Dynamite!

Dynamite!  Stocks had a mixed close yesterday, ending the session well off its lows. Yesterday’s winners included South Korea’s Big Hit Entertainment of K-Pop BTS notoriety and … SMALL CAPS.

 

N O T E W O R T H Y

 

I WANT MY N.P.V.  I really hope that at least some of my readers get my little inside jokes in my tag lines (also referred to as Dad Humor by my kids).  “Dynamite” is the name of a K-pop hit song by BTS.  They are a big deal globally. The Korean boy band is a Billboard chart topper, and now the septet’s management company tops the charts as well… the stock charts.  The company went public yesterday and its shares rose by some +91%, valuing the company at $7.6 billion.  I would call that a chart topper.  All 7 analysts that cover the stock rate it a Buy, despite its rich 68x P/E.  But don’t rely on what the analysts think, evidence suggest that the interest in the stock surged on social media as the army of K-pop fans took to the blogosphere to hype the investment.  Welcome to 2020… I guess.  Back in the day, we used to value companies a little differently.  Absent of social media, we were forced to come up with elaborate financial models to attempt to accurately predict future earnings in order to put a value on stock.  Likes or no likes, if a stock was trading below its projected price and the analyst was confident in the business, it was a Buy.  Ok, Ok, there is my humor again.  Before you get on Facebook or Twitter to pick your next big stock I want to assure you that we still use tried and true financial analysis to rank and rate stocks.  Analysts work closely with companies to understand the dynamics which affect performance in the coming quarters and years.  They consider the company’s ability to grow revenues while maintaining control over its expenses.  If a company has lots of credible growth prospects and solid management, it can be expected to grow revenues in the coming years.  Once an analyst predicts future earnings, they discount them into current dollars in order to come up with a theoretical share price.  I have over-simplified it here for illustration, but that is the basic process.  We use a function called Net Present Value, or NPV, to accomplish this (hence my other tag line humor of the day). For more detail on how stocks are valued, read my note on the topic here: https://www.siebert.com/blog/wp-content/uploads/2019/04/geek-out-topic-Stock-Valuation-1.pdf  . To spare you further details, I will cut to the point.  Growth companies like Apple, Amazon, Microsoft, etc. are expected to continue to grow earnings on a steep trajectory which, in turn, increases the theoretical value of the those stocks.  In fact, the companies need not even be mega cap behemoths like the aforementioned.  Even upstarts with far smaller earnings can get high valuations if investors expect large growth.  I am sure that I don’t have to run down the list of all the recent IPO’s that received eye-watering valuations with very small, but fast growing, earnings. Growth stocks have noticeably outperformed in the past few years.  Sure, they have demonstrated their ability to dominate and grow their revenues, even in tough times. Expected fast growth beyond the current year is a big factor in growth companies’ high valuations, which partially explain how those stocks continue to thrive even through the current economic contraction.  Another factor is low interest rates. Interest rates are one of the key inputs into the NPV valuation model, and lower rates mean future earnings are worth more in today’s dollars. Fast growth and low rates equal higher valuations. The Korean Exchange (KRX) had already closed when I first checked the markets this morning at 4:00 AM.  Big Hit Entertainment’s second day of trading was not as stellar as its first.  Its shares were down by -22.29%.  Perhaps someone lowered their growth estimates on their valuations… or maybe some investors decided to take some profit.  It’s Friday, so if you want some entertainment, you can click here: https://www.youtube.com/watch?v=gdZLi9oWNZg  to listen to BTS’ hit “Dynamite”, or you can look up the stock with the symbol 35282 on the KRX.

 

THE MARKETS

 

Stocks closed off their session lows at nearly break even as hope for more stimulus continues to persist.  The S&P500 slipped by -0.15%, the Dow Jones Industrial Average fell by -.07%, the Russell 2000 Index advanced by +1.06%, and the Nasdaq Composite Index dropped by -0.47%.  Bonds fell and 10-year treasuries added +1 basis point to 0.73%.

 

NXT UP

 

– Retail Sales (Sept) may have grown by +0.8%, bettering last month’s +0.6% growth.

– Industrial Production (Sept) is expected to have sped up to +0.5% from last month’s +0.4% growth.

– Economists expect University of Michigan (Oct) to have increased slightly to 80.5 from 80.4.

– This morning Bank of New York Mellon, Schlumberger, and VF Corp beat expectations and we expect to hear from Ally Financial and State Street before the opening bell.

– Next week we have a truckload of earnings along with housing numbers, the Beige Book, Leading Index, and manufacturing/services PMIs. Please check back on Monday for calendars and details.

 

 

daily chartbook 2020-10-16