David Pauly: Wall St's narrow vision is hitting firms in the wallet

Opinion

To understand why individual investors abandon the stock market, you only have to look at the indignities suffered last week by Amazon.com, McDonald's Corp and T. Rowe Price Group.

All three reported second-quarter profits that looked solid, especially considering the tepid growth of world economies. All three watched their stocks get whacked late last week because the results didn't measure up to Wall Street's narrow vision.

Amazon, which sells everything from books to electric shavers on the internet, was punished by the market for investing in its future. The company spent US$196 million ($267 million) in the quarter to build warehouses and centres that offer computer services to other businesses.

This was the second quarter in a row that the Seattle-based retailer had doubled its capital spending. If more companies would take advantage of the current economic lull to expand, the business outlook would pick up immediately - and the companies would be better prepared when growth accelerates.

But, moan Wall Street securities analysts, heavy spending hurts profits. While Amazon.com's second-quarter profit rose to 45 cents a share from 32c in the year-earlier period, it missed the average analyst estimate of 54c.

Analysts also said price cuts on Amazon's Kindle electronic reading device were bad news. Sorry. The real profit from Kindle won't be in its price but in the downloaded books device that owners will buy in the future.

Wall Street's shortsightedness prevailed on July 23 when Amazon shares fell as much as 12 per cent before closing down 1 per cent at US$118.87.

Folks who see McDonald's as a reasonable investment were no smarter, according to Wall Street wisdom. The biggest restaurant chain said its second-quarter profit rose 12 per cent to US$1.23 billion, or US$1.13 a share, as it continued to expand its menu away from hamburgers and french fries.

McDonald's frozen smoothies and frappes tempted customers during the recent heat wave that engulfed the US, helping the firm to increase sales in stores open 13 months or more by 4.8 per cent.

The chain may introduce other new products, such as frozen lemonade and hot oatmeal in the next year, says Mark Kalinowski, an analyst at Janney Montgomery Scott in New York. McDonald's also benefits from lack of competition, he says.

In the long run, that may be bad, but for now, though, lack of it helps McDonald's earnings. Why then did the company's shares drop 2.1 per cent to US$69.90 on July 23? Because the results were pretty much what analysts expected. No big upside. No momentum. No demand on Wall Street. No brains there, either.

Mutual-fund manager T. Rowe Price took in US$5.1 billion in new money in the quarter when rivals BlackRock and Janus Capital Group had net outflows.

What's more, Baltimore-based Price's profit rose to 59c a share from 38c in the year-earlier quarter and revenue surged 31 per cent to US$577 million.

The market put more emphasis on Price's failure to match the average analyst earnings estimate of 61c and chief executive James Kennedy's comment that investor inflows slowed after stock prices plummeted in May.

Price's stock dropped as much as 5.2 per cent on July 23 and closed down 3.2 per cent at $47.85.

The swings in stock prices no doubt are exacerbated by the computer-driven programmes that account for so much of today's trading.

The poor computers don't understand that today's spending will increase earnings in many quarters to come. But then, the machines are no smarter than the people who programme them.

- BLOOMBERG