The Big Wait And See

The big wait and see.  Stocks bounced around breakeven yesterday, ultimately closing down as conflicting commentaries around stimulus agreements left investors… confused.  Earnings – yes earnings – are also driving the markets, and investors are expecting a lot from the high flyers.

 

N O T E W O R T H Y

 

Once upon a time.  There once was a stock market…. that was filled with stocks in companies that produced all sorts of goods and services.  Those companies were expected to act responsibly with investors’ money.  That means they were expected to use the invested capital to make more money by investing it in employees, facilities, and new products. If a company executed its plans properly it would have been able to grow sales and earnings and build up excess cash.  Historically, investors expected to get some of that excess cash back in the form of a dividend, a return on their investment made good.  Of course, increasing sales alone would not be enough.  A company was expected to maintain and grow profit margins.  It doesn’t seem too complicated, but it is. Some companies did it better than others and the stocks of the successful ones rose more than the ones that could not make the cut.  That sounds like a fairy tale, doesn’t it?  In fact, those basic tenets of stock value still exist today, but things are far more complicated.  A big change occurred as growth investing rose in prominence.  In a growth company, revenues are important but take second, or maybe even third seat, to… you guessed it: growth opportunity.  Notice how I didn’t even mention earnings… because that is really not too important.  Of course there has to be earnings in the future and they will have to appear to able to grow at a tremendous pace, but earnings today are less important. I know that I am overly simplifying things, but imagine that some of the largest companies on the US stock exchanges are actually barely profitable.  Take, for example Amazon, the third largest company by market capitalization. The company was barely profitable up until a few years ago and even had many losing quarters, but the stock was always a high flyer because it always had great growth potential.  In that case of Amazon, early investors were paid off for their faith as the company is highly profitable today, but now investors expect a continuation of great growth, as is evidenced by Amazon’s P/E multiple of 122x. That means that investors are willing to pay 122 times the earnings per share to own the stock.  What about some other well-known growth stock poster children.  Apple, Microsoft, Google, and Facebook boast P/E multiples of 35x, 36x, 35x, and 34x respectively.  Seems like investing in those would take a lot less faith than investing in Amazon at 122 times, eh.  You want to talk about faith?  Beyond Meat (BYND) is trading with a P/E multiple of 6,199 times earnings… and that is NOT a typo.  They are going to have to sell a lot of veggie burgers in the future to justify that!  Still, it is a great company with really good prospects, but is the company worth $11.1 billion?  Eastman Chemical  (EMN) trades at a P/E of only 13 times earnings and its market cap is $11.6 billion, similar to Beyond Meat’s… and Eastman pays a 3% dividend.  A little less faith is required to own that stock. You want to talk about real faith? How about neophyte Snowflake (SNOW) with a market cap of$76 billion.  Wondering how expensive it is relative to earnings?  The company does not earn any income yet, so one cannot even compute its P/E ratio!  Don’t get me wrong, this is not a rant about stocks being overvalued.  Electric truck manufacturers Nikola (NKLA) and its Chinese rival NIO (NIO) are worth $8.4 billion and $37.9 billion respectively and neither is profitable yet, but that doesn’t mean that they are bad investments.  Tesla (TSLA), the current leader in the electric vehicle space was once in the same category.  Today, Tesla has a market cap of $931 billion, it is profitable, and trades with a P/E multiple of 714 times, which still requires a bit of faith.  The company reported earnings last night beating estimates by +38% and it has now reported positive earnings for 5 consecutive quarters.  Can Nikola or NIO follow Tesla’s path?  Only time will tell.  Making investment decisions these days is challenging given the volatile macro climate and high growth expectations.  While investing in upstart growth companies can certainly yield great potential returns, they can also yield great losses.  Beyond faith, proper due diligence, and diversification can help to minimize volatility and risk in a portfolio.

 

THE MARKETS

 

Stocks closed in the red yesterday, trading in synch with the ups and downs of stimulus negotiations in Washington.  The S&P500 traded off by -0.22%, the Dow Jones Industrial Average dropped by -0.35%, the Russell 2000 fell by -0.56%, and the Nasdaq Composite Index slipped by -0.28%.  Bonds also lost ground and 10-year treasury yields added +4 basis points to 0.82%.

 

NXT UP

 

– Initial Jobless Claims (Oct 17) is expected to have fallen to 870k from 898k.

– Continuing Jobless Claims (Oct 10) is expected to come in at 9.625 million, down from the prior week’s 10.018 million claims.

– The Leading Index (Sept) may have risen by 0.6% compared to last month’s +1.2% climb.

– Existing Home Sales (Sept) are expected to have grown by +5.0%, up from last month’s +2.4% growth.

– Fed speakers include Barkin and Kaplan.

– This morning Dow, Danaher, Tractor Supply, AT&T, Valero, PulteGroup, Quest Diagnostics, Northrop Grumman, and Coca-Cola beat estimates while losers included Alaska Air, American Electric Power, and Kimberly-Clark.  After the bell, we will hear from Intel, eHealth, Seagate, and CoreLogic.

 

 

daily chartbook 2020-10-22