With corporate profits set to fall for calendar year 2022 (final results won’t be known for weeks), the big question for equity investors is whether 2023 will bring stability on that front or not. Wall Street strategists largely expect another decline as economic headwinds accumulate, but the sell side is staying rosy (current consensus forecast is earnings growth of ~10%) and likely will continue that stance until companies explicitly give them 2023 guidance because they have very little reason to go out on a limb and make their own forecasts.The economic and investment climate today reminds me a lot of 2015-2016. Back then earnings also showed a year-over-year decline (2015) during a time when overall economic indicators remained bright. The U.S. unemployment rate fell that … [Read More...]
Starbucks Buyback Plan Highlights Why Opportunistic Corporate Buying Is Rare
There are a lot of mixed feelings about corporate stock buybacks depending on which group of stakeholders one polls, but one thing is clear; finding instances when management teams choose to buy mostly when their stocks are temporarily and unfairly depressed is a difficult task. When times are good (and share prices reflect this sentiment), buybacks seem like an easy capital allocation decision for ever-optimistic CEOs and CFOs. When the tide turns cash is conserved and debt repayment takes precedent even as the stock price tanks to attractive levels.Coffee giant Starbucks (SBUX) is the latest example. With union pressure coming at them in full force, the company suspended buybacks in early April so they could improve operations and employee morale without taking a political hit … [Read More...]
Unlike with GameStop, Ryan Cohen Cashes In His Chips Just In The Nick Of Time
“Why on earth would I pay an advisor when I can trade for free with Robinhood on my phone?” – 27 year-old meme stock traderI am asked about meme stocks and my opinion of people like Ryan Cohen all the time. Cohen was interesting because while he has amassed a fortune over the last decade (all due credit to him), each move had also resulted in him leaving a lot on the table. He hasn’t really had a Mark Cuban moment yet (Cuban sold Broadcast.com at the top for all stock and immediately hedged the Yahoo shares he received before they crashed) so his loyal cult-like following is interesting. Consider that:Cohen sold Chewy in 2017 for $3 billion in cash, but the buyer (PetSmart) took … [Read More...]
A Look At Pre-2008 Equity Market Valuations
We hear a lot of market commentators refer to long-term average P/E multiples for the U.S. stock market when trying to assess what “fair value” might be. It is interesting to me that oftentimes the time periods they choose to focus on often map right on to the desired conclusion they want to numerically support. For instance, the trailing 10 -year average P/E for the S&P 500 index is about 19.5. As a result, bullish Wall Street strategists can easily, and usually without much pushback, come on TV and pronounce the market cheap (at current prices – 3,735 – and current 2022 profit estimates – $224 – the market P/E is about 16.7x).Of course, over the last 10 years we have had record-low interest rates that some thought would … [Read More...]
Are Financial Markets Getting Even Less Predictable in the Near Term?
Earlier in my investment management career it was not uncommon for me to raise a fair amount of cash, say 10-20%, in client accounts when I thought the equity market was overheated. The idea was that I would have plenty of firepower when prices dropped and bargains were abundant. Over the years the data suggested that such a move was rewarding, at best, half the time. Too many instances, though, resulted in prices rising enough before they fell that the cash positions at best offered no alpha.Don’t get me wrong, I have always been in the camp that market timing in the near term is difficult (hence I would never go to 50, 75, or 100 percent cash), but I learned that mean reversion, while a real thing, could … [Read More...]
While Many SPAC Deals Overload On Speculation, Some Are Worthy Of A Look
It says a lot about where we are in the cycle when sponsors of special purpose acquisition companies (SPACs) can easily and relatively quickly make tens of millions of dollars merely by taking a shell company public and choosing an acquisition target, before long-term success could ever be determined. But with the free market system we need to take the good with the bad (so long as legalities are considered), so as much as I think the SPAC structure is a strange way to accomplish a goal, it is probably short-sighted to write off the pathway completely and never consider investing in any of the deals.Don’t get me wrong, assigning a multi-billion valuation to a revenue-less, concept company based on rosy hypothetical … [Read More...]
Underlying Earnings Continue to Support Strong Market Action
Most of the commentary I hear around why the U.S. stock market has gotten off to such a strong start in 2021 focuses on governmental fiscal stimulus and the Federal Reserve’s intent to keep their target funds rate low for as long as the data can possibly justify doing so. While strong consumer spending will help businesses rebound from the pandemic, and low rates support elevated valuation multiples, I think the underlying profits being generated now, and those expected over the next 12-18 months are even more of a tailwind for stock prices.As 2021 began I wrote in my quarterly client letter that consensus expectations for a record high S&P 500 profit figure in 2021 (easily surpassing 2019 levels), while certainly possible, didn’t seem like a sure thing. With the … [Read More...]
Should Investors Freak Out About Interest Rate Normalization?
So far in 2021 the yield on the benchmark 10-year government bond has surged from 90 basis points to over 150 (hopefully you refinanced your mortgage last year) and higher rates have many investors concerned given the rapid rate of increase. Though the financial markets have become a bit more volatile lately, equities have been range-bound and peak-to-trough losses have not been more than 5 percent at the worst point.So how much concern should there be about rising rates? Given that equity prices are a function of profits as much as they are about interest rate sensitive metrics like P-E ratios, I think we really need to look at the big picture. In that sense, a 10-year bond yielding 1.5% is pretty tame regardless of where … [Read More...]
App-Based, Commission-Free Trading Fuels Bubble-Like Behavior
With each passing week I get asked more and more if we are in a stock market bubble. Since there is no one set definition, that is not the easiest question to answer. But if comparisons to the late 1990’s are the closest comp (the only bubble in stocks I have seen firsthand), it is hard to argue against the notion that trading action in the last year or so looks and feels like that period, though it might be narrower in scope.In the large cap space, you have real businesses that are simply trading at sky-high prices, much like AOL, Cisco, and Dell 20+ years ago. Tesla is the easiest example, as they entered the S&P 500 as the 6th most valuable component of … [Read More...]
Will Stocks Really Trade at 22x Forward 12-Month Profits By December 2021?
Goldman Sachs just raised their year-end 2021 price target for the S&P 500 index to 4,300. That implies a 20% gain over the next year or so. The call got a lot of attention, perhaps unsurprisingly, as they expect an above-consensus profit figure for the index next year of $175 (current consensus calls for $165). Just as bullish, they expect stocks can fetch 22 times forward 12-month profits (estimated at $195 for 2022), which is where the 4.300 figure comes from.There is a lot to unpack here. At first blush, both the valuation multiple and the profit estimate appear wildly optimistic. Predicting $175 of S&P profits in 2021, when 2019 was a record-breaking year registering just $157 seems a bit silly to me at this point. Historically, … [Read More...]
Suicide by Robinhood User Shows Some Folks Should Consult With Investing Pros
The stories behind the Robinhood generation of investors is getting worse:Rookie trader kills himself after seeing a negative balance of more than $700,000 in his Robinhood accountIt seems that startups bringing free trades and app-based investing to the uninformed masses might need to be reined in a bit. The narrative in recent years has been that investing can be a low-cost, do-it-yourself kind of thing, where paying professionals a fee is a complete waste of money and only eats into your returns. Of course, that is only true if the small investors have as much knowledge and experience as the professionals and therefore would get zero value from the professional advice (that caveat is rarely mentioned in the same conversation).Now yes, … [Read More...]
As Plummeting Oil Prices Compound Economic Concerns, Here Are 2 Things To Do This Week
Two weeks ago we saw a severe stock market decline, which was followed up with whipsaw volatility but a leveling off of prices overall last week. We are starting this week off with what appears to be somewhat of a panic by short-term market participants, with stock trading halted within minutes of opening Monday morning after a 7% drop (due to a exchange-imposed “circuit breaker” 15-minute trading halt – a rule in place, but never triggered, since 2013). As if the virus was not enough, now we have collapsing oil prices threatening the viability of an entire sector of the economy.If this week is the first time during the coronavirus scare that stock prices meaningfully diverge from the underlying businesses they comprise (a 2,000 point drop … [Read More...]
Market Strategists Focus on December 2018 Lows For Support, Does That Make Sense?
It might surprise many investors to know that despite the violent stock market correction over the last few weeks, the S&P 500 index remains above the trough made during the late 2018 decline. Recession fears during Q4 2018 led to a 20.2% bear market from peak to trough over a three-month period, resulting in an intra-day low for the index of 2,346. Given that 2019 corporate profits were only modestly above 2018 levels, and considering that the economic weakness from COVID-19 is tangible and not just a “growth scare” (like 2018) market watchers who believe a drop back to that 2,346 is possible, or even likely, do not seem out of line to me. Even at this week’s low point (2,478) it would mean another 5% lower and a full 31… [Read More...]
Coronavirus Correction: How Far?
So how far will the U.S. stock market fall as the fear of a coronavirus pandemic tightens its grip on daily trading activity? Since there is no way to know, there is little sense to making a prediction on that front. But that does not mean that we cannot set our expectations based on market history, even if there are no assurances that the actual result will be no worse than said expectations.Without full blown recessions, market corrections are typically in the 10-20% range. Today I updated a graphic that I had last posted on this blog in early 2016, which summarizes recent corrections in the S&P 500 index. The data now goes back 10 years: If the virus starts to slow in the coming days and … [Read More...]
As 2020 Begins, Low Volatility and Investor Complacency Warrants Some Caution
As the new year has begun the same way the prior one ended (a slow melt-up in stock prices without much in the way of concern from any corner of the market), I can’t help but get the feeling that complacency is extremely elevated and investors are mostly bullish. Can the U.S. equity market keep up this trajectory: Can market volatility remain this benign, as the Wall Street Journal reported this morning: “The S&P 500 is in one of its longest streaks without a 1% daily move in the past five decades, highlighting how the latest leg of the stock-market rally has been a gradual climb rather than a euphoric surge. The broad equity gauge hasn’t moved 1% or more in either … [Read More...]
Guess The Valuation – Inaugural Edition
As a fundamentally and valuation driven investor, I am continuously amazed at some of the equity valuations the public market bestows on growth companies, even in an age of near-zero interest rate borrowing conditions. So for those valuation-driven readers, let me present the first of what I will simply call “guess the valuation.” I present you with financial metrics and you tell me how much you think a growth investor, at most, should be willing to pay in total equity market capitalization terms. Before the comments start coming, understand that I am fully aware that this exercise is overly simplistic and one would want to have more data before answering such a question. Humor me please to play along, and feel free to … [Read More...]
The IPO Market Has Taken The Baton From Large Cap Tech And Is Running Like Crazy
For several years until recently large cap technology companies were carrying the U.S. stock market on their backs. The nickname of FANG was even coined to describe the group, which included Facebook, Apple, Netflix, and Google. However, all of those companies saw their stock prices peak in 2018 and move in sideways fashion since, which has resulted in the S&P 500 doing the same over the last year: With the tech sector comprising more than 30% of the S&P 500, as big tech stocks see their rapid ascents halted, so does the overall market… However, with the economy doing well and stocks having rebounded from their Q4 2018 swoon, there are going to be pockets of strength in the market regardless. For a while it was cannabis stocks … [Read More...]
What A Difference A Decade Makes!
There was a lot of talk on CNBC this week about the trailing 10-year returns of the S&P 500 index and what, if anything, they tell us about the duration of the current equity bull market. Interestingly, the U.S. stock market bottomed at 666 on March 6, 2009, and has since returned nearly 18% annually for a decade. The consensus view is that periods of strong market returns are often bookended by low valuations on one side and high valuations on the other side. That is certainly the case in this instance, and I am not sure it tells us very much about the current bull market (in terms of when it loses steam). Using the intra-day bottom during the worst market environment in nearly 100 years, as a … [Read More...]
U.S. Stock Market Seems Like An Obvious Buy For First Time In A Long Time
With the S&P 500 index now down roughly 18% from its peak reached about three month ago, for the first time in years it appears the U.S. stock market is severely oversold and pricing in worse than likely economic conditions. In the two weeks since my last post discussing valuation, the S&P trailing price-to-earnings ratio has dropped by more than a full point and now stands at just above 15x. I have previously posted that we should expect P/E ratios of between 16x and 17x with the 10-year bond yielding in the 3-5% range (current yield: 2.75%). Given that 2018 corporate profits are pretty much in the books already, the current valuation of the S&P 500 assuming ~$157 of earnings is 15.3x (at 2,400 … [Read More...]
With The Elevated Valuation Issue Solved, 2019 Earnings Growth Takes Center Stage
With S&P 500 profits set to come in around $157 for 2018, the trailing P/E ratio for the broad market index has fallen from 21.5x on January 1st of this year to 16.5x today. Surging earnings due to lower corporate tax rates have allowed for such a significant drop in valuations despite share prices only falling by single digits this year, which is a great result for investors. Normally, a 5 point drop in multiple requires a far greater price decline. With sky high valuations now corrected, the intermediate term outlook for stocks generally should fall squarely into the lap of future earnings growth in 2019. On that front, there are plenty of headwinds. With no tariff relief in sight, the steady inching up of interest rates, a surging … [Read More...]