Broadridge Touted as Low Volatility Reveals a Great Deal

Broadridge Financial

Broadridge Financial should be as stable of a company as they come. They make their money in both good and bad times. The company’s stock is far from stable though.

Sometimes we may wonder if they send analysts out in the wilderness to live in isolation and send their reports about their neck of the woods in periodically, without having any real sense of what is going on in the forest as a whole or even that such things should matter.

What happens in a particular area of the forest does matter to the overall picture, and no one would ever question that a company’s business results matter to its stock price. We don’t want to ever make the mistake of thinking that this is the only thing that matters, as this all depends on the climate, especially when the rains come, where this might not even matter at all.

There may be no better example of this than with Broadridge Financial, whose business is very stable no matter what the climate. Broadridge makes most of its money by providing reports to investors, as well as clearing trades and providing back end support to financial services companies, where the demand for these things do not waver.

This is needed just as much in a bear market than in a bull market, and this business is therefore very much insulated from the business and economic cycle. You might think that this is therefore a pretty boring stock, like a utility, and utilities are more stable and boring because their business don’t vary that much.

Based upon evaluating this at the business level, this is a stock that we would not expect would go up or down all that much, and therefore function as a defensive play, like utilities are. This is far from what actually happens though and the difference between the very high stability of the business and its being a high beta stock is pretty instructive actually.

If we just look at the fundamentals, we can easily be fooled. During the very troubled times of the Great Recession, Broadridge’s business didn’t go down at all, even during the worst of this in 2009 when companies got really stung by this. Broadridge’s stock took a big hit right alongside just about every other stock though, dropping 60% at the worst of it, which is a pretty porous defense indeed.

This business stability certainly didn’t protect us from this market dive, which should scream at us that there is indeed more to it than that. The state of the forest matters as well and can matter a great deal at times.

In more recent times, during the pullback of late 2018, the market declined by 20%, with Broadridge giving up 30%. As much as it has rallied in 2019, it never did make it back up to where it was before this move, even though it did come close back in July.

The market topped in July, and has recently surpassed this high-water mark to make new highs, but Broadridge is off by 11% since then. Their latest earnings results missed expectations by a few cents a share, and this has been enough to beat them down a fair bit.

The 30% dip that they suffered in late 2018 wasn’t due to business performance, as their results at that time were very good, and even better than the more recent results that inspired their coming back most of the way since. Business was good, they tanked, business slowed down a bit, they made it back. This is not a very reliable way to predict stock prices at the best of times and certainly isn’t in Broadridge’s case.

Business Performance Sometimes Does Not Even Matter

The market dip didn’t have anything to do with business performance either, or the economy for that matter, which has slowed down since. The pullback was merely due to the market being afraid of more rate hikes by the Fed, and once they backed down, that’s all it took to have the market resuming its upward movement and trades over 25% higher now, even though concerns about slowdowns and even recessions have increased along with the escalation of the current trade war.

On the other hand, Broadridge has averaged over 100% return each year over the past 11 years, since their bottom in 2008. It traded as low as $9.72 per share back then, and we’ve added $110 to the share price since. This is by no means a low beta stock on either the downside or the upside.

Broadridge has performed fabulously over this time, beating market returns by over three times during this long and famous bull market. There is every reason to think that if the bull market continues, in spite of its recent struggles, this stock would be a very good bet as long as the party continues.

On the fundamental side, the little step back that they recently made earnings-wise is not expected to last, and both the company and the analysts are projecting good earnings growth for the next few years. 2020 is expected to deliver $5.09 per share in earnings, a 10% improvement over 2019, with $5.51 in 2021, $6.05 per share in 2022, and $6.55 in 2023. In a climate where earnings growth is tending to slow, these numbers look very good indeed.

Over the longer term, where the waves even out more, Broadridge looks like a strong buy and perhaps one of the best-looking stocks longer-term out there. Where it is headed over a shorter period, like the next few years, is much more in doubt, as these things do tend to be when you have a market that looks a little tired and with the very likely prospect of a bear market hitting should a Democrat be elected president in 2020, especially if it is Elizabeth Warren or Bernie Sanders.

It’s not that Joe Biden wouldn’t bring the market down as well, as he has plans to enact a number of market unfriendly changes himself, but nothing like the other two, who want to burn the market down. The 20-25% bear market that some are predicting if Warren wins look more like what we should expect from Biden, and the threat is a lot bigger with Warren, who is bent on bringing both the stock market and the economy to its knees.

The way things look now, even though this election is a year away, it is not too soon to start thinking about what we will do if this comes to pass, if the angry mob that did all that protesting a few years ago sees one of their own made president.

What stands out the most about Broadridge is that it is being touted as a defensive play right now, and the reasons that are given is that its business is so stable and reliable. This crosses the line into the absurd actually, although it does require that we actually look at the stock to understand why.

The lesson here is that business fundamentals do play a role in the price movement of a company’s stock, but there are so many other things that factor in, especially the direction of the market. Analysts are happy to just look at the sky above their heads to predict the weather, instead of looking at the bigger map, and when the rain comes, Broadridge offers less protection from a storm than your average stock.

This is Not a Defensive Stock, Although the Only Good Defense is to Run Away

It is being described right now as a defensive stock that can “withstand an inevitable slowdown.” To be fair, there may be certain businesses that may be affected by a slowdown more, companies that are already struggling, and there may also be some successful companies that may suffer more if this happens.

This might make sense to us if we think that the only thing that influences the price of a stock is business performance, but among the other influencers is market risk. Market risk is the big dog of the stock market, and if we do get this slowdown, you can bet that the market will feel it and pass it along to stocks in general, including Broadridge.

We already know how this stock fares when the market goes south, and there’s no reason to think that this will magically change, because this really is a high beta stock, not a low beta one. Just having the word financial in its name, as the company’s full name is Broadridge Financial Services will have it picked on, and this is not a lot you want to get thrown into. Even though they are not a company whose fortunes are cyclical like just about any capital market company is, this may not matter, just like it doesn’t matter that a company’s profits go up when the market goes the other way, as the undertow can be too great, and we see this happen all the time.

Analysts are also pointing out that Broadridge has been increasing their dividends, even though they surely notice how small of an effect this has on overall return. The stock is up over $23 since the beginning of the year, and their higher dividends have added $1.51 a share to this, so it’s fine to be happy with the dividends but we need to realize how insignificant this all is in the end.

A more reasonable view would be to recognize that this is a strong company who is set to grow even more and is even in the upper tier of stocks right now. However, this is not a stock that you want to be in when the music stops, as it tends to fall even harder than your average stock, not that you want to be in any stocks if this happens.

The best defense against bears is not to look to battle them but to run away, because they will hurt you if you try to fight them. We should actually go on the offensive here as you can make money from bear markets even easier than with bull markets if you join up with the bears while they are running the show. While everyone around you winces, you will be trying your best to hide your smile as well as your thicker wallet.

The lesson here is that you can’t just look at business fundamentals and predict a stock price in the near term. This works as a guide for the long term but you still need to be minding the store to make sure that your dreams do come true instead of your nightmares, and things can go either way. When we end up categorizing volatile stocks such as Broadridge as having low volatility and being defensive plays, we are letting the world know just now confused we are.

This problem runs much deeper and there is a whole industry built around looking at business fundamentals and does so exclusively and claims to have things figured out. The very idea that you could come up with a reliable price forecast for a stock this way on any time frame is simply out of touch with reality, in spite of how popular it is to be.

This does not mean that we should not be looking at these things, as this is useful information, just as knowing how solid Broadridge’s business forecasts are, both short and longer-term. Where we mess up with this is allowing ourselves to lose our perspective of the big picture and ignore forces that move stock prices even more, and especially realize that the market always has the final say and is not something we want to try to either ignore or wrestle, lest we end up laying injured on the ground when this should have been easily avoided.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.