Why Cash Cows Are Wall Street’s New Darlings

Summary

WSJ What’s News: Episode Summary - "Why Cash Cows Are Wall Street’s New Darlings"

Release Date: February 12, 2025

In this episode of WSJ What’s News, hosted by Luke Vargas, The Wall Street Journal delves into significant developments in government policy, trade, aviation safety, and the evolving landscape of stock market investing. The episode, titled "Why Cash Cows Are Wall Street’s New Darlings," particularly highlights the resurgence of cash-generating stocks and their growing prominence among investors. Below is a detailed summary of the key discussions, insights, and conclusions drawn during the episode.

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1. Government Cost-Cutting and Regulatory Changes

President Trump's Regulatory Overhaul

The episode opens with an in-depth analysis of President Donald Trump's ongoing efforts to reduce government expenditure and streamline regulatory bodies. Luke Vargas reports on exclusive insights revealing that Trump’s advisers are exploring methods to curtail and consolidate America's bank regulators without legislative approval.

• Potential Regulatory Restructuring: Plans include potentially merging the Federal Deposit Insurance Corporation (FDIC) into the Treasury Department or combining its regulatory functions with the Office of the Comptroller of the Currency (OCC) under the Treasury. This consolidation is expected to result in substantial job cuts within bank regulatory agencies.

• Industry Pushback: Bank executives have long criticized excessive regulation, arguing that other industries face fewer regulatory constraints. Vargas notes that executives from major commercial banks are scheduled to meet with Congress members and regulatory nominees to discuss these proposed changes.

Elon Musk’s Defense of Cost-Cutting Measures

At a press conference in the Oval Office, Elon Musk, representing the Department of Government Efficiency, defended the administration’s cost-cutting initiatives despite facing opposition and legal challenges.

• Notable Quote: Musk stated at [02:49]: “We have this unelected fourth unconstitutional branch of government, which is the bureaucracy... it's just something we've got to fix.”

Trump echoed Musk’s sentiments, criticizing judges who impeded efforts to reform the federal bureaucracy. However, he affirmed his commitment to abide by court rulings and pursue appeals when necessary.

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2. Trade Policies and Reciprocal Tariffs

Reciprocal Tariffs Announced

President Trump is poised to introduce reciprocal tariffs targeting countries that have imposed levies on U.S. exports. This strategic move, potentially announced via executive order, aims to not only match existing tariffs but also address non-tariff barriers.

• Anticipated Targets: Countries such as India, Vietnam, Brazil, and Argentina may face these tariffs. Jason Douglas, WSJ's Asia Economics reporter, provides nuanced insights into how these tariffs might vary.

• Notable Quote: Douglas at [03:54]: “For countries like India, like Vietnam, like Brazil, Argentina... many of these places might actually end up facing tariffs that are slightly less than 10%.”

• Non-Tariff Barriers: Douglas further explains the complexity of targeting non-tariff barriers like regulations, subsidies, and tax treatments, which are more prevalent in developed economies like the EU. He remarks, “[Non-tariff barriers] include things like regulation, subsidies to domestic industries... Exactly how you translate a non tariff buyer into a reciprocal tariff, I'm not entirely sure.”

These reciprocal measures indicate a potential escalation in trade tensions, especially with developed nations that impose multifaceted barriers on U.S. companies.

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3. Aviation Safety Reforms Post-Crash

FAA’s Proposed Restrictions at Reagan Airport

Following a tragic collision between a U.S. Army helicopter and an American Airlines jet at Washington's Reagan Airport, resulting in 67 fatalities, the Federal Aviation Administration (FAA) is considering permanent restrictions on helicopter operations near commercial jet flight paths.

• Safety Improvements: The move aims to enhance safety protocols after identifying contributing factors such as airspace design and operational procedures by both the helicopter pilot and air traffic control.

• Ongoing Investigation: The FAA has temporarily barred helicopters from the specific flight corridor used during the January 29 incident, pending a comprehensive evaluation of the crash's causes.

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4. Cash Cows: Wall Street’s New Darlings

Spencer Jacobs on the Rise of Cash-Generating Stocks

In the latter part of the episode, Spencer Jacobs, WSJ’s investing columnist, explores why companies that return significant cash to shareholders are gaining favor on Wall Street.

• Value Investing Revisited: Jacobs highlights the fundamentals of value investing—purchasing stocks that are undervalued relative to their intrinsic worth. He explains, “[Value investing] is basically buying something cheaply. So paying 80 cents for a dollar... the real trick is cheap how?”

• Shift from Traditional Metrics: Jacobs observes that traditional value metrics, such as price-to-book ratios, may not accurately capture the value of modern tech companies. He cites Microsoft as an example of a firm that thrives despite not fitting traditional value criteria due to intangible assets like brand strength and intellectual property.

• Innovative Valuation Formulas: The discussion shifts to new valuation strategies focusing on free cash flow. Jacobs elaborates, “They’re trying to buy companies that are cheap relative to their free cash flow... [which] has had tremendous success.”

• Performance During Downturns: Research from S&P Dow Jones indices suggests that free cash flow-focused investments outperform during economic slowdowns and periods of rising inflation. Jacobs notes, “Its excess performance was greatest during times of slowing growth and rising inflation.”

• Risks and Considerations: While acknowledging the strategy's benefits, Jacobs also points out potential downsides, such as missing out on high-growth "compounder" companies that reinvest earnings for longer-term gains. He states, “Companies that have such profitable opportunities that they can reinvest it and then their business will grow... is also a very desirable type of company.”

• Notable Quote: At [10:35], Jacobs remarks, “Its excess performance was greatest during times of slowing growth and rising inflation... it especially shines during bad times.”

This nuanced analysis underscores a strategic pivot in investment approaches, favoring stability and consistent cash returns over high-growth, albeit volatile, stocks.

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5. Additional Business and Market News

Corporate Developments:

• Spirit Airlines: The carrier plans to pursue a loan following the rejection of Frontier's takeover bid. Spirit, which filed for bankruptcy in November, is scheduled to present its reorganization plan in court and aims to exit Chapter 11 in the first quarter of the year.

• Lyft’s Challenges: Lyft's stock plummeted in after-hours trading as the company anticipates that a pricing war with Uber will dampen booking growth. Additionally, Lyft’s partnership with Delta Airlines is ending, with Delta now aligning with Uber instead.

Economic Indicators and Earnings Reports:

• Inflation Data: The Consumer Price Index (CPI) for January is expected to show a 2.9% increase year-over-year, consistent with December’s figures, indicating sustained inflationary pressures.

• Earnings Season: A busy day ahead with major companies like Cisco, CVS, Robinhood, and Kraft Heinz set to release their quarterly results.

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Conclusion

This episode of WSJ What’s News presents a comprehensive overview of pivotal events impacting government policy, international trade, aviation safety, and investment strategies. The spotlight on cash-generating stocks highlights a significant trend in the investment community, emphasizing the balance between value investing and embracing new valuation methodologies tailored to contemporary market dynamics. As Wall Street adapts to these shifts, investors are encouraged to consider both traditional and innovative approaches to optimize their portfolios amidst evolving economic landscapes.

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Produced by Daniel Bach and Kate Bullivant with supervising producer Christina Rocca.

Transcript

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[Luke Vargas]

Elon Musk defends his government cost cutting drive from the Oval Office. Plus, with President Trump poised to impose reciprocal tariffs, we'll look at what the measures might look like and which countries they'll target. And our investing columnist explains why Cash cow stocks are having a moment.

[Spencer Jacobs]

People are exasperated by how expensive the average stock is, and so they're looking for some way to stay invested in the market, but according to a formula that is likely to have better odds of Success.

[Luke Vargas]

It's Wednesday, February 12th. I'm Luke Vargas for the Wall Street Journal, and here is the AM edition of what's news, the top headlines and business stories moving your world. Today, we are exclusively reporting that days after taking aim at the Consumer Financial Protection Bureau, President Trump's advisers and allies are discussing ways to curtail and combine America's bank regulators without involving Congress, according to people familiar with the matter. That include includes the possibility of collapsing the Federal Deposit Insurance Corporation into the Treasury Department or combining the FDIC's regulatory role with the Office of the Comptroller of the Currency under Treasury. In any plan that advances, significant job cuts are likely at the bank regulators. Bank executives have been saying for years that their industry suffers under too much regulation, arguing that other industries are encroaching on their business without facing the same regulatory hurdles. According to our reporting, execs from some of America's largest commercial banks are set to meet with members of Congress, bank regulators and nominees this week. President Trump is handing Elon Musk's Department of Government Efficiency expanded authority to reduce the size of the federal workforce. In an executive order yesterday, Trump directed federal agencies to restrict hiring to essential positions and gave agency heads 30 days to report on whether their agencies or sub agencies could be eliminated or consolidated. Standing beside Trump at an impromptu Oval Office press conference, Musk defended his cost cutting plans against opposition from Democrats and legal challenges that have stalled some of his efforts.

[Elon Musk]

Well, we have this unelected fourth unconstitutional branch of government, which is the bureaucracy which has in a lot of ways currently more power than any elected representative. And this is, this is not something that people want and it's not, it does not match the will of people. So it's just something we've got to fix.

[Luke Vargas]

For his part, Trump again criticized judges who've blocked some of Doge's steps to reform the federal bureaucracy, but said he would abide by court rulings and appeal decisions if needed. Meanwhile, President Trump's trade agenda could soon take a major step forward with reciprocal tariffs on countries that have imposed levies on US Exports. That could be announced as soon as today. And the move, expected to come via executive order, could go beyond simply matching other nations tariffs, potentially taking into account non tariff trade barriers, according to people close to the president. Journal Asia Economics reporter Jason Douglas told me how reciprocal tariffs are likely to go over.

[Jason Douglas]

So for countries like India, like Vietnam, like Brazil, Argentina, on the face of it, this is kind of a relief in a way, because after all, One of President Trump's other plans that he had floated was a 10% tariff on all imports into the U.S. and just because of the way these average tariff rates work out under a reciprocal plan, it is possible that on average, many of these places might actually end up facing tariffs that are slightly less than 10%. But having said all that, the devil is in the detail, right? For some products, these levies are a lot steeper. Lots of countries charge very high levies on things like agriculture, on cars, and so they could face much steeper levies if Trump reciprocates on those specific products.

[Market Analyst]

And Jason, should Trump choose to target.

[Luke Vargas]

Non tariff trade barriers? It's a whole other ballgame.

[Jason Douglas]

Yeah, that's right. Non tariff trade barriers include things like regulation, subsidies to domestic industries, tax treatment, this kind of stuff. And that is much more of an issue for developed economies, particularly places like the EU where people in the administration complain that there are all sorts of barriers facing US Companies. And it's a complaint you hear from the US Business community often as well. Exactly how you translate a non tariff buyer into a reciprocal tariff, I'm not entirely sure. But if they're going after non tariff barriers as well, then plenty of developed countries could find themselves in the firing line too.

[Luke Vargas]

That was Journal Asia Economics reporter Jason Douglas. We are exclusively reporting that Federal Aviation Administration officials are considering a move that would permanently keep helicopters away from commercial jets taking off and landing at Washington's Reagan Airport, part of a broader plan to improve safety there after a U.S. army helicopter collapsed with an American Airlines plane last month, killing 67 people. For now, helicopters are temporarily barred from the flight corridor that was used by the Black Hawk involved in the January 29 incident, according to people familiar with the investigation into the crash. Preliminary indications point to multiple factors that could have contributed to it, including the design of the airspace as well as actions by the helicopter pilot and air traffic control. Coming up, move over Mag 7 Journal investing columnist Spencer Jacobs says a new group of stocks is making waves. We've got that story, plus the latest in markets after the break.

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[Luke Vargas]

Are cash cows, the new kings of the stock market. WSJ investing columnist Spencer Jacobs says that companies returning lots of cash to shareholders have some newfound swagger on Wall street lately, and he's here to talk about why. Spencer, before we get deeper into this, in your latest column, you bring up the concept of value investing. Just remind us of what we mean when we talk about that.

[Spencer Jacobs]

Yeah. So value investing is pretty simple but pretty hard to do. Value investing is basically buying something cheaply. So paying 80 cents for a dollar, that's what made Warren Buffett very wealthy. That's what made his mentor Benjamin Graham very wealthy. It's basically companies that are cheap, but the real trick is cheap how? And how do you know they're cheap and how do you know they're not going to stay cheap? And that's the really hard part. And also it requires a lot of patience, obviously, because you're not owning often the latest high Flyers when you're a value investor and you may underperform for a long time.

[Luke Vargas]

Well, speaking of high flyers, you write about how the Magnificent Seven stocks like Nvidia and Apple seem to have rewritten the rules of the game, leaving the concept of value investing looking a little outdated.

[Spencer Jacobs]

That's right. I mean, if you go back to as far as the 1920s and 1930s, people began to understand that if you looked at a company's financials and you said, you know, this company, if broken apart or in terms of the money that it's paying out in earnings, is very cheap compared to other companies. And you owned mostly companies like that, you did pretty well. But it wasn't really defined by academics until decades later. And the definition that they used was price to book value. So they looked at the assets and the liabilities of the company and they said these companies, if broken apart, are really cheaper than what they cost on the stock market per share. But as soon as they wrote that, the economy already was undergoing rapid change. And today companies, especially tech companies, have a lot of value that really can't be described on the balance sheet or isn't captured by the balance sheet. Things like know how and brands and patents and things like that. So Microsoft, for example, it doesn't look like a value stock. So it's done very well the last 10, 12 years, but it might not have been picked up according to those traditional value formulas.

[Market Analyst]

So now there are some new formulas out there, including some trading under ticker symbols that seem thoroughly modern. Like cows with a Z.

[Spencer Jacobs]

Totally, yeah. And there are others out there too, that all more or less have the same formula where they're trying to buy companies that are cheap relative to their free cash flow. That's the money that's left over after your expenses and after any investments you need to make, divided by what's either your market value or your enterprise value. And so that's the kind of smarter way to look at a company's what it fetches on the market. And it's a very simple formula, very easy to calculate, but has had tremendous success. If you look back just Even the.

[Market Analyst]

Last 10 years, success and ETFs that follow this approach keep on launching.

[Luke Vargas]

What does that tell us?

[Market Analyst]

Is it a sign investors might be looking to hedge in some way?

[Spencer Jacobs]

If you look at the most popular ETFs and funds, they still are the funds that really try to shoot the lights out. The things that either track The S&P 500, which has done really well, or, you know, QQQ, which owns the NASDAQ 100, that portion of the market that's had excellent results. But these also are gaining a lot of traction under the surface. People are exasperated by how expensive the average stock is, and so they're looking for some way to stay invested in the market, but according to a formula that is likely to have better odds of success.

[Market Analyst]

Do we know how this strategy would perform in a downturn?

[Spencer Jacobs]

Well, we do have some inkling. I mean, you never really know, but some research recently came out of S and P Dow Jones indices where they reconstructed a free cash flow type index. And according to their research, its excess performance was greatest during times of slowing growth and rising inflation. So, in other words, it especially shines during bad times.

[Market Analyst]

Is there a risk associated with this approach that we haven't mentioned here? And I guess a related question, isn't there a case to be made that cash is best reinvested back into the business to yield longer term returns as opposed to kickback to shareholders.

[Spencer Jacobs]

Yeah, that's a great question because there's also this notion of compounders. And if you look at people who see themselves more in the Warren Buffett mold these days, that's what they're looking for. So not necessarily companies that are paying out lots of cash or using it to pay down debt or whatever, but companies that have such profitable opportunities that they can reinvest it and then their business will grow and make up for it. So that's also a very desirable type of company and is likely to be missed by this formula.

[Market Analyst]

Spencer Jacob is the Journal's investing columnist and writes our Markets AM newsletter.

[Luke Vargas]

Spencer, thank you so much.

[Spencer Jacobs]

Hey, thanks for having me.

[Luke Vargas]

And in business and markets news today, Spirit Airlines says it plans to push on a loan after rejecting the latest takeover bid from its on again, off again suitor Frontier. Spirit, which filed for bankruptcy in November, has a hearing to consider its reorganization plan scheduled for Thursday and expects to emerge from chapter 11 in the first quarter. Shares in Lyft are slumping in off hours trading after the ride sharing company warned that a pricing war with Uber would slow bookings growth. Lyft said its results will also be hit by the end of a long exclusive partnership with Delta Airlines, which recently tapped Uber for a new deal. And on deck, we'll get the latest read on inflation today. With the consumer Price index for January due out at 8:30am Eastern, economists are expecting it to show a 2.9% increase from a year earlier, the same rate seen in December. And it's another busy earnings day with Cisco, cvs, Robinhood and Kraft Heinz all set to report results. And that's it for what's news for this Wednesday morning. Today's show was produced by Daniel Bach and Kate Bullivant with supervising producer Christina Rocca. And I'm Luke Vargas for the Wal Street Journal. We will be back tonight with a new show. Until then, thanks for listening.