The Individual vs. the State
A Trend in CEO Pay
One Sector that’s Thriving Today
---
The Individual vs. the State
My wife and I love vacationing in Europe; last month we spent 10 days in Puglia, the “heel” of the boot that is Italy.
The reason is pretty simple: there are very few European stocks that meet my criteria for investment. Either they’re not traded in the U.S., or the underlying companies are growing too slowly, or their charts are poor.
And that’s not surprising.
When you think of all the companies that are changing the world, you’ll come up with very few European names. Years ago Nokia (Finland) was a great stock, and more recently Teva Pharmaceuticals (Israel) and Elan Pharmaceuticals (Ireland) had good runs, but by and large, the greatest world-changing ideas come from the U.S.
And why?
Some people will say it’s our schools, others the intellectual climate in places like Silicon Valley and New York, and still others will cite the reduced red tape in the U.S., or more favorable tax laws. All of these are factors to some degree.
But it seems to me that one major reason is our country’s culture, which still values and rewards the rights and efforts of the individual as opposed to the state.
In 2011, a Pew survey asked both Americans and Europeans what was more important: “freedom to pursue life’s goals without state interference” or “state guarantees that nobody is in need.”
In the U.S., 58% of respondents said personal freedom was important, while in Europe, 62% of respondents said that state protection was more important.
Reflecting the priorities of the people, in Europe there is a more robust safety net, so that fewer people fall to the depths possible in the U.S.
At the same time, however, there’s less incentive to build a world-changing company.
There’s more security, but there’s less opportunity.
Here in the U.S., contrarily, there’s more opportunity, but less security.
But there is a nasty downside to the opportunities our country offers (including to people who immigrate from Europe and other countries) and it’s this: we are a very unequal country.
Inequality
The theme of inequality in the U.S. has been hot for a while and remains so, and I’m not going to delve into the numerous reasons here.
But I do want to focus on the aspect of CEO pay and a trend I see going on there.
In the U.S., the average CEO at an S&P 500 company earns roughly 300 times what the typical U.S. worker makes. In 1980, the multiple was 42. In other words, the trend has been toward greater inequality.
Now, it’s possible that CEOs have become seven times more effective than they were in 1980—but I doubt it. Instead, their increasingly enormous salaries reveal two things. One, that these companies, on the whole, are quite profitable. And two, that management as a whole (from compensation committees to boards of directors) has seen fit to boost salaries for the top executives far faster than for employees.
But there’s a movement afoot to halt the trend, a movement that gained steam when the heads of companies that were rescued in 2008-2009 economic collapse escaped unscathed with their multi-million dollar salaries intact.
Beginning in 2017, the SEC will require public companies to disclose the ratio of their CEO’s annual compensation and that of the median employee.
Companies with revenues of less than $50 million will be exempt, and there’s some wiggle-room about how the median is determined—up to 5% of employees outside the U.S. may be excluded from the calculation. But overall, the information should shed a little light on the situation and, by using shame as a motivation, rein in the trend toward ever-more-generous CEO compensation.
But will it also boost the median salary of the rank-and-file?
Will it be a statistic considered by institutional investors?
Will it make U.S. companies more like those in Europe?
If you have an opinion, I’d be happy to hear it.
For my part, I won’t change a thing. As I’ve told you many times, when it comes to investing in growth companies, the chart knows all, because it reflects the conclusions of everyone with a financial interest in the stock. So to the extent that these new CEO compensation ratio statistics matter, you will see their import reflected in the action of the stocks.
Moving to the market, as everyone knows, the broad market stinks. And the odds are that the situation will get worse before it gets better. That’s how long-term market tops work.
Nevertheless, there are still stocks hitting new highs, and those are where you want your money to be!
One recently strong sector has been the cruise line industry, which is thriving thanks to the millions of baby-boomers who are spending more and more money on leisure travel, particularly cruises. The industry is dominated by a few big players, and one of the standouts is Carnival Corp. (CCL), which hit a new high just over a week ago when rival Royal Caribbean reported earnings.
Here’s what Mike Cintolo wrote about Carnival in a recent issue of Cabot Top Ten Trader.
Carnival Corporation (CCL)
- “Carnival is one of the big dogs of the cruise industry, with more than 100 cruise ships operating under various brands like Carnival, Princess, Costa, Holland America and more. Frankly, the company hasn’t been as good a performer as some of its peers, as revenues and earnings have been relatively flat for the past five years, but better operational performance, lower fuel prices (down a whopping 37% in the latest quarter), some new ships hitting the water and a big expansion in China should help earnings surge in the quarters ahead. Analysts see the bottom line rising about 30% both this year and next. Carnival is the largest cruise operator in China, which isn’t just boosting revenues there but also creating relative scarcity in other markets as it sucks up cruise liners (hence boosting ticket prices). The company’s recent quarterly report was a good one, with earnings miles ahead of expectations, and the top brass said that rest-of-year bookings were well ahead of the pace from a year ago.”
Mike neglected to mention—mainly because Cabot Top Ten Trader is geared to short-term traders—that CCL pays a 2.3% annual dividend. But I think it’s important, particularly if this trade turns into a long-term investment. With only a few big players in the industry, Carnival’s long-term prospects are pretty solid.
But Mike did (as he does for all his recommendations) provide a thorough technical analysis of the stock.
Here’s what the daily chart looks like:
And, most important of all, he provided his readers with precise guidance about exactly where to buy the stock, as well as where to sell if the trade didn’t work out.
If you’d like to know exactly what that guidance was, subscribe here.
