You Likely Own the Ultimate Meme Stock
I'm a hybrid bear... Embracing 'fanatical thinking'... Assessing risk, not predicting... My exquisitely timed warning... When mindless buyers become mindless sellers... The ultimate meme stock that you likely own...
I'm an endangered species...
This species was rare enough to begin with, but now there are fewer of my kind than ever.
I (Dan Ferris) have been a member of the bear species since 2017.
It has been a tough time for us bears...
Market declines in 2018, 2020, and 2022 aside, watching stocks continue to make new all-time highs means that so far, each dip really was just another buying opportunity.
So you could say I deserve to be a rare species... because being too bearish for too long seems the most obviously avoidable mistake in the U.S. stock market, which has produced stellar returns for decades.
Sympathetic readers will note that I'm something of a hybrid bear. I never predict market declines. I've never once advised anyone to sell equities. And since 2017, I've made dozens of new buy recommendations (with Mike Barrett in Extreme Value and on my own in The Ferris Report).
This doesn't change the fact that valuations today are mega-bubble levels, which historically have been followed by steep bear markets and brutal decade-plus sideways markets.
I always say, "Prepare, don't predict," and encourage folks to own Treasury bills, gold, and a few other things I've discussed in The Ferris Report to prepare for whatever might come our way.
As I've noted a few times, hardly anybody else is saying this stuff, so I might as well do it...
Even fewer folks are saying it now...
In May, one of Wall Street's last remaining bears – Mike Wilson, Morgan Stanley's chief U.S. equity strategist – threw in the towel and predicted the S&P 500 Index would hit 5,400 by the second quarter of 2025.
The index closed at 5,308 that day and has been as high as 5,667 since... So it wasn't the most dramatic call. But it technically does qualify as the capitulation of one of the Street's last bears.
Two months later, the last big-name bearish equity strategist on Wall Street – Marko Kolanovic, JPMorgan Chase's chief global market strategist and co-head of global research – lost his job.
Bloomberg reported on July 3 that an internal memo said Kolanovic was "exploring other opportunities," meaning he's leaving the bank after a 19-year stint there. Over the past two years, Kolanovic was bearish in rising markets and bullish into falling ones.
I don't know the details of Kolanovic's departure, but I do know that it just gets way too hard for clients to listen to someone they think is too far out of touch with the market for too long. The business thrives on keeping clients around, not on any given market call by any given analyst.
Stifel, a much smaller investment bank, still employs Chief Equity Strategist Barry Bannister. He summed up the problem with being bearish in a recent Financial Times article...
This rally has been tough and we're having a hard time convincing [clients] to be bearish. There's a wall of money that's willing to buy the market at any price and embrace fanatical thinking. People are bubbled up right now, they think the sky is the limit.
I feel his pain, and I'm grateful that Stansberry Research (and its subscribers) are more understanding than clients who demand market-beating gains every quarter. But so far, it has been better to bubble up than to bear down. Bannister expects weak growth and persistent inflation to drag the S&P 500 down 13% from recent levels by the end of the year.
The FT's writer was more blunt than Bannister...
Bears have a long history of finding it difficult to hold on to their contrarian views. While staying bearish could cost them their job during lengthy bull runs, capitulating and turning bullish can make them look foolish if the downturn they had been predicting materialises soon afterwards.
Both Bannister and the FT are right, of course. There is so much career risk in being a bearish analyst on Wall Street that you have to wonder why any of them would ever do it.
Maybe the real mistake is trying to get every market wiggle right all the time...
This effort is so stupid and unnecessary. And frankly, we also know that it's undoable. Nobody is famous for consistently providing accurate predictions on the short-term direction of the big stock indexes. Those people don't exist.
The whole exercise is a marketing scheme. Wall Street analysts aren't primarily financial prognosticators. They're top-down BS artists trying to sell clients on how smart they are. It's marketing, not financial analysis.
From a business perspective, I have little reason to be bearish... Prospective subscribers have rarely flocked to us in response to a message about stocks falling. Mostly, people want you to tell them that some stock or another will go up a lot very soon.
For most people, there are only two reasons you'd ever want to be bearish: to try to guess right about a stock market decline so you could make money by shorting stocks, or to simply avoid losing money by selling and waiting for the decline to bottom out.
That's not what I want to do at all.
My primary objective is not to predict market declines. It is to help readers understand, recognize, and control risk.
To that end, I hope I've done an adequate job of making it clear that steep, protracted bear markets are rarer than garden-variety market corrections. That goes double for decade-plus sideways markets.
Still, sometimes those conditions get likelier than most folks would guess. I believe one of those times is right now.
Last week's Digest provides a perfect example of what I'm trying to do for readers...
And by sheer coincidence, my timing was absolutely exquisite.
Last week, I wrote about how insanely overvalued Brad Jacobs' QXO (QXO) was... and it didn't take long for the market to correct its mistake.
The stock fell 80% on Tuesday after a company filing on Monday showed that, though QXO has roughly 395 million shares outstanding, its fully diluted share count is as high as 789.6 million.
The company also allowed investors whose stock had previously been locked up to sell their shares in the public market. Until then, only something like 0.1% of the shares traded publicly. Coupled with meme-stock-like fever running through their veins, this lack of liquidity allowed naive individual investors to run the share price through the roof.
I reported that Jacobs had injected $5 billion into the company and showed that its market cap, at multiples of that sum, was exorbitant. All Jacobs had done so far was raise money. The company still has no business operations.
I didn't report a couple of important things about QXO last week...
First, Brad Jacobs invested his own money in QXO at $4.57 per share back in December. He sold shares to other investors at $9.14 per share. All those shares were locked up until Tuesday, when many of them were able to trade freely, resulting in the stock's steep decline.
Second, the company's latest balance sheet indicates that it now has a total of $6.3 billion in cash and no debt.
Depending on whether you use the current share count or the fully diluted share count, investors who buy today are paying somewhere between $4.7 billion and $9.5 billion for $6.3 billion in cash. Anything above that cash amount is what you're paying for Brad Jacobs and his team.
When QXO had a market cap of $87 billion at its peak, that Brad Jacobs fee was completely ridiculous. Now, at a maximum of $3.2 billion (the difference between the $9.5 billion valuation and the $6.3 billion in cash), it might not be so crazy.
Investors simply need to understand that the share count will likely rise to nearly double its current amount as Jacobs starts tapping into the remaining equity to acquire companies and grow the business.
The inevitable rising share count is not a huge problem. A new business needs capital, and Jacobs has made a specialty of allocating it well. He has rolled up companies in industries that need plenty of capital, like waste hauling, large-equipment rental, and trucking.
And let's not forget the stellar outcomes of Jacobs' previous efforts, which have generated a total market value of about $70 billion. As we noted in last week's Digest, his previous three roll-ups all generated massive multibagger returns.
The question is whether or not QXO is a good bet at the current share price.
Well, one thing is for sure... It's a much better buy around $12 per share than it was in early June above $200, or last week when I finally noticed it at around $80.
Though still not a bargain, it might be a decent bet right now if you're patient enough to buy the stock today and forget you own it for a long time. As we made clear last week, expecting Jacobs to create many billions worth of value over the next several years isn't crazy at all.
And if you think of yourself as paying just shy of $10 billion (the fully diluted market cap) for the whole business, you'll automatically lower your expectations to a more reasonable level. And yes, that big dilution in Jacobs' hands is more valuable than in the hands of many management teams.
One more thing about QXO...
What troubles me about QXO this week isn't so much its valuation as the fact that it became the latest meme stock.
That's true even though it doesn't resemble the two meme-stock poster children: movie-theater owner AMC Entertainment (AMC) and bricks-and-mortar video-game outlet GameStop (GME).
They're dying businesses in deteriorating industries. Before their first explosive meme-stock runs, they were heavily shorted, which as you know led to the epic short squeezes that sent them soaring.
These companies were heavily touted on social media. They desperately needed to raise more money to survive. They were able to do that when their stocks soared to insane heights, allowing them to sell plenty of new equity. Neither company is run by a great capital allocator.
QXO is not heavily shorted. Data compiled by Bloomberg puts its most recent short interest at a mere 0.02% of shares outstanding. Though it was mentioned in a recent Financial Times story, QXO isn't exactly a social media darling.
It doesn't have an operating business yet, though we know it intends to acquire companies in the construction materials distribution industry. It has $6.3 billion in cash and no debt. It certainly doesn't need money to survive like AMC and GameStop.
Anybody who has been around the stock market long enough expects naive investors to believe crazy things about lousy businesses...
It's just the way things tend to work. I realized years ago that it's reasonable to expect the biggest short-term moves from all manner of microcap garbage, not in spite of the fact that nobody really knows what they're worth, if anything.... but because of it.
One of the reasons exploration mining, biotech, and other sectors are so prone to volatility is that it's really hard, often truly impossible, to value a given company. The potential for the market to get that value wrong in either direction is greater than average. Size and liquidity can compound the difficulty and amplify the volatility.
But anybody who bothered to look could learn that QXO stock had been sold at $4.57 and $9.14 per share. And that all it owns is a giant slug of cash worth around $8 or so per share, fully diluted.
So a meme stock doesn't have to be a lousy business that's heavily shorted. It's potentially any illiquid stock whose value naive investors don't understand.
That's troubling for one overwhelming reason...
Most investors understand nothing about the stocks they own...
They're like Bannister said, investors embracing fanatical thinking, throwing a wall of money at stocks with zero reference to any fundamentals. Rather than the bland label of passive investing, I have to call it what it is: mindless investing.
It's just like what meme-stock and QXO fanatics did, but on an absolutely massive scale. Today, more than half of all Americans are invested in stocks, and more than half of them are passive investors... mindless investors.
While the entire U.S. stock market isn't as illiquid as QXO was before Tuesday, there are definitely thousands fewer stocks to choose from over the past few decades.
According to private-equity firm Apollo's chief economist, Torsten Slok, the number of publicly traded companies has fallen from more than 8,000 in the mid-1990s to a little more than 4,000 today. JPMorgan Chase CEO Jamie Dimon expects the number to halve again over the next 20 years. Going public just isn't what it used to be. Initial public offerings hit a 32-year low in 2022.
Eric Hippeau, management partner at Lerer Hippeau, says...
Several factors have precipitated this decline: mergers and acquisitions among public companies, increased regulatory hurdles and compliance costs, and the availability of more capital to allow companies to stay private for longer and avoid the pressure to deliver short-term results that comes with being public.
Hippeau also says that going public through a special purpose acquisition company ("SPAC") once showed promise, "but in recent years, they've been overburdened with regulations that all but obviate their intended purpose."
With more and more money mindlessly aimed at fewer and fewer companies, the market becomes prone to meme-stock dynamics on a larger scale. As I've asked before, what happens when the mindless buyers become mindless sellers?
We already know that mega-cap stocks can lose massive amounts of value very quickly... like on February 3, 2022, when Meta Platforms (META) lost $232 billion of value in a single day.
It's not such a huge leap to believe that sort of thing could happen on a much larger scale. If that kind of one-day move is possible, a similar move in the S&P 500 is more likely than anybody currently believes, too.
Passive investors don't understand the companies behind their S&P 500 investments... And if the herd suddenly starts selling, liquidity will dry up.
Put another way... comprising 80% or more of the total U.S. market cap at any given moment while the market is overvalued, the S&P 500 is the world's largest meme stock – and you likely own a piece of it.
Bearish predictions haven't been right since the market bottomed in October 2022. But stocks are once again trading at mega-bubble valuations.
The cyclically adjusted price-to-earnings ("CAPE") ratio bottomed out at 27 in October 2022. It's 35 today – exceeded only by dot-com era and late 2021/early 2022 highs.
Though you can measure U.S. market cap in different ways, all measures of the ratio of total U.S. market cap to GDP show that today's levels are roughly in line with the all-time highs of late 2021.
So it's not an exaggeration to say that stocks have almost never been this expensive.
I keep wondering about the potential long-term consequences of 40 years of declining interest rates culminating in zero-percent rates for several years.
Maybe it's that stocks will remain egregiously expensive longer than anyone ever would have guessed... But even if that turns out to be true over the next several years, it's nothing you should bet on.
Again, I'm not making any predictions... just pointing out risks that most folks probably don't think about much.
New 52-week highs (as of 8/1/24): AbbVie (ABBV), Alpha Architect 1-3 Month Box Fund (BOXX), Brown & Brown (BRO), Colgate-Palmolive (CL), Coca-Cola Consolidated (COKE), Danaher (DHR), Direxion Daily Real Estate Bull 3X Shares (DRN), Fidelity National Financial (FNF), Hologic (HOLX), Coca-Cola (KO), Lockheed Martin (LMT), London Stock Exchange Group (LNSTY), Newmont (NEM), Northrop Grumman (NOC), Novartis (NVS), Sprouts Farmers Market (SFM), Thermo Fisher Scientific (TMO), Vanguard Short-Term Inflation-Protected Securities (VTIP), Utilities Select Sector SPDR Fund (XLU), and Health Care Select Sector SPDR Fund (XLV).
In today's mailbag, a question about the escalation of the war in the Middle East, which Digest editor Corey McLaughlin wrote about in Wednesday's edition... and an observation about inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I have a question, which none of the journalists seem to be asking... How the heck does Israel get a missile all the way from Israel to the capital of Iran without it being detected? Iran has all kinds of radar & defense capabilities. Not to mention it would have to fly over two other countries to get to Iran (unless it wasn't launched from within Israel). I smell a conspiracy theory cooking." – Stansberry Alliance member G.F.
Corey McLaughlin comment: So, your instinct is right... Since Wednesday, this story has changed a bit. Initially, Iranian state media claimed the assassination of Hamas leader Ismail Haniyeh just north of Tehran happened via an "airborne projectile."
But several Western outlets, citing anonymous sources, have since reported that Israel's Mossad intelligence agency managed to plant a bomb in the location in question two months ago, in the specific room at an Iranian military guesthouse that they learned Haniyeh stayed in when he visited Iran.
That's quite a plot "behind enemy lines." Either way, though, the point we made Wednesday is the same: It seems Iran will seek retaliation for an attack on its soil, which would escalate the war in the Middle East once again... and stoke inflation fears.
"How's this for inflation, according to the Orange County (Calif.) Register...
Over just the past three years rates have skyrocketed 51% for customers of Southern California Edison and Pacific Gas & Electric, while they've jumped 20% for customers of San Diego Gas & Electric, according to a new analysis by the Public Advocate (the branch of the California Public Utilities Commission that's supposed to represent the little guy).
"This has happened to many bills in the last few years and all over the U.S." – Subscriber Norman B.
Good investing,
Dan Ferris
Eagle Point, Oregon
August 2, 2024