Lessons for a 'Frothy' Stock Market
On Apple, Tesla, and Zoom... Whitney Tilson's 'bubble' radar is on... Lessons for a 'frothy' market... How the Fed has changed the risk curve... Risk and reward in tech stocks... Getting in at the right time matters...
It feels kind of 'frothy' out there today, don't you think?
By that, we mean it feels like the market is ripe for a pullback. They happen, of course.
Except the last one occurred way back in March. And it wasn't just any usual correction... It officially dropped U.S. stocks into a bear market.
So today, with all the major indexes again positive for the year, we don't blame anyone who's on edge a little bit.
We certainly see evidence of what looks like unusual, dot-com-bubble-esque behavior...
Two of the world's biggest tech names – Apple (AAPL) and Tesla (TSLA) – just split their stocks, giving investors more shares for an equivalent price, because their market caps have gotten so big... and then, their prices shot higher afterward.
We also see the share price of Zoom Video Communications (ZM), the darling of the work-from-home transition, similarly continuing to head "up and to the right"... It's now at an even more incomprehensible valuation after the company reported jackpot second-quarter numbers last night. As Stansberry NewsWire analyst Nick Koziol reported...
The video-conferencing software company reported year-over-year sales growth of 355% in the quarter. And it boosted its full-year sales forecast for the second time so far during the pandemic.
ZM shares are up 36.10% on the report. But it's not the only stock benefiting. ZM's results are highlighting the continued need for software that supports working from home.
Zoom's stock closed today at $457.69 per share – up nearly 41% on the day. So far this year, its shares are up an incredible 573%.
As with demand for Apple's products (including a new 5G-capable iPhone that the company said today is coming in October), long-term demand for work-from-home products and services like software is in place. But based on the fundamentals, Zoom's share price makes even Tesla and Amazon (AMZN) look like bargains.
Our friends at our corporate affiliate InvestorPlace noted yesterday that Zoom shares were priced roughly 1,750 times greater than what the company has earned per share over the past 12 months.
And today, our colleague Alan Gula told us that Zoom's multiple of its enterprise value to its next 12 months sales – a popular measure in evaluating Software as a Service ("SaaS") stocks – is now at 42.5.
That's almost 3 times above a comparable average... The median multiple of the 59 public companies in our "Stansberry SaaS Composite" – a pure-play SaaS index that Alan wrote about in the previous issue of our flagship Stansberry's Investment Advisory newsletter – is "only" 15.
In other words, this is frothy stuff...
Our friend and Empire Financial Research founder Whitney Tilson is feeling similar...
In his free daily e-letter today, Whitney said his "spidey sense is tingling"... telling him a bubble is ongoing or a top is near.
Whitney cited two examples... starting with the fact that Tesla and Apple were trading higher after their stock splits yesterday. Tesla added $50 billion in market cap with a 12.6% move higher, while Apple gained 3.4%... even though the stock splits are essentially an accounting metric more than anything.
Whitney shared perspective from his friend, fund manager Doug Kass of Seabreeze Partners, who compared the stock-price behavior with his own "stupid" behavior as a child when his dad used to bring pizza home for dinner. As Doug said...
I would call up my dad pleading for him to bring home the 18-inch pizza with eight slices (not the 18-inch one with six slices) as, to this nine-year-old kid, the eight slices sounded larger than the six-slice pizza.
One day my dad came home with the 18-inch pizza with only six slices.
Disappointed, I started crying, thinking there was not enough for me!
It was only when Mother Koufax (Grandma Koufax's daughter) taught me the lesson, that night, that an 18-inch pizza with eight slices was the same as an 18-inch pizza with six slices.
This silliness, and embracing of post-split shares of Tesla and Apple, is nothing short of stupid – as I was many decades ago.
Then Whitney shared an enlightening, if not scary, and entertaining exchange with an 11-year-old boy whose father asked Whitney to talk some sense into him...
The boy recently asked his dad for $50,000 to trade Tesla options after doing well with smaller investments that haven't gone down since he started making them.
"I know it will go up!" the boy told his dad about Tesla stock. The child insisted even after Whitney urged caution and shared his own story of being a "bull market genius" as a young investor in the late 1990s before the dot-com bubble burst.
Finally, Whitney, a value investor, ended up telling the kid...
I encourage you to learn about a small number of companies you're interested in. Research them. Use their products. Ask other customers what they think. Read their earnings reports and study their financial statements.
Then, if you think you've found a company the market isn't fully appreciating, buy its stock.
Someone focused on short-term trades and riskier speculations might have different advice. Still, in any case, Whitney wrote today that he doesn't see the current stock market as being near "a top" just yet, but more like the beginning of a bubble...
Yup, my spidey sense is tingling...
That said, today's market reminds me more of the beginning of 1999, not March 10, 2000, the day the Nasdaq peaked (the tech-heavy index more than doubled over that period).
As we've said before, two things can be true...
Stocks can be expensive... Some investors can be greedy, and these expensive stocks can still go up in price (until they don't). That has been happening for a long time, just most notably and recently with tech stocks.
And you can still find smart "relative" value at these times as well... To do that, it helps to start by looking at the broader investing environment for context. That's what you have to work with...
Today, the idea of the "Fed put" comes to mind...
The kid who dismissed Whitney's advice is the type of investor – whether he knows it or not – that is acting like the Federal Reserve has given a lot of folks in the stock market a "golden ticket."
By that, I'm referring to the central bank's quantitative easing ("QE")-like "easy money" policies in the form of low rates, negative "real" yields, and a devalued U.S. dollar pushing a lot of investors into stocks and other assets to find meaningful returns.
This has led to things like Apple, with its dividend, becoming almost like what a bond used to be.
The insightful, anonymous blogger and Wall Street veteran John Street Capital noted the cascade of effects of next-to-nothing yields in savings accounts and the new risk-reward dynamic of stocks in a recent podcast with noted angel investor Howard Lindzon...
I used to say that QE turned your checking account into cash, the savings account into your checking account, the bond market into your savings account, the equity market into the bond market, the venture market into the equity market and it gave rise to the crypto market.
It pushed everybody up the risk curve. People were chasing the highest risky assets because, given this liquidity, it's where they thought you would see the greatest return.
That's all we're doing [today], and we're doing it on steroids...
At the same time, demand for all technology has grown exponentially since the dot-com bubble...
Gartner Research expects worldwide information technology ("IT") spending to total $4 trillion in 2021. This figure compares with $2 trillion at the start of the century.
And the firm expects "cloud" spending to grow to $350 billion per year over the next two years... None of that even existed in 2000, of course.
Still, does that explosion of new spending justify that the big five by market cap of Apple, Amazon, Facebook (FB), Alphabet (GOOGL), and Microsoft (MSFT) – all cloud companies to various degrees – account for roughly a quarter of the benchmark S&P 500 Index?
And take a favorite of a few of our editors, e-signature software company DocuSign (DOCU), as another example...
After catching some of Zoom's SaaS sector tailwind, DocuSign was up roughly 21% today. And even before that, as Alan shared a few weeks ago in the Investment Advisory, the stock was already expensive relative to its SaaS peers.
This example illustrates the key of getting in (and out) of these trades at the right time. Our team recommended DocuSign back in October 2019, when shares were still relatively cheap... and Investment Advisory subscribers who followed the advice to buy back then are up more than 300% today.
It's a similar story with our team's latest SaaS pick in our flagship newsletter. Alan identified this stock as "relatively" cheaper to its peers, meaning there was more upside based on a lot of the same broader thesis for SaaS stocks in general. As Alan wrote last month...
Valuations also reflect sales-growth rates. Investors should be willing to pay more for a company that's growing sales 30% a year versus one growing sales 10% a year.
The Stansberry Investment Advisory team's latest SaaS pick is now up more than 13% in less than a month. And it's also now already above their recommended buy-up-to price after a generous bump today.
But that doesn't mean you won't find other smart investments in this sector over the next few months and years. Our team is constantly searching and finding these investments.
To get in on our team's next recommendation as soon as we publish it, be sure to subscribe to Stansberry's Investment Advisory if you don't already. You can give it a try risk-free today. Click here for more information.
What a Biden Administration Could Mean for the Markets
James Early, CEO of Stansberry China, breaks down how the investing landscape could change under a Biden-Harris administration.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 8/31/20): Amazon (AMZN), Cognex (CGNX), Fortuna Silver Mines (FSM), KraneShares CICC China Leaders 100 Index Fund (KFYP), Flutter Entertainment (PDYPY), ProShares Ultra Technology Fund (ROM), Sabina Gold & Silver (SGSVF), Sprott (SII), Silvercorp Metals (SVM), Victoria Gold (VGCX.TO/VITFF), Vanguard Inflation-Protected Securities Fund (VIPSX), Belo Sun Mining (VNNHF), and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP).
In today's mailbag, more feedback on Dan Ferris' latest must-read Friday Digest. Do you have a comment or question? Send your e-mails to feedback@stansberryresearch.com. As a reminder, we cannot provide individual investment advice, but we do read every note.
"Thanks as usual, Dan. My assessment is that there is one thing that isn't changing and that is the Fed's direction. In other words, they still think they can control the economy, and I'm guessing now they will continue down the same path they have been on. They will do this because the government, synonymous with the Fed, has foolishly increased their debt for 30+ years. Their choices are to decrease the size of themselves and their promises or create inflation." – Paid-up subscriber Al M.
"Dear Mr. Ferris, my compliments for the fine and somewhat funny commentary (or should I say translations) of Mr. Powell's speech. Especially the often forgotten quotation of Adam Smith 'the Moral Sentiment.' As an old (1935) Dutch econometrist I could not agree more on the 'message' you sent out to us all." – Paid-up subscriber Teunis Z.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 1, 2020