The Recovery-Less Recovery

The Feds recent language about its unwillingness to raise interest rates is a sign of discomfort on the part of many of the world’s leading economists. The recent melt down in Greece only illustrates ongoing weakness in Europe. Closer to home, Puerto Rico is in deep financial trouble.  The U.S. economy actually contracted last quarter[i].

As has been the case for 3 years, the economy continues to send mixed signals. Economic growth varies from sector to sector and from region to region.  I don’t remember a time when U.S. real estate markets were so inconsistent. Some markets (such as the Bay Area) have soared, while others remain sluggish.  GNP growth is highly regional. Fourteen states grew 10% between 2009 and 2013. Ten states hardly grew at all.[ii]

Recent slides in the market are not surprising. The S&P peaked at over 20 times earnings, with margin debt (borrowed money to buy stocks) exceeding over $500 Billion.

Companies will need to remain selective and opportunistic. Some markets are hot and ripe with opportunity. In our practice health care has been a hot industry, and the reshuffling of the deck will clearly create wealth for those in a position to capitalize on specific opportunities. We have a client that was one of the leading providers of technology to the health care sector during the adoption of electronic medical records. Now that the deadline for implementation has passed, they are actively figuring out what is next.

It is as if our economy is trying to find an identity. Some setbacks (such as another bad winter), are only temporary. Others (such as the California drought) feels like they could have an impact for some time (California agriculture is particularly vulnerable).

One avenue pursued by many of our clients at the moment is acquisitions. Average valuations (based on multiples of EBITDA) are up two full turns (to over 10x) in the last 8 quarters, demonstrating strength in M&A.[iii] Of course at some point the market with self-correct.  It appears that the inventory of well-run companies (that are on the market) have already been absorbed.

But the focus on acquisitions brings us back to the point that organic growth in this market is hard to come by. There are market takers and market makers, and making a market seems uncommonly difficult.  The advent of many new exciting technologies certainly creates opportunities for companies to improve their position.

In the long run, market taking can only offer meager returns as there are competitors, grappling for nickels and crumbs. So staying focused on a long term vision, and executing against that vision at all costs is probably the cost of admission in the recovery-less recovery.


[i] U.S. Economy at a Glance: Perspective from the BEA Accounts. Bureau of Economic Analysis

[ii] Briefing America’s Economy 6/13/15

[iii] US Middle Market Monitor FactSet Flashwire February 2015