 million, or $0.12 per diluted share, compared to $4.9 million, or $0.34 per share, last year. EBITDA was at $11.4 million versus $9.0 million in the prior year. We had estimated revenue of $102 million, adjusted EBITDA of $11 million, and EPS of $0.10.
Other Key Indicators. DLH produced $15.0 million in operating cash in the quarter and had cash of $0.5 million and debt outstanding under its credit facilities of $195.8 million as of June 30, 2023. The Company paid off $8.4 million of debt from the previous quarter, and the Company lowered the range on its pace to reduce its total debt balance to between $185.0-$187 million from $185.0-$190 million by the end of this fiscal year.
Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
How Does Additional Equity Financing Affect Existing Shareholders?
Fitch Ratings was able to do for interest rates what the Federal Reserve has been looking to do for almost two years, increase them out along the yield curve. And this changes corporate finance in a way that impacts stock market investors. The ten-year US Treasury Note has gained nearly 0.25% since Monday July 31 as a result of the Fitch credit downgrade and big-name firms like Bank of America forecasting a soft landing. Some companies looking to grow through increased financing are now faced with either substantially increased borrowing costs or going to the equity markets and diluting shareholder value. How should shareholders look at share dilution considering today’s cost of money?
Equity Financing
Try to picture management of a company you are invested in that decides it needs funds to to either expand its operations, get out in front of competitors in new and growing markets, or even ease its financial burdens. Borrowing in the public markets, when possible, is much more expensive for a public company today. This is why investors can expect more equity financing, by management offering shares not in circulation of the company to investors under today’s conditions.
The problem with this is that there is an immediate mathematical reaction. For simplicity, imagine you’re a shareholder in a company with 10% ownership. Suddenly, the company issues more shares, raising the total number in circulation. This increase creates a phenomenon known as share dilution. It dilutes your ownership percentage and, consequently, the value of your existing shares. This dilution can spark unease among investors, potentially leading to sell-offs in excess of the dilution.
On the day the shares are made available, the impact is real, long term shareholders that trust management may think of it as smart growth financing, but those in the company for a short trade may never realize the benefits of the company’s investment in growth.
As a company issues new shares, its earnings-per-share (EPS) – a measure of profitability – often takes a hit. Consider a company with 10 million shares and an EPS of $0.20. If it issues 5 million more shares, the total becomes 15 million shares. Even if profits stay steady, EPS drops to $0.13 due to the increased share count.
This EPS dip isn’t taken lightly; it can be viewed as reflecting shifts in a company’s financial health, affecting investor perceptions and the stock price.
Stock Price Impact
An EPS drop from equity financing can initially dampen stock prices. Yet, it’s not a one-size-fits-all scenario. If a company uses the raised capital as an investment in the future by paying off debt or fueling strategic growth, a more positive outcome than not financing in this way can occur. Later, share prices might climb, reflecting optimism about the company’s future potential.
In contrast, if a struggling company resorts to equity financing as a last resort, stock prices might continue their downward trajectory, signaling financial instability.
Key Considerations
Deciding when to issue additional shares is a strategic move that companies carefully consider based on their financial needs, growth plans, market conditions, and investor sentiment. Here are some key factors that companies often take into account when making this decision:
Capital Requirements: Companies assess their current financial needs, including expansion plans, research and development, debt repayment, acquisitions, and working capital. If traditional financing options like bank loans or internal reserves are insufficient or less favorable, issuing additional shares might be considered.
Growth Opportunities: If a company identifies significant growth opportunities that require substantial capital infusion, issuing additional shares could be an effective way to fund those initiatives. This could involve entering new markets, launching new product lines, or investing in innovative technologies.
Market Conditions: Companies closely monitor the overall stock market conditions and investor sentiment. If the market is favorable and investor confidence is high, issuing new shares might be more likely to garner positive reception and minimize potential dilution concerns.
Debt Management: If a company aims to reduce its debt burden, it might issue new shares to raise capital for paying off loans or bonds. This can improve the company’s debt-to-equity ratio and overall financial stability.
Investor Demand: If there is strong demand from institutional investors or strategic partners to invest in the company, it might signal a good opportunity to issue additional shares. This can also boost the company’s credibility and valuation.
Valuation Considerations: Companies assess their current stock valuation and evaluate whether issuing new shares is likely to be accretive or dilutive to existing shareholders. If the company’s stock is trading at a relatively high valuation, issuing shares might be more attractive.
Investor Communication: Open and transparent communication with existing shareholders is vital. Companies often engage with their investor base to gauge their opinions on potential equity financing and address concerns.
Regulatory Considerations: The regulatory environment and legal requirements related to equity issuance need to be taken into account. Companies must comply with securities regulations and fulfill disclosure obligations.
Timing: Timing is an important ingredient. Companies aim to issue shares when market conditions are favorable and the company’s financial performance is strong. However, they must also balance this with their immediate needs and long-term goals.
Alternatives to Equity Financing: Companies explore other financing options, such as debt issuance, venture capital, private equity, or strategic partnerships. They compare these options to issuing additional shares and choose the one that aligns best with their goals.
Management’s Vision:The company’s management team plays a crucial role in the decision. They consider the company’s long-term vision, strategic goals, and the potential impact of issuing additional shares on the company’s future prospects.
The decision to issue additional shares involves management’s comprehensive evaluation of the company’s financial situation, growth prospects, market conditions, and investor sentiment. It’s a strategic move that requires careful analysis to balance the company’s short-term and long-term objectives while considering the potential impact on existing shareholders. Investors that trust management to do what is best are more comfortable with these financial decisions than those either distrusting or unfamiliar with affirms management.
Tesla as an Example
The case of Tesla (TSLA) exemplifies the nuances of equity financing. In February 2020, Tesla announced plans to issue 2.65 million equity shares. The funds were intended to enhance the company’s financial position and support various initiatives. While this move could have triggered concerns about share dilution, Tesla’s clear plan and CEO Elon Musk’s commitment to invest in these shares painted a positive picture.
Take Away
Additional equity financing is a complex decision for companies that could lead to different outcomes. Share dilution and EPS shifts can trigger investor reactions, impacting stock prices. However, a well-executed strategy can offer forward-looking investors a reason to be confident in their holdings or even a reason to increase their share number. Overall, understanding these dynamics is essential for investors and company stakeholders alike.
Cumulus Media (NASDAQ: CMLS) is an audio-first media company delivering premium content to over a quarter billion people every month — wherever and whenever they want it. Cumulus Media engages listeners with high-quality local programming through 406 owned-and-operated radio stations across 86 markets; delivers nationally-syndicated sports, news, talk, and entertainment programming from iconic brands including the NFL, the NCAA, the Masters, CNN, the AP, the Academy of Country Music Awards, and many other world-class partners across more than 9,500 affiliated stations through Westwood One, the largest audio network in America; and inspires listeners through the Cumulus Podcast Network, its rapidly growing network of original podcasts that are smart, entertaining and thought-provoking. Cumulus Media provides advertisers with personal connections, local impact and national reach through broadcast and on-demand digital, mobile, social, and voice-activated platforms, as well as integrated digital marketing services, powerful influencers, full-service audio solutions, industry-leading research and insights, and live event experiences. Cumulus Media is the only audio media company to provide marketers with local and national advertising performance guarantees. For more information visit www.cumulusmedia.com.
Michael Kupinski, Director of Research, Equity Research Analyst, Digital, Media & Technology , Noble Capital Markets, Inc.
Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Q2 operating results. The company reported quarterly revenue of $210.1 million, in line with our estimate of $208.3 million. While National/Network advertising remains weak, Local advertising has some greenshoots particularly with Digital Marketing Services revenue. Adj. EBITDA in the quarter was $28.7 million, beating our estimate of $21.8 million by an impressive 32%, excluding a $2 million nonrecurring benefit. The adj. EBITDA surprise was attributed to aggressive cost cutting efforts.
Positive DMS outlook. Digital Marketing Services performed strongly, with revenue up 21% in the latest quarter. Management believes there is significant untapped growth potential in local DMSand is tripling its salesforce. Management anticipates an increase of 3x to 4x its current revenue run rate of $40 million in the next few years.
Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.
This Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
This Trading Week – Earnings Reports are Likely to Set the Tone
Just over half of the companies in the S&P 500 have now reported second-quarter earnings. Of these companies, 80% have surprised on the high side with actual EPS above the average estimate – 4% have reported earnings equal to the average expectations. The reporting sectors beating estimates by the most are Information Technology at 93%, and Communication Services, which beat average estimates 92% of the time. Of sectors that beat the least often, Utilities and Financials were at the bottom of the list at 67% and 70%, respectively, surpassing average estimates. These are also above 50%, supporting strong stock markets.
The weaker US dollar has helped companies with more international exposure as these have had improved year-over-year earnings above those companies with a higher percentage of domestic revenue.
The markets are likely to focus on the earnings reports this week as economic releases will be slow. Stocks may also take its cue from interest rates that have been rising for longer duration US Treasuries.
Monday 7/31
• 9:45 AM ET, The Chicago Purchasing Managers Report is expected to improve 2 points in July to a still very weak 43.5 versus 41.5 in June, which was the tenth straight month of sub-50 contraction. Readings above 50 indicate an expanding business sector.
• 10:30 AM ET, The Dallas Fed Manufacturing Survey is expected to post a 15th straight negative score, at a consensus minus 22.5 in July versus minus 23.2 in June. The Dallas Survey gives a detailed look at Texas’ manufacturing sector, how busy it is, and where it is headed. Since manufacturing is a major sector of the economy, this report can greatly influence the markets.
Tuesday 8/1
• 9:45 AM ET, the final Purchasing Managers Index (PMI) for manufacturing for July is expected to come in at 49.0, unchanged from the mid-month flash to indicate marginal contraction (above 50 indicates expansion).
• 10:00 AM ET, Construction Spending for June is expected to rise a further 0.6 percent following May’s 0.9 percent increase that benefited from a sharp jump in residential spending.
• 10:00 AM ET, JOLTS (Job Openings and Labor Turnover Survey) still strong but slowing is the consensus for June as it is expected to ease 9.650 million from 9.824 million.
Wednesday 8/2
• 10:00 AM ET, New Home Sales are expected to slow after a much higher-than-expected 763,000 annualized rate in May. Junes are expected to have slowed to 727,000.
• 10:30 AM ET, The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.
Thursday 8/3
• 8:30 AM ET, Jobless Claims for the week ended July 30, 2023, are expected to come in at 225,000 versus 221,000 in the prior week. Claims have been moving lower in recent weeks. This is a classic case of where what might otherwise be considered worsening news (increased jobless claims) may be taken well by the market as tight labor markets are considered additive to inflation pressures.
• 8:30 AM ET, Productivity and Costs (nonfarm) is expected to rise at a 1.3 percent annualized rate in the second quarter versus 2.1 percent contraction in the first quarter. Unit labor costs, which rose 4.2 percent in the first quarter, are expected to rise to a 2.6 percent rate in the second quarter.
• 9:45 AM ET, PMI Services. Following Tuesday’s PMI Composite Final for manufacturing, which has been contracting, the Services Purchasing Managers Index is expected to indicate no change at 52.4 as the July final.
• 10:00 AM ET, Factory Orders are expected to rise 1.7 percent in June versus May’s 0.3 percent gain. Factory Orders is a leading indicator that economists and investors watch as it has been a fairly reliable indicator of future economic activity.
• 10:00 AM ET, The Institute for Supply Management (ISM) gauge is expected to have slowed to 53 from June’s 53.9 level. An ISM reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining.
• 4:30 AM ET, The Fed’s Balance Sheet is expected to have decreased by $31.208 billion to $8.243 trillion. Market participants and Fed watchers look to this weekly set of numbers to determine, among other things if the Fed is on track with its stated quantitative tightening (QT) plan.
Friday 8/4
• 8:30 AM ET, Employment Situation is expected to show that the unemployment rate unchanged at 3.6%, with a consensus for payrolls at 200,000 versus the 209,000 reported in June.
What Else
On Thursday quarterly results will be reported on Apple (AAPL) and Amazon (AMZN). The week will be the busiest one of the earnings season. About 30% of the S&P 500 will give their financial updates during the week, including Alphabet (GOOGL), Microsoft (MSFT), Meta (META), and Robinhood (HOOD). Several big pharma companies are getting ready to report, and it’s a big week for industrial companies and big oil as well.
We’re near the halfway point for Summer 2023. Have you signed up to receive Channelchek market-related news and analysis in your inbox? Now is a good time to make sure you don’t miss anything!
DENVER, July 26, 2023 /CNW/ – Medicine Man Technologies, Inc., operating as Schwazze, (OTCQX: SHWZ) (NEO: SHWZ) (“Schwazze” or the “Company”), will host a conference call on Wednesday, August 9, 2023 at 5:00 p.m. Eastern time to discuss its financial and operational results for the second quarter ended June 30, 2023. The Company’s results will be reported in a press release prior to the call.
The Schwazze management team will host the conference call, followed by a question-and-answer period. Interested parties may submit questions to the Company prior to the call by emailing ir@schwazze.com.
Date: Wednesday, August 9, 2023 Time: 5:00 p.m. Eastern time Toll-free dial-in: (888) 664-6383 International dial-in: (416) 764-8650 Conference ID: 70252888 Webcast: SHWZ Q2 2023 Earnings Call
The conference call will also be broadcast live and available for replay on the investor relations section of the Company’s website at https://ir.schwazze.com.
If you have any difficulty registering or connecting with the conference call, please contact Elevate IR at (720) 330-2829.
About Schwazze
Schwazze (OTCQX: SHWZ) (NEO: SHWZ) is building a premier vertically integrated regional cannabis company with assets in Colorado and New Mexico and will continue to take its operating system to other states where it can develop a differentiated regional leadership position. Schwazze is the parent company of a portfolio of leading cannabis businesses and brands spanning seed to sale. The Company is committed to unlocking the full potential of the cannabis plant to improve the human condition.
Schwazze is anchored by a high-performance culture that combines customer-centric thinking and data science to test, measure, and drive decisions and outcomes. The Company’s leadership team has deep expertise in retailing, wholesaling, and building consumer brands at Fortune 500 companies as well as in the cannabis sector. Schwazze is passionate about making a difference in our communities, promoting diversity and inclusion, and doing our part to incorporate climate-conscious best practices.
Medicine Man Technologies, Inc. was Schwazze’s former operating trade name. The corporate entity continues to be named Medicine Man Technologies, Inc. Schwazze derives its name from the pruning technique of a cannabis plant to enhance plant structure and promote healthy growth. To learn more about Schwazze, visit www.schwazze.com.
“We’re Not Finished Yet” According to the FOMC Post Meeting Statement
The Federal Open Market Committee (FOMC) voted to raise its target rate on overnight interest rates from 5.00% – 5.25% to 5.25%-5.50% after the July 2023 meeting. This 25 bp move follows a pause in rate hikes decided during the June meeting. The Fed still maintains a hawkish stance after raising the Fed Funds rate to its highest level in 22 years and leaving quantitative tightening (QT) targets unchanged.
The implementation note following the meeting spells out QT implementation to reduce the Fed’s balance sheet as:
“Roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.”
“Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.”
QT is an important part of the Federal Reserve Bank reducing the stimulus effect of having injected, through quantitative easing (QE), substantial amounts of money into the U.S. economy.
Words in the statement, particularly those changed from the prior meeting, are placed under the spotlight. In June, the FOMC members felt the U.S. economy was “growing” at a “modest” pace. Now it sees “more growth”—at a “moderate” level. This indicates that they may believe they have a higher need to continue tightening credit conditions.
At the previous meeting a Summary of Economic Projections (SEP) for the Fed Funds Rate indicated the Fed expected two additional 25 bp increases. While no SEP is available after the July meeting, the view the economy has become stronger, would suggest that at a minimum, another 25 bp is likely.
The FOMC as the monetary policy arm of the Federal Reserve is, as it says, “data dependent” when determining what tightening or other moves may be appropriate in the future.
A Broad-Based Recovery in Shares of Internet & Digital Media Stocks
Despite macroeconomic headwinds that include higher interest rates, a regional banking crisis, elevated inflation and a war in Europe, the S&P 500 powered higher for the third quarter in a row. The S&P 500 Index continued its streak of steady increases, with an 8% increase in the Index in 2Q 2023, which followed a 7% increase in 1Q 2023 and a 7% increase in 4Q 2022. The broad index is up a healthy 24% since the end of the third quarter of 2022. The S&P 500 bottomed on October 12, 2022, and is up 26% from that date through mid-July.
The S&P 500’s performance was driven primarily by its largest constituents. As a market weighted index, the largest stocks have an outsized impact on its performance, and that was certainly the case in 2Q. Eight of the largest stocks in the S&P 500 Index were up in 2Q 2023 by 2x-3x or more than the Index’s 8% gain. Stocks that powered the Index higher included Nvidia (NVDA, +52%), Meta Platforms (a.k.a Facebook, +META, +35%), Netflix (NFLX, +28%), Amazon (AMZN, +26%), Tesla (TSLA, +26%), Microsoft (MSFT, +18%), Apple (AAPL, +18%) and Google (GOOGL, +15%).
Noble’s Internet and Digital Media Indices, which are also market cap weighted, also powered higher thanks to the biggest constituents in their respective Indices. Each of these Indices posted double digital percent increases, with only the exception being Noble’s Video Gaming Index (+5%), which slightly underperformed the broader market/S&P Index. For the second quarter in a row, the best performing index was Noble’s Social Media Index, which increased by 34% in 2Q 2023, followed by Noble’s Ad Tech Index (+24%), MarTech Index (+18%), Digital Media Index (+16%), and Video Gaming Index (+5%).
STOCK MARKET PERFORMANCE: INTERNET AND DIGITAL MEDIA
Meta Powers the Social Media Index Higher
We attribute the strength of the Social Media Index to its largest constituent, Meta Platforms, whoseshares increased by 35% in the second quarter. We noted last quarter that Meta appeared to be returning to its roots and focusing on profitability, rather than its nascent and riskier web3 initiatives. That return to its core strengths has been greatly rewarded by investors. Shares of Meta were up 225% from its 52-week low of $88.09 per share in early November through the end of June. Shares are up another 8% since the start of the third quarter with the launch of Threads, Meta’s answer to Twitter. Over 100 million people signed up for Threads within the first five days of its rollout. Meta has not yet begun to monetize this opportunity, but it will clearly add to its growth in coming quarters.
Ad Tech Stocks Embark on a Broad-Based Recovery Following a Difficult 2022
Noble’s AdTech Index increased by 24% in 2Q 2023, and this performance was very broad based, with 15 of the 24 stocks in the sector up, and a dozen of the stocks up by double digits. Ad Tech stocks that performed best during the quarter include Applovin (APP, +63%), Magnite (MGNI, +47%), Tremor International (TRMR, +37%), Pubmatic (PUBM, +32%), Double Verify (DV, +29%), The Trade Desk (+27%), and Integral Ad Science (IAS, +26%). Ad Tech stocks were the worst performing sector in our universe in 2022, with the index down 63% for the year in 2022. The strong performance in 2Q 2023 in many respects reflects a bounce back off multi-year lows for several stocks. Year-to-date, one standout in particular is Integral Ad Science, whose shares were up 104% in the first half of 2023. The company continues to expand its product suite, scale its social media offerings (i.e., for TikTok) and is well positioned to continue to benefit from the shift from linear TV to connected TV (CTV). The company is benefiting from new partnerships with YouTube and Netflix and shares likely benefited during the quarter from anticipation of the company’s mid-June analyst day presentation.
Noble’s MarTech Index was up 18%, with performance within the group also broad based. Thirteen of the 20 stocks in the Index were up in the quarter. MarTech stocks that performed best during the quarter include Cardlytics (CDLX, +86%), Shopify (SHOP, +35%), Live Ramp (RAMP, +30%), Adobe (ADBE, +27%), and Hubspot (NUBS, +24%). MarTech stocks were victims of their own success: the group traded at double digit revenue multiples in 2021, but the sector’s revenue multiples were more than halved in 2022. The group currently trades at 5.3x 2023E revenues, up from 4.1x 2023E revenues at the end of the first quarter, and 3.5x 2023E revenues at the start of the year.
Finally, the Digital Media Index was up 16% in 2Q 2023, and here again, the performance was broad based with 8 of the 12 stocks in the Index posting gains. Digital Media stocks that performed best during the quarter include Fubo TV (FUBO, +72%), Travelzoo (TZOO, +31%), Netflix (NFLX, +28%), Interactive Corp (IAC, +22%), and Spotify (SPOT, +20%). Year-to-date, the two best performing Digital Media stocks are Spotfiy (+103% YTD), which has shifted its priority to running a profitable company and took additional steps in 2Q to achieve it, for instance, by consolidating and streamlining several of its podcast company acquisitions from recent years. The second best performing Digital Media stock through the first half of the year was Travelzoo (TZOO), whose shares were up 77% in the first half of the year. The company continues to benefit from pent up demand that helped a surge in travel as the pandemic ebbed. Lodging and domestic travel demand rebounded first, but Travelzoo appears to be benefiting from cruises and international travel, where pent up demand took longer to recover.
2Q 2023 M&A – Global Deal Market Fell by 36% Year-Over-Year
According to Dealogic, global M&A fell by 36% to $733 billion in 1Q 2023 compared to $1.14 trillion in 2Q 2022, with high interest rates and a stand-off over the U.S. debt ceiling cited as reasons for caution in the M&A market. Uncertainty is the biggest issue impacting M&A. However, 2Q 2023 global M&A levels represent a 22% increase from 1Q 2023 global M&A of $601 billion in the first quarter of 2023.
In the U.S., M&A deal values decreased by 30% to $318 billion, while Europe and Asia Pacific volumes decreased by 49% and 24% respectively. Private equity buyouts have been particularly challenged with year-to-date values down 59% to $197 billion in the first half of the year, following a 56% decrease in 2Q 2023 vs. the year-ago period. It is difficult to tell how much the regional banking crisis in the U.S. played a role in these declines, but to the extent that regional banks play a role in middle market M&A, there is less credit available in the middle market, which has impacted valuations.
2Q 2023 Internet and Digital Media M&A – A Mixed Bag
Based on Noble’s analysis, deal making in the second quarter of 2023 in the Internet and Digital Media sectors slowed, but was surprisingly weaker on a year-over-year basis than on a quarter-over-quarter basis. The total number of deals we tracked in the Internet and Digital Media space actually increased to by 3% to 187 deals in 2Q 2023 compared to 181 deals in 2Q 2022. On a sequential basis, the total number of deals decreased by 7% compared to 202 deals in the first quarter of 2023.
The biggest change was in the second quarter’s M&A deal value, where the total dollar value of deals fell by 82% to $17.0 billion of announced deals in 2Q 2023 compared to $95.5 billion in announced deals in 2Q 2022. While total deal value of announced deals decreased significantly year-over-year, on a sequential basis, deal value increased by 82% from $8.4 billion in deal value in 1Q 2023 to $17 billion in 2Q 2023.
From a deal volume perspective, the most active sectors we tracked were Digital Content (53 deals), MarTech (52 deals) and Agency & Analytics (40 deals). From a dollar value perspective, Digital Content led the way with $13.4 billion in transactions, followed by MarTech ($1.25 billion), Information Services ($1.23 billion) and eCommerce ($800 million). It was a very slow quarter for Ad Tech deals, where we tracked just 9 transactions for a total of $248 million.
Video Gaming Deals Drive the Largest Transactions in 2Q 2023
It is notable that we tracked 16 transactions that were greater than $100 million in dollar value during the quarter and half of those transactions were in the Digital Content sector. In fact, the four largest transactions in the quarter were digital content transactions, with two of these deals being in the video gaming sector: Savvy Games Group’s $4.9 billion acquisition of Scopely, and Light & Wonder’s (previously known as Scientific Games Corp) $849 million announcement that it would acquire SciPlay Corporation. The largest deals in the quarter by dollar value are shown below.
TRADITIONAL MEDIA COMMENTARY
The following is an excerpt from a recent note by Noble’s Media Equity Research Analyst Michael Kupinski
The Recession Is Here
The economy grew post pandemic through the first quarter of 2023, reflecting a rebounding economy, fueled by government spending. But, economic activity is slowing, taking pressure off of inflation. Nonetheless, the Fed seems intent on pushing interest rates higher, likely through the balance of this year. Most economists anticipate that the Fed will raise interest rates by 25 basis points two times in the second half of this year. Not only will the interest rate increases be a headwind for the economy, but government spending, a key driver to the economy this year, is likely to wane. Recent economic forecasts anticipate GDP to contract over the next few quarters, a classic definition of an economic recession. The Conference Board of Economic Forecasts anticipates that the US economy will contract -1.2% in 3Q 2023, -1.9% in 4Q 2023, and -1.1% in 1Q 2024.
This does not paint a favorable picture for advertising in the very near term. Advertising is highly correlated to personal disposable income, particularly discretionary income. If consumers have discretionary income, companies advertise in anticipation of consumer spending. Disposable income has declined over the past 18 months. Not surprisingly, economically sensitive national advertising has been down nearly 4 quarters and at high double digit rates. Given the significant declines, as much as 25% in each quarter for the past year, national advertising trends should moderate, given that the comps get easier. Even with an economic downturn becoming more visible, it is possible that national advertising declines may moderate.
National advertisers tend to spend when there is light toward the end of an economic recession, when consumer personal disposable income shows signs that it will improve and consumers have the propensity to spend. In our view, that light at the end of the tunnel is still pretty dim given the economic forecast that anticipates a decline in GDP through 1Q 2024. While the visibility of an improvement in national advertising seems to have improved as we enter an economic downturn, especially given the easing comps and the benefit from political advertising (expected to begin in 3Q 2023), we think that it is too early to be optimistic. We believe that the length and severity of an economic downturn is not yet visible.
STOCK MARKET PERFORMANCE: TRADITIONAL MEDIA
What does this mean for the stock market and for media stocks? The recent increases in Fed Funds rates had little effect on the general stock market as measured by the S&P 500 Index. Unfortunately, late cycle and economically sensitive media companies declined or under-performed the stock market. In spite of Fed Fund rate increases over the past year, the S&P 500 Index increased 18% in the last 12 months. The anticipation of an economic recession, however, weighed on media stocks.
The stock performance of the various media sectors generally under-performed the market. The exception to the poor performance were the Internet and Digital Media stocks, which had a broad-based recovery. Is it possible that early cycle media stocks will outperform the general market in the near term? In our view, yes, but, this may mean that the general market may decline as media stocks decline less. Historically, it has been the case to buy media stocks in the midst of a recession as media stocks strongly outperform the general market in an economic recovery. But given the likely disappointment in revenue in the coming quarters, it is likely that media stocks will be volatile as investors weigh the near-term revenue and earnings disappointments to the prospect of a revenue rebound in an improved economic scenario. This would suggest that if one were to try to time the stocks, investors may want to wait a quarter or two and buy on the improved momentum. This may mean that one might miss the large gains. For long-term investors, we believe that we are nearer to the bottom and that the downside appears relatively limited and valuations appear compelling. But, given the anticipated volatility in the near term, media investors should look for opportunistic purchases and accumulate positions in their favorite media names.
Traditional media stocks largely underperformed the general market over the LTM, the Radio sector was the hardest hit. The Noble Radio Index decreased 38% over the latest twelve months, compared with the general market increasing 18%, as measured by the S&P 500 over the same period. The Television Index was down 15% and the Publishing index outperformed the general market, increasing 28% over the last year. Notably, there were company stock performance disparities within each sector. Given the indices are market cap weighted, larger market capitalized companies skewed the indices’ performance.
The traditional media industry is still finding its footing in the difficult economic environment, given the indices performance in Q2. While the Newspaper and Radio indices performed better in Q2 than Q1, the TV Index did not. The S&P 500, increased 8% over the last quarter and outperformed all but one traditional media sector. The Newspaper Index, which increased 9% over the same period narrowly outperformed the general market. The TV Index was the hardest hit traditional media sector and decreased -11%. While the Radio index underperformed the market in Q2, it improved upon a difficult Q1 and increased 3%.
Broadcast Television
Are ad trends really improving?
The TV Index underperformed the general market in the second quarter. While none of the stocks in the TV Index increased in the second quarter, many performed better than the market cap weighted return of -11%. Fox Corporation (FOXA; was flat at 0%), E.W Scripps (SSP; down 33%), Nexstar (NXST; down 4%) and Gray Television (GTN; down 10%) were among the best performing stocks in the hard-hit TV index. The stocks hit the hardest in Q2 were Sinclair Broadcast Group (SBGI; down 20%) and Entravision (EVC; down 27%). Given the recent turmoil in TV stock performances we view the depressed prices as a potential opportunity given the prospect of an advertising recovery over the next few quarters.
While there have been some recent reports indicating that television advertising is improving, possibly related to increased political advertising and auto advertising in the third quarter, we remain skeptical that the improvement is sustainable given the weakening economy. Nonetheless, the TV stocks appear cheap.
From a valuation perspective, Paramount (PARA) trades well above industry peers such as Entravision (EVC) and E.W Scripps (SSP), which trade at multiples well below the industry high. While E.W Scripps had modest year over year revenue decline, we believe it will benefit from favorable retransmission renewal revenue and improved margins on said revenue. Given the SSP shares low float, the shares tend to underperform when industry is out of favor and overperform when the industry is back in favor. As for Entravision, we view the company’s digital transformation positively, given the shares are trading at a modest 3.9 times Enterprise Value to our 2024 Adj. EBITDA estimate we believe there is limited downside risk. In our view, the EVC shares and SSP shares both offer a favorable risk reward relationship and are poised to benefit from an advertising recovery.
Broadcast Radio
While the Radio Index underperformed the S&P 500 in Q2, it was an improvement from a difficult Q1. Notably, there were a few strong performances in the market cap weighted index. Beasley Broadcast Group (BBGI, up 24%) , Cumulus Media (CMLS, up 11%) and Townsquare (TSQ, up 49%) all strongly outperformed the S&P 500 in Q2. The largest stocks in the group did not perform well in the quarter skewing the index lower, Audacy (AUD, up 3%) and iHeart Media (IHRT; down 7%). The second quarter stock performances were a mixed bag and largely did not reflect the first quarter operating results. Most companies had modest revenue growth. The larger Radio companies that rely more on national advertising had the greatest declines of YoY revenue. With CMLS being the exception, the larger Radio companies underperformed relative to Radio companies with a stronger digital and highly localized presence.
Some Radio companies have strong digital businesses and highly localized footprints, which provides some shelter from weakness in national advertising. Those companies include Townsquare, Beasley Broadcast Group, Salem Media (SALM; down 12%) and Saga Communications (SGA, down 4%). While the shares of Saga Communications (SGA) were down 4%, the performance did not reflect its favorable first quarter operating results. Importantly, Saga grew revenues a modest 1.3% and had an above average Q1 EBITDA margin of 9.6%. Saga has a highly localized footprint, as approximately 90% of revenues come from local sources. Furthermore, the company has been placing more importance on growing a profitable digital business in recent years. While Saga’s Digital business is early in its development, management is focused on growing digital revenues from 7.5% of total revenue in Q1 to 20% of total revenue over the next couple years. Additionally, the company is likely to maintain a strong cash position given the economic uncertainty.
Townsquare Media (TSQ), Salem Media (SALM), Beasley Broadcast (BBGI) and Saga Communications (SGA) have all diversified their revenue streams, and while not immune to the economic headwinds, their digital businesses and local footprints should offer some ballast to the more sensitive radio business.
We believe that radio advertising pacings likely will be problematic in the second half given the economic headwinds. Unlike Television, the industry does not benefit as much from political advertising. We expect that advertising pacings likely will be lower in Q3 than the Q2 results. It is likely that many radio companies, especially those with higher debt leverage, will implement cost cutting measures. With many of the radio companies already relatively lean from the Pandemic, it is likely that such measures will be difficult.
Publishing
The Publishing industry is no exception to the advertising weakness that is impacting the broader media landscape. Revenues are likely to continue to decline, despite an already weak performance in the first quarter of the year. Revenue were predominantly negative in 1Q23. The advertising challenges are hitting the traditional print side of the publishing business hardest. For example, Lee Enterprises (LEE) reported a 10% decline in print advertising revenue in 1Q23, while digital advertising grew a modest 2%. The company’s adj. EBITDA generation fell 15% compared with a more moderate 2% drop in total company revenues.
Not surprisingly, the dampened industry revenue resulted in lower industry cash flow generation with EBITDA margins averaging in the 10% range. Yet despite the constraints on cash flow generation on Lee and the other Publishers, we believe the companies have the ability to cut costs to help offset the pressure on cash flow generation. In particular, companies could cut costs in their print manufacturing and distribution operations, reducing overhead in the same business segments where revenues are expected to lag. Publishing companies have a playbook on cutting legacy print costs and have the ability to maintain cash flow. However, cost cuts can take time to go into full effect, which could result in poor cash flow performance over the next quarter or so.
In spite of the nearer term economic headwinds impacting the operating performance of the industry, we believe that the industry is near an inflection point towards revenue growth. This dynamic is related to the degree of the recovery in its digital media businesses, a key driver to the industry’s overall revenue performance. While there are secular challenges to the industry’s print business, digital revenues account for an increasing portion of total revenues. For companies like Lee Enterprises, digital accounts for over 38% of total revenues in the most recent quarter. In our view, publishing companies will be a player in the advertising recovery as economic prospects improve.
Furthermore, we believe that stock valuations are compelling. The New York Times (NYT) trades well above the levels of the rest of its peers. In comparison, Lee and Gannett appear to be compelling. However, both Lee and Gannett are highly levered. Yet, in our view, Lee’s debt profile has several favorable characteristics, such as a fixed 9% annual rate, no fixed principal payments, no performance covenants and a 25-year maturity. LEE shares trade near 5.3 times enterprise value to our 2024 adj. EBITDA forecast, and with a favorable digital transformation of the business well underway, LEE shares could close the valuation gap with some of its higher trading peers.
This newsletter was prepared and provided by Noble Capital Markets, Inc. For any questions and/or requests regarding this news letter, please contact Chris Ensley
DISCLAIMER
All statements or opinions contained herein that include the words “ we”,“ or “ are solely the responsibility of NOBLE Capital Markets, Inc and do not necessarily reflect statements or opinions expressed by any person or party affiliated with companies mentioned in this report Any opinions expressed herein are subject to change without notice All information provided herein is based on public and non public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on their own appraisal of the implications and risks of such decision This publication is intended for information purposes only and shall not constitute an offer to buy/ sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice Past performance is not indicative of future results.
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Adam Aron Explains the Reasons Share Conversion and Issuance is Good for APE Shares
Meme stocks are getting attention again as the movie Dumb Money is set for release in late September, GameStop (GME) is implementing a strategy to use its stores as fulfillment centers, and AMC Theatres (AMC) has a court ruling on its APE shares that has added significant volatility, including a 67% upward spike after hours on Friday July 21. The AMC story is involved and likely to cause wide swings until resolved as investors wrestle with guessing what a new ruling means for the company’s financial strength, and whether the judge’s decision could be overturned on appeal or through shareholder approval.
The main source of the ongoing dramatic moves in AMC stems from its proposed APE shares conversion. These preferred shares were provided as a dividend with a 1:1 conversion feature. If/when converted to regular AMC shares, they will dilute the regular shares. When issued, APE shares were considered a brilliant financing mechanism and method to determine if any fraudulent units were used to create a naked short.
In late July a judge blocked the proposed settlement on AMC Entertainment Holdings stock conversion plan that would also allow the company to issue more shares. The stock had been depressed in anticipation of the additional shares that would have been created. With the thought that additional shares won’t be entering the market, common shares (AMC) soared, and preferred shares (plummeted).
The Delaware chief judge Morgan Zurn said in her ruling that she cannot approve the deal, which would provide AMC common stockholders with shares worth an estimated $129 million. The company was sued in February for allegedly rigging a shareholder vote that would allow the entertainment company to convert preferred stock to common stock and issue hundreds of millions of new shares. The investors who sued alleged AMC had enacted the plan to circumvent the will of common stock holders who opposed the company diluting their holdings.
Without the proposed settlement, common stockholders and preferred shareholders would end up owning 34.28% and 65.72% of AMC, respectively. Under the ruling, common stockholders and preferred shareholders would own 37.15% and 62.85%, respectively.
Judge Zurn wrote that while the deal would compensate common stockholders for the dilution, they had no right to settle potential claims by holders of preferred stock in this way. The settlement received more than 2,800 objections from shareholders, a level of interest Zurn called “unprecedented.” She said “AMC’s stockholder base is extraordinary,” adding many “care passionately about their stock ownership and the company.”
But what appears short term to be good for common shares, may actually weaken the financial position of the company over time according to AMC’s chairman. In an open letter, AMC chairman Adam Aron wrote, “What may not be clear to AMC’s shareholders is that if the company is unable to convert APE shares, AMC will be forced to issue significantly more APE shares to cover its upcoming cash requirements.”
Aron explained AMC is burning cash at an unsustainable rate and warned that an inability to raise capital could force the company into bankruptcy. Selling more shares would enable it to pay down some of its $5.1 billion in debt. These financial matters are further complicated by the writers and actors strike which according to Aron could delay the release of movies currently scheduled for 2024 and 2025.
A Social Security Funded Study Demonstrates the Benefit of Including Equities
Should all or part of Social Security be invested in the stock market? A study out this month by the Center of Retirement Research (CRR) at Boston College uses evidence from the U.S. and Canada that shows that investing in equities through government retirement funds is feasible, safe, and effective. In 1984, before he became the Chairman of the Federal Reserve, Alan Greenspan headed a commission on Social Security (S.S.). While he was positive on stocks used for a portion of S.S., it was not part of the commission’s recommendation. Since then, equity returns have averaged about twice that of S.S. investments in U.S. Treasuries.
According to CRR, “evidence from the U.S. and Canada shows that such investing through government retirement funds is feasible, safe, and effective.”
The Center for Retirement Research is a non-profit research institute that studies retirement income security. It was established in 1998 as part of the Retirement Research Consortium and is funded by the U.S. Social Security Administration. The CRR’s mission is to produce first-class research and educational tools and forge a strong link between the academic community and decision-makers in the public and private sectors. The CRR conducts a wide variety of research projects on topics such as Social Security, private pensions, annuities, and retirement savings. It also publishes a variety of research reports, data sets, and educational materials. Policymakers, academics, and the media widely cite the CRR’s research.
Background
The merits of investing a portion of the Social Security trust fund in equities have been discussed for decades. With potentially higher returns compared to safer assets, such as Treasury bonds, equity investments could potentially reduce the need for tax increases or benefit cuts to ensure the long-term solvency of the system. However, this approach also carries risks and raises concerns about government interference in private markets and misleading accounting practices that may give the impression that issuing bonds and buying equities can effortlessly generate wealth for the government.
There are real-world examples that one can point to that demonstrate that governments can engage in equity investments sensibly. Canada, for instance, has a large, actively managed fund that adheres to fiduciary standards and employs conservative return assumptions. In the United States, both the Railroad Retirement System and the Federal Thrift Savings Plan have invested in a diverse range of assets without disrupting private markets. In these cases, the government’s role is primarily passive.
Despite the demonstrated successes, the question remains whether equity investments should be considered as a solution for Social Security. The prerequisite for such an approach is a trust fund with substantial assets available for investment. Currently, the existing trust fund is being depleted, and the likelihood of raising taxes to rebuild it is low. Borrowing to rebuild the trust fund does not guarantee any additional resources for Social Security.
After the Greenspan amendments in 1983, which resolved the problem for a time with taxing S.S., future deficits began to reappear. President Clinton tasked the 1994-1996 Advisory Council on Social Security with considering options for achieving long-term solvency. The council could not reach a consensus on a single plan, and its members put forward three different proposals to close the funding gap, all of which included some form of equity investment. Two proposals involved individual accounts for equity investment, while the third recommended direct equity investment using a portion of the trust fund reserves.
The primary attraction of equity investment lies in its higher expected rate of return compared to safer assets like Treasury bonds or bills. By restoring balance to Social Security, the need for tax increases or benefit cuts could be reduced (see Table 1). Economists also argue that effective risk-sharing across a lifespan requires individuals to bear more financial risk when young and less when old. As young individuals possess limited financial assets, investing the trust fund in equities becomes a means to achieve this goal.
Table showing the average returns and standard deviation of different assets, 1928-2022
Critics expressed concerns that equity investment by Social Security could have adverse effects on the stock market and corporate decision-making while also creating the false perception that trading bonds for stocks yields magical money.
Addressing these concerns involves answering the following questions:
How significant is the equity investment initiative relative to the overall economy? According to a 2016 study, if Social Security had begun investing in the stock market in 1984 or 1997, it would now own approximately 4 percent of the market. For comparison, state and local pension plans currently hold about 5 percent of total equities.
How do government officials select investments? Proponents of equity investment for the trust fund assume that the government would take a passive role. However, the Canada Pension Plan and the Railroad Retirement system, as discussed later, adopt a more active approach.
Do government agencies use expected returns or risk-adjusted returns to evaluate the impact of equities on plan finances? Crediting expected returns quantifies the potential contribution of equities to addressing Social Security’s financing shortfall but may falsely suggest that the government can generate money simply by selling bonds and buying stocks. Adjusting for risk avoids this misperception by acknowledging that returns are not guaranteed, but the risk adjustment would yield no immediate impact from equity investment on the system’s finances. Higher returns are only recognized after they are realized.
Three Federal Government Plans with Equity Investments
The Canada Pension Plan is a major component of Canada’s retirement system, initially established in 1966 as a pay-as-you-go plan with a modest reserve, similar to the U.S. Social Security program. This approach was suitable when the country had a young population and rapidly growing wages. However, factors such as declining birth rates, longer life expectancies, and lower real wage growth led to increased plan costs and the prospect of rising payroll contribution rates.
To address intergenerational fairness and ensure the long-term financial sustainability of the plan, Canada enacted legislation in 1997. The legislation increased payroll contributions to projected long-term rates and introduced equity investments into the fund. Any future changes to the plan must be fully funded.
The investment strategy was implemented through the creation of the CPP Investment Board (CPPIB), a government-owned corporation that operates independently from the CPP itself and is managed at arm’s length from the government. The CPPIB’s mandate is to invest excess CPP revenues in a way that maximizes returns without incurring undue risk, solely for the benefit of CPP contributors and beneficiaries.
The CPPIB has built a diverse portfolio comprising stocks, bonds, real estate, infrastructure projects, and private equity (see Figure 1). As of 2023, the total assets amount to 570 billion CAD.
Pie chart showing the asset class composition of the Canada Pension Plan, as of March 31, 2023
To reduce risks associated with future Canadian economic and demographic conditions, the CPPIB diversifies its investments globally (see Figure 2). Therefore, the fund’s domestic investments are relatively small compared to the country’s GDP (2.8 trillion CAD) and stock market (3.9 trillion CAD).
Pie chart showing the geographic composition of the Canada Pension Plan assets, as of March 31, 2023
The CPPIB comprises six departments responsible for investing and managing the assets, employing highly compensated in-house managers. Over the past decade, the fund has achieved an annualized net return of 10 percent (see Figure 3).
Bar graph showing the net annualized nominal returns for the Canada Pension Plan by asset class, as of March 31, 2023
The CPPIB also considers economic, social, and governance factors in its investment decisions when managers believe that addressing these issues will generate superior long-term returns. The Board exercises proxy voting at annual meetings and encourages companies to consider climate risks and develop viable transition strategies. Rather than engaging in blanket divestment from high-emitting sectors, the managers believe in using the CPPIB’s influence constructively.
The Board assesses risk using a minimum and a target level. The base CPP’s minimum risk level consists of a portfolio divided equally between Canadian government bonds and global public equities. In 2016, legislation was passed that increased CPP contributions and benefits. The minimum risk levels for the additional component are slightly lower: 60 percent bonds and 40 percent global equities.
The actuarial reports adopt conservative return assumptions, as the actual investment earnings have consistently exceeded projected earnings. Under these prudent assumptions, both the base CPP and the additional CPP components have been projected to remain sustainable for a 75-year period. If the system’s finances are projected to be imbalanced, an additional safeguard triggers an increase in contribution rates and a freeze in benefit indexation if policymakers fail to address the projected imbalance.
The Canadian investment initiative has proven successful while addressing the concerns raised by critics. Investments represent a small share of the Canadian economy, adhere to strict fiduciary standards, and the assumed investment returns used for evaluating the solvency of the CPP are conservative.
U.S. Railroad Retirement System
The Railroad Retirement system was created by Congress in 1934 to assume responsibility for the rail industry’s ailing pension plan. Initially funded on a pay-as-you-go basis through payroll taxes on workers and employers, the program had a modest trust fund invested solely in government bonds. However, by the 1990s, the trust fund’s assets had grown to four times the annual outlays, reaching historically high levels. There was a belief that further growth could be achieved through equity investments, leading management and labor to negotiate a proposal for such investments. However, given that Railroad Retirement is a government program, the plan required congressional approval.
Congress expressed concerns about potential political influence on investment decisions. To address this, Congress established the National Retirement Investment Trust (NRRIT). The NRRIT comprises six trustees, with three selected by management and three by labor, who then choose a seventh independent trustee. Congress also imposed a private-sector fiduciary mandate on these trustees, requiring them to invest the government’s assets solely in the interest of plan participants. Initially, 65 percent of trust fund assets were allocated to equities. Over time, the NRRIT expanded its portfolio beyond equities to include real estate, private equity, and private debt. As of 2023, the net assets in the trust fund amounted to $27 billion. External managers handle the actual investing.
The evaluation of equity use in reform proposals raised a key issue. While the Social Security actuaries credit equities with their expected rate of return, the Office of Management and Budget, in assessing the financial implications of the Railroad Retirement proposal, disregarded the higher expected return and employed a risk-adjusted return—the long-term Treasury rate—to project future trust fund balances. Currently, the Railroad Retirement actuaries assume a 6.5-percent return, striking a balance between actual returns and a risk-adjusted rate.
Bar graph showing the Railroad Retirement Trust annualized returns, as of March 31, 2023
Federal Thrift Savings Plan
Established in 1986, the Federal Thrift Savings Plan (TSP) boasts 6.5 million participants and approximately $800 billion in assets. Concerns among members of Congress regarding potential executive branch pressure on plan fiduciaries to select investment options that align with its policy goals prompted the establishment of stringent safeguards.
The Federal Retirement Thrift Investment Board, responsible for administering the TSP, has limited discretion compared to other plan fiduciaries when setting investment policy. Congress determines the number and types of investment funds that the Board can offer, and any expansion or change requires congressional approval. When choosing benchmark indices for the investment funds, the Board is restricted to those that are widely recognized and reasonably represent the entire market. The Board is also prohibited from removing any stock from the index and categorically barred from using proxy voting power to influence corporate decision-making.
Francis Cavanaugh, the first executive director of the TSP’s Board, reported no difficulties in selecting an index or obtaining competitive bids from large index fund managers. He encountered no instances of government interference in the market. In essence, the TSP provides a model for structuring Social Security’s equity investment, with a passive approach through index funds and no proxy voting.
Does Equity Investments Make Sense in 2023?
In theory, the answer is “yes.” Plans that have adopted equity investments have consistently outperformed bond yields, even in the face of economic downturns such as the dot-com recession and the financial crisis. Concerning critics’ concerns, the experience of the TSP offers guidance on separating government intervention from actual investment decisions. Additionally, evaluating returns on a somewhat risk-adjusted basis, similar to the approach employed by the Railroad Retirement system, prevents the perception of easy money.
However, investing trust fund assets in equities necessitates a substantial trust fund. Unfortunately, the Social Security trust fund that emerged from the 1983 amendments is rapidly diminishing. Rebuilding the trust fund would require a tax increase to cover current program costs and generate an annual surplus to accumulate reserves.
Although such an initiative is not without precedent—the United States and Canada both raised payroll contributions above current program costs and accumulated fund assets—present circumstances differ significantly from those in 1983. The majority of cost increases lie in the past. Even if Congress were to raise the payroll tax rate by 4 percentage points starting in 2030—an amount roughly needed to cover benefits over the next 75 years—it would only result in minor temporary surpluses, followed by future cash-flow deficits. These surpluses would be less than 40 percent of those generated by the 1983 legislation
Line graph showing the U.S. Social Security income and cost rates as a percentage of taxable payroll, assuming a 4.0-percentage-point tax increase in 2030, 1980-2100
Considering the unlikelihood of Congress taking action well before 2030, the combination of current trust fund balances and immediate surpluses resulting from the tax increase would only lead to modest accumulation.
Furthermore, it is questionable whether there is enough political will to implement such measures, and the case for building a large trust fund is not particularly compelling. With costs projected to stabilize, it is challenging to argue that today’s workers should pay more to build a trust fund that will benefit future workers.
If Congress is unwilling to raise taxes sufficiently to create a substantial trust fund, could borrowing be a viable solution? One proposal suggests that the government borrow around $1.5 trillion to invest in stocks, private equity, and other instruments with higher expected returns than government debt interest. In the interim, the government would continue borrowing to cover Social Security’s shortfall. After 75 years, the trust fund proceeds could be used to repay the borrowed funds that financed benefit payments.
This proposal differs fundamentally from Canada’s approach, which involves contributing additional funds to build up a reserve for the future. On the contrary, creating a trust fund with borrowed money that the government must repay with interest means that any proceeds would be limited to returns exceeding the bond rate. Fixing Social Security requires genuine economic changes, such as benefit reductions or increased income. This proposal offers no real solutions except the opportunity to pocket returns exceeding the bond rate.
Critics liken this proposal to advising a middle-aged couple who realize they have insufficient retirement savings to not reduce their spending, plan for reduced expenses after retirement,
Take Away
The US Social Security System investing in equities through retirement program trust funds is a viable concept that has been proven feasible, safe, and effective in both Canada and the United States. So, in theory, this idea could have worked, but can it may be late to attempt now. This is because one critical component is now deficient. SS no longer has a sizable trust fund to invest. And rebuilding the trust fund through additional taxes or borrowing may not be feasible.
While the mechanics are manageable, the window may have passed for raising taxes enough to accumulate a meaningful Social Security trust fund that would make investing in equities worthwhile and prudent according to the CRR.
