Patience is the calm acceptance that things can happen in a different order than the one you have in mind.
David G. Allen
At the end of a long summer, Wednesday was a day where I wondered if all was right in the world. First, Las Vegas set records for heat this month, and this week the thermometer reading nearly hit a cool 110 degrees. Just when you think it will start to temper off, it gets even hotter. Next, earnings season in the stock market continues to wind down and for the last three months, we have seen pretty much the same thing. The NASDAQ, led by Apple, Amazon, Pelaton, Tesla, Zoom, Salesforce, Docusign, Wayfair, and others, goes up every single day. Every. Day. Every. Day. Every. Single. Day. In fairness, Apple has been a huge reason for the gains, and much of it is deserved. The other companies we mentioned are all interesting and have growing businesses. One role of an investor is to analyze enterprises to assess their investment merit. In this capacity, the price paid is an important component. It is not the singular issue, but a very important one, when determining whether or not one wants to plunk down their hard earn capital for a piece of the business. One of the difficult experiences for many investors is paying for a stock and discovering, over a long period of time, the business is not quite what you thought it was. Day after day, month after month, year after year, it just doesn’t quite fulfill the promise you thought it had. Guess what is related to that? Yep, the stock price.
Along those lines, the stock prices of the entities we mentioned have rewarded their fortunate shareholders. Remembering a long time ago, twenty years to be exact, there was a similar period where companies traded at outrageous multiples of everything (price-book/earnings/sales/cash flow/assets). Many traded on price to web site traffic, or other vague metrics which meant very little. The period was remarkable in how long it lasted, and the incredible heights some stock prices reached. During this time frame, Warren Buffett spoke at the summer retreat held every year by a media-focused investment bank. He essentially warned the technology focused group the party would be ending fairly soon. Many in the crowd were dismissive and arrogantly believed washed-up Warren was bitter because he had lost his touch, and his company, Berkshire Hathaway, had seen it’s time pass. A year later, the Nasdaq dropped nearly 90% and Berkshire traded back to it’s all time high. Of course, Davey Day trader and his few million followers might be dismissive of this time period. Maybe it’s a new era, a different environment, and the companies we reference are much better businesses. Yes, you are right, most are far superior than the trash we saw twenty years ago (who could ever forget Pets.com, Dr. Koop, Exodus Communications, or Webvan). However, the common characteristic are stock prices which price in future performance going out decades. As an investor, it is a dangerous recipe because you can suffer large losses in a rapid time frame. In March, the market fell 35% in just over 17 days. In the last two trading sessions, we have seen losses of nearly 10%, especially in these NASDAQ related names. What could the selling be attributed to?
Some information is showing heavy option related buying by Softbank and other large institutions which took place over the last three months. The options are tied to, you guessed it, the largest Nasdaq companies. There are intermediaries which buy and sell stocks in order to make markets, and they adjust their business daily based on the volumes being traded. With such heavy option orders, they must buy more stock to balance their trading books. As prices turned negative, the reverse happens. Of course, there is another explanation for the selloff. Many investors recognize the market prices are excessive. Maybe it’s one hundred and ten degrees in other parts of the country too. Looking ahead, the stretched valuations are going to make it tough on the market. It does not mean equities are destined to crash, not with interest rates locked at nearly zero for the foreseeable future. It does mean investors have to be very careful in the current environment.
In the markets this week, the August jobs report showed an increase of 1.4 million positions, many related to the Federal Government (part time census work). The hospitality area showed a nice increase as well (174 thousand jobs restored- good to see). On the earnings front, Zoom was the headline with a 355% increase in revenues. The company is projecting yearly sales of about 2.5 billion (compare that to a valuation of 110 billion). Other notable results came from CrowdStrike, Five Below, Vera Bradley, Macy’s, Copart, and Cloudera, and nearly all beat their estimate. Today, we read the most prominent pharmaceutical companies are combining to hold off on asking for government approval of their Corona-virus vaccine. We are specifically referring to Pfizer, JNJ, and Moderna. Their clinical trials in October will engage tens of thousands of patients and before they seek government approval for mass manufacturing, they want to make sure of the safety and efficacy of the drugs. A reasonable step, especially considering the political environment.
Speaking of politics, the big event of the week was Speaker Pelosi deciding to have a hair day. Without a mask. It is consistent with other hypocritical leaders in the Democratic party (Governors Quomo, Newsome, Northam, Sisolak, Mayors Deblasio and Lightfoot, among others). The abrogation of responsibility to citizens in terms of safety, property rights, and ability to earn a living leaves many, including this writer, shaking their head. It was part of what made me wonder if all was right in the world. The Presidential debates begin in a few weeks, and polls are all over the place. They will change based on debate performance by our outstanding candidates. I’ll be watching and I am sure you will be, too.
I hope you enjoy the long Labor Day Weekend.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.