Earlier this week, the heads of 181 major companies decided that maximizing shareholder value was no longer the main purpose of the modern corporation.
The redefined role—announced at a time when many people are worried about a recession and their portfolios—is promoting an economy that serves all Americans.
The new principles were memorialized in a Business Roundtable statement that could be called “woke capitalism.” If the rollout is handled properly, it might even convince some millennials—and members of the U.S. Congress—that corporations aren’t all evil.
Corporate leaders at companies such as Amazon.com (ticker: AMZN), Apple (AAPL), BlackRock (BLK) , and Walmart (WMT) signed the Roundtable’s statement on “the purpose of a corporation.” It’s great to know that masters of corporate politics recognize that others are struggling to get by, that hard work is often unrewarded, and that not enough is being done to help workers adjust to the changes.
The principles may even eventually help humanize companies and make them more appealing to millennials who like to invest with their values, unlike economist Milton Friedman, who thought that companies existed to maximize shareholder returns.
The only issue in the principles that merits monitoring by other investors is a nod to generating long-term value for shareholders. Some CEOs have fretted that focusing on short-term quarterly results interferes with their ability to focus on long-term issues that benefit the company. Should the Roundtable commit to changing the frequency of corporate earnings, or altering the basic relationship with investors, then a new day truly will have dawned.
Until then, anyone who wants to invest in a company that embodies the Roundtable’s new principles might consider Costco Wholesale (COST), the membership-only warehouse club. Its CEO wasn’t a Roundtable signatory, which is ironic since Costco has been criticized by Wall Street for paying workers too much and not doing enough to maximize earnings. The old complaints have subsided a bit as Costco’s stock gained some 35% this year, outperforming the S&P 500 index’s 17%.
Costco is often mentioned as a good, safe place to wait out the trade war. A recession could hammer the stock, but if belts tighten, then a lot can be said for buying in bulk and saving money.
A good, principled Roundtable-esque approach should involve a commitment to buying the stock on a decline and a willingness to be a long-term supporter. At the same time, there’s nothing wrong with profiting from a little short-term upside.
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The latter goal can be achieved by selling downside put options and buying upside calls. The truly just among you can even buy some stock, too. Timing is everything, especially as Costco is scheduled to report fourth-quarter earnings on Oct. 3.
When the stock was at $275.15, investors could sell Costco’s October $270 put for $7.10, and buy the October $280 call for $7.20. (Puts increase in value when the underlying security price declines, while calls increase in value when the underlying security price increases.) The so-called risk-reversal trade positions investors to buy stock at $270 and to benefit if the stock rallies above $280. During the past 52 weeks, the stock has ranged from $189.51 to $284.31.
The key risk to the trade is if the stock is below the put strike price at expiration, which could happen if earnings and future guidance are really bad or if the market gets pulverized by the trade war, an inverted yield curve, or recessionary fears. Should the stock be at $260, investors must buy the stock at $270 or cover the put at a much higher price.
If the trade goes sideways, embrace the social significance of your lost money. The people on the other side of your trade—America’s hardworking market makers—often struggle to get by. Lately, they’ve had difficulties making ends meet in this volatile, unpredictable market that has corporate leaders aligning themselves with social justice even as the U.S. president keeps tweeting about cutting interest rates.
Email: editors@barrons.com
https://www.barrons.com/articles/costco-is-the-most-woke-company-out-there-51566464401
2019-08-22 09:00:00Z
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