Beware the Illusion of Growth

If this quarter is flashing one big warning, for some companies it's the illusion of growth... Better yet, organic growth – or as my friends Bill Whiteside and Jeff Middleswart call it in a recent edition of their A Peek Behind the Numbers newsletter: "The Organic Growth Illusion." (They also run the independent long/short institutional […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Beware the Illusion of Growth By Herb Greenberg --------------------------------------------------------------- [Shocking true story about a beverage manager...]( A guy named Hal K. spent 30 years with Coke... including roles in general and revenue management, strategy, operations, marketing, and sales. It turns out, Hal figured out an investing secret. He discovered a special way to increase the value of his shares from $39,000 into $627,260. Hal did NOT use day trading, options, leverage or anything complicated. And the crazy part? Anyone could've gotten in with Hal for the chance at the same 1,588% returns. In this short message, Whitney reveals his “blueprint” to show his readers how they could profit from this opportunity [To get the "blueprint" for 10 times gains, go here now](. --------------------------------------------------------------- If this quarter is flashing one big warning, for some companies it's the illusion of growth... Better yet, organic growth – or as my friends Bill Whiteside and Jeff Middleswart call it in a recent edition of their A Peek Behind the Numbers newsletter: "[The Organic Growth Illusion]( (They also run the independent long/short institutional research firm Behind the Numbers.) Here we have company after company reporting better organic growth, but... is it really? As Bill and Jeff explain – and this was before the latest earnings deluge... Investors must always remember that organic growth is a function of volume growth plus price increase. And in many cases, as they point out, "all of the recently reported organic growth" comes from price increases while volume has evaporated. They cite such examples Conagra Brands (CAG), the protective product segment of Sealed Air (SEE), and the tools unit of Stanley Black & Decker (SWK). In the recent quarter, the trend hasn't just continued, but accelerated... Just consider a few earnings reports from last month... - Kimberly-Clark (KMB): Organic sales rose 5%, driven by a 10% increase in price and favorable product mix... while volume fell by 5%. - Procter & Gamble (PG): Organic sales were up more than 7%, aided by a 10-point boost from pricing... while volume slipped by 3 points. - Coca-Cola (KO): Organic revenues rose by 12%, mostly the result of pricing... while volume rose a mere 3%. - PepsiCo (PEP): Organic growth rose 12%, mostly the result of pricing... while volumes slipped by 2%. If you go through call after call, you'll notice something... Many companies are saying they're done or nearly done with price increases (at least for now). Either they're like Pepsi, which said it has already raised prices enough this year to cover higher costs... or McDonald's (MCD), which said customers are balking at the price hikes. In the words of McDonald's CEO Chris Kempczinski... The customer is certainly feeling, I think, some of the stress and pressures on that. More important, as he said... So things like did someone add fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down. All of which means that short of a sudden surge in demand, organic growth might start to sputter. Other companies, like Chipotle Mexican Grill (CMG), claim they have more pricing power than others... but even Chipotle said it plans to pause increases, at least for now. If the trend continues, something has got to give – like operating leverage, which can quickly shift into reverse... and thus take margins along for the ride. And I'm not even going to get into the more difficult comps a year out. Or the falling dominoes – as Bill and Jeff lay out so well in their newsletter – from rising inventories as orders started to fall. As one friend mused, "people forget how ugly things can get." Not to mention how fast it can happen. --------------------------------------------------------------- Recommended Link: # [Whitney Tilson says buy these 5 stocks TODAY]( For a limited time, Wall Street legend Whitney Tilson is sharing the details on a situation he's been following for years. It's an opportunity to take advantage of an $87 trillion wave of wealth that has already started affecting the stock market. The good news is Whitney has handpicked his five favorite ways to play this situation. And he urges that you get in today. [Click here to see his analysis on these five stocks](. --------------------------------------------------------------- Moving on, I'm a sucker for boring companies... One reason is that their executives often spend more time running their businesses than running their mouths. One example is Bel Fuse (BELFB), which makes electronic connectors. Or as my friend Bob Marcin of Marcin Asset Management said just over a year ago [when I first quoted him]( on the company... NOTHING has been more boring than that for the last 20 years. How boring? Just look at this product list from the home page of the company's website... That's not exactly the kind of stuff that makes headlines. When Bob first told me about Bel Fuse, I paused. With a $150 million market cap at the time, and so thin it generally trades by appointment, it was almost too risky to write about. The stock was just under $16 per share, but Bob insisted that even after it already had lifted 25% in the span of a few months, it was still cheap, in part based on what he thought was "considerable" margin upside. He also likes that the company's fairly new CFO "is a former investment banker from this industry who knows all the right ratios and companies from which to model Bel Fuse's price and cost structure." With 10% organic sales growth, the company seemed to be benefitting from the electrification of everything. As it turns out, after a few good quarters, Bel Fuse went on to more than double by earlier this year. Even after pulling back, it has still more than doubled. And after proclaiming yet another good quarter last week, Bel Fuse spiked 21% the very next day. As Bob – who tends not to mince words – [tweeted](... A real beat and raise, with 26% sales growth and 150% surge in EBITDA. This is not that META... beat [with a] 0% sandbag guide that turns into a 3% sale growth "blowout"... Bel is a big beneficiary of secular trend towards Electrification of Everything, EVs, IoT, and Data Center buildout for AI. All at 4x's EBITDA run rate. That valuation is crazy cheap if numbers continue to grow. Sell Meta and swap into Bel, the Fuse has been lit! Bel is still a microcap... still thinly traded... and still potentially too volatile. But while everybody else is firing, Bel Fuse has been hiring. That's because unlike so many speculative ideas these days, it's a real business with real products and what seemingly looks to be a real turnaround story. And the best part? It has nothing to do with artificial intelligence, generative or otherwise. Finally, in the [April 20 Empire Financial Daily]( I noted that while the world is getting more volatile, the market seemingly hasn't figured this out... The question was... why? Classically, the answer might be hiding in plain sight... Maybe it has to do with nothing more than a market that has been dominated by exchange-traded funds ("ETFs") and other large "passive" investors, which were flooded with regular inflows of cash from 401(k)s. That money, in turn, poured into the market, indiscriminately, month in, month out... but in the process created a false floor. There was a point, when I was doing short research, that we skirted companies whose holdings were dominated by big ETF investors for the simple reason that no matter how bad the numbers were or the model was, the only thing that would happen is that the stock would go higher. That may be changing, as Mike Green [recently wrote]( in his Yes, I Give a Fig newsletter... Equity markets are largely incapable of looking forward due to the constant flows into passive funds from 401(k) contributions – this flow is starting to falter with layoffs in the high-wage technology sector lowering contributions. Just remember... if there's a false floor, beware of the trap door. Regards, Herb Greenberg May 2, 2023 [Get a 60-day, 100% money-back trial to Empire Real Wealth by clicking here.]( --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. Charles Street, Baltimore, Maryland 21201 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](