Round 2 of the Contest of Compounder Champions!
Upcoming Earnings Calendar (Jan 31st- Feb 4th)
Here's the earnings calendar for next week! Here's what I'm interested in:
- $XOM - Insights on the global oil market.
- $GOOG - Strength of the digital ad market + growth of YouTube (since $NFLX slowed down).
- $FB - Comments on their strategy to monetize Whatsapp (I don't expect any, but one can hope).
- $SPOT - They recently expanded to other markets, so maybe they can maintain accelerated growth, unlike Netflix.
- $AMZN - AWS and Advertising segment growth + impact of the increase in 3P fees.
What are you looking forward to next week?
If you'd like an easier way to track earnings dates, you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.
Upcoming Earnings Calendar! (Nov 1-5)
Hey guys! Here's next week's earnings calendar! Several very interesting companies set to report earnings. Here's the one's I'm most excited about and why:
- $APPS: any sign of iOS ad dollars shifting to android (Digital Turbine's revenues are mostly from android).
- $Z: an update on the real estate market and iBuying
- $LYFT and $UBER: is mobility in the US back to pre-pandemic levels?
- $COIN metrics on the NFT market.
- $PENN and $DKNG update on the mobile sports betting market.
- $ATVI number of Call of Duty Warzone players. The last reported number was 100MM.
- $CRSR: comments on the supply chain issues they're experiencing.
- $MELI: update on the Brazilian e-commerce market. Relevant for $SE's expansion.
Comment below which earnings report you are looking forward to the most!
Friendly reminder: you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.
Inflation, Deflation, Elon, and Cathie
This is a broad macro piece on my thoughts around inflation, deflation, and the conflicting forces. Please note, I am not an economist by trade, simply an observer.
I’ve been thinking a lot about this thread between Cathie Wood and Elon, and inflation in general. Elon Musk asked Cathie, the CEO of ARK the below question:
Her response thread was pretty interesting.
I respect Cathie and her company, but have mentioned before my worries on the ARK’s risk cluster. I also don’t entirely agree with her thesis on deflation.
Cathie’s thesis seems to be that the stock market isn’t that expensive now (compared to the early 1900s) because of the deflationary impact of technology. Because of that, supports current valuations, and gives the market more room to run.
The Thread: GDP and Productivity
Click below to read her whole thread if you would like. I don’t have every tweet included.
> GDP statistics evolved during the Industrial Age and do not seem to be keeping up with the digital age.
Cathie is saying that both real GDP growth and inflation are mismeasured. Because of this, things are actually better than they seem to be.
Productivity, which is referenced as a driving force for economic growth, is equal to the ratio between output volume and input volume - so how efficiently labor and capital are used to produce something.
She states that GDP growth is higher than expected and inflation is lower - which doesn’t make a ton of sense (how can you get more for less or less for more, and numbers not capture that?) But if we do have increased productive capacity, she is right - that raises potential GDP and can have a deflationary impact.
So how do we measure productivity - a few different ways:
- GDP / hours worked
- Flow of productive services that can be drawn from past investments
- Multi-factor productivity
According to data from BLS, productivity hasn’t increased (on paper).
But Cathie’s thesis is that things are actually different - that all of the above are potentially not the correct way to measure productivity. A big driver behind her argument is that earnings quality has improved - that GDP stats aren’t capturing the fact that companies are better.
You can look at earnings quality from a few different angles:
- Non-GAAP vs GAAP EPS: See below for some Non-GAAP magic, partly from pandemic impact. Is productivity higher or is accounting just easier to play around with?
- Profit Margins: Profit margins haven’t improved as much as earnings have. With the fluctuations in the PPI (to be discussed later) profit margins will likely continue to contract. This doesn’t mean that companies aren’t “productive” - but it does work against the idea that earnings quality is higher.
- Corporate profits as a % of GDP: Corporate Profits are now ~10% of GDP, after hovering much lower for most of the last century. This feels like a chart crime too, but it shows that companies are earning more relative to GDP.
Does this mean that companies getting more productive? Maybe.
But the flows towards unproductive assets (pre-revenue SPACs, potentially some of the meme stocks, and other stagnant goods) more shows that there is just a lot of money around right now. This isn’t a bad thing - but just because earnings have increased doesn’t mean that they are all going towards productive assets.
The Thread: Good Deflation
This is a big part of the narrative. Good deflation is supported by tech, and tech inherently is deflationary. That is true.
- Demand and Deflation: Explosive demand and deflation are inherently contradictory. The mismatch between supply and demand does create some inflationary headwinds, at least in the short term. However, over time, this will result in deflation.
- EV and battery technology: This is a reason that some of these SPACs can go on and SPAC at absolutely wacky valuations - because of the promise of growth and explosive demand, backstopped by the idea of deflationary pressure. Is this “productive”? Only time will tell.
- Rates: rates will remain low forever - if we do have deflation. So inflation expectations will be unfounded - giving support to higher valuations.
She came back a few days later to explain some of the “good vs bad deflation” and references the S&P / US GDP as a source for anchoring market valuations.
Here is what she is referring to:
The whole thesis is that the market is underpricing growth right now, relative to history. The idea is that the market was more expensive in the late 1800s and early 1900s (2-3x higher) so the market today has more upside. This is bizarre.
I think she means that we are in a similar space now - and that equities have more room to run because of that (go 2-3x higher).
There are some parallels that she draws between now and then - the Roaring 20s was fueled by technology-enabled platforms, primarily:
She cites learning curves (the infamous Wright’s law) as creating the deflationary impact (tech makes things cheaper), coupled with the gold standard.
The idea is that deflation leveled the nominal GDP, with general growth and productivity boosting the quality of earnings. Add in low interest rates = companies have a higher market cap.
Today, we have more tech (the deflationary forces and the learning curve):
- Genomic sequencing
- Energy storage
- Artificial intelligence
- Blockchain technology
She also refers to Bitcoin as today’s gold standard. So things are similar to the 1800s, 1900s - but the stock market is lower now, so there is more room to the upside.
> Deflation should lower the velocity of money, a mirror image of the seventies.
Seems like we are already there.
The theory is that people will not spend, because they expect prices to fall. The only inflation that we would see would be in asset prices. I am not sure if this theory entirely holds up - velocity is already so low.
I don’t think we are in a world where tech allows us to wait. There are so many products, service, etc released instanteously - waiting cost is outweighed by FOMO.
Overall, I see what she is saying. I have immense respect. But I think it’s tough to compare now to the early 1900s, and say that equity markets are cheap relative to then.
It was a completely different time. For 4 main reasons (MarketDog has a good recap):
- The stock market wasn’t as important then as it is now. Most of the economy was centered around mom-and-pop shops, not large cap corporations
- There were fewer companies. There were fewer investors. Most people had no idea how to invest (because of lack of access).
- The economy wasn’t centered on tech like it is now.
- There wasn’t the same level of fiscal support and monetary policy intervention
She highlights at the end that
> “This time is different” are dangerous words in forecasting markets.
And she is right. Markets are forward looking, but they have a memory. I think the argument of deflation is interesting - primarily because of all the short-term inflationary pressures that take precedence to the long term deflationary impacts.
So, do we have inflation?
I don’t know (a terrific conclusion).
I am writing this because I think we have inflationary pressures - the long end of the curve is pricing in an expectation of inflation and the expectation of tightening. But I also agree with Cathie that there are longer term deflationary forces that will price out some of the short term inflationary pressures.
Shorter Term (?) Inflationary Pressures
The CPI is set for today at ~2.5% expected for Headline CPI and 1.5% for Core. A lot of the gap between the two is driven by increased energy prices.
- CPI has remained “low” for the past several months. And note, this is a very large gap - 1% is definitely not a nonfactor in the inflationary world
US Producer Price Index climbed 1% on a seasonally adjusted basis in March (~12% annualized)
- There are severe supply chain bottlenecks and increasing commodity costs. Aluminum, copper, oil, and lumber have all surged in recent months.
- Rising air and freight costs to ship its goods
- Eventually, some of these costs will get passed off to consumers. Or companies will eat the cost - which will bite into margins, and presumably impact their performance (doesn’t bode well for their stocks)
Stimulus and pent-up demand
- The idea that we can expect ~7% GDP growth and not have inflation seems strange. I understand that y-o-y everything will seem outsized - but surely the gap up of demand will drive some pressure.
Jump in the 10Y: It’s calmed down quite a bit, but the pace of the move upward was concerning. It shows that the market is expecting inflation (or at least doesn’t trust the Fed as much as it used to).
- The 10-year break-even rate, climbed to its highest level since 2013 last week, at 2.36%
Asset Inflation: The stock market seems expensive. Home prices are on an absolute rip.
- However, Jamie Dimon highlighted in his recent letter that economic growth could support where markets are currently at. “While equity valuations are quite high (by almost all measures, except against interest rates), historically, a multi-year booming economy could justify their current price.”
- Continued growth could support these valuations - but that requires a “booming” economy - which could be weighed down by the above
The Dual Mandate: Unemployment and Inflation
Part of the reason that the Fed hasn’t pulled back on QE is because there is still a real economic gap in employment - all the numbers are skewed because of the pandemic.
- This is why it would potentially be a bad move for the Fed to move now. Many are still unemployed (or are just now getting their jobs back).
Things have to normalize (whatever that means) before we can get a true
sense of what things mean. Even if we do have outsized inflation, we still have to reach the Fed’s target - which will take some time. That is a whole other can of worms to unpack.
There are broader macro risks that can send the market into a tailspin - and that will create outsized pressure that the Fed won’t be able to maintain.
Leverage (looking at you, Archegos). Consumers are also trading with incredible margin - which is concerning for if/when the market does pull back
- “Investors had borrowed a record $814 billion against their portfolios... up 49% from one year earlier.” That’s a lot of margin!!
- The massive unwinds and the liquidation that was the Archegos debacle could be a warning sign of what could come.
Concentration risk: This is my main problem with ARK (circling back to Cathie). I wrote about it a little bit in my Stonks piece, and I have some quick videos on it (here and here). There is illiquidity, volatility, intercorrelation, just general reflexivity from fund flows. That creates an ARK bubble, which is going to be painful if it pops.
Conclusion: There is some sort of Flation
In conclusion, I am uncertain. A lot of market movement is expectations and companies that can play into growth opportunities (tech companies as highlighted by Cathie’s thread) are going to price based off expectations, not so much current fundamentals.
Tech is deflationary. But supply chain risks are inflationary. In the long term, I think we will experience deflation as tech will expedite so many processes and create so many efficiencies - but in the short term, it does seem like that there are inflationary headwinds that the Fed and other policymakers could be underpricing.
What to do? $SPY
- Luxury goods: Someone will always pay for something. Fashion never dips out of style for some - also, these brands ($RACE or LVMHF for example) have a lot of pricing power
- Crypto: Time will only tell here, but for now, crypto seems like a gold-like hedge against inflation and the potential valuation compression that can come from a rise in real rates $ETH.X
- Hard goods: The supply and demand nature of commodities makes them decent investments. I think that their inflationary headwinds should be short lived (hopefully) but companies with energy exposure could be interesting. $ENPH
Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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Awesome memo @kyla! Agree on a lot of these points. Totally agree on tech being deflationary. That and globalization have been two megatrends keeping a lid on the CPI.
I also see what Cathie is saying, but perhaps the drivers of the unusually high S&P 500 / GDP ratio are much simpler. I thought this chart was super interesting: https://twitter.com/Schuldensuehner/status/1379098735796490246?s=20
Idea: Ferrari ($RACE)
In 2019 the luxury car market was valued at $500bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an experience and that category is projected to grow at an even higher rate.
One good thing of a luxury goods company is it is a price maker. Ferrari can increase the price of their cars by about 4-7% per year and still reach strong demand.
Special cars have historically been about 2% of sales but they will become a larger part of the business. By 2023 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars - sell for more than 1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased, EBITDA margins for the whole group could increase from 33% to 38%.
Another important thing of a luxury goods player is careful management of supply. Current product capacity is about 16000 cars per year yet only 9000 are made. In comparison, Porsche sells 25000 to 30000 911s per year. Ferrari could increase production to 16000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years. That’s a lot more than in the past. It takes about 40 months to produce and launch a new car.
2 potential risks to the Ferrari growth thesis:
- Do wealthy millennials want a Ferrari? Do they even want to drive at all? There could be a demographic timebomb? The Ferrari sweet spot is in the 35 to 50 year old age range. Even though fewer millennials drive during their 20s than previous generations by age 30 they catch up.
- Changes in consumer preference. Consumers may become more environmentally conscious? They might prefer to use autonomous cars? The most bullish forecasts suggest that EVs may become 30% of the fleet by 2030. In addition, Ferrari are aiming for 60% of their new cars to be hybrid by 2023. The hybrid cars will have higher price tags and be more profitable.
Luxury goods companies with a similar financial profile to Ferrari have an average P/E 25. If you put Ferrari on that multiple it implies 60% upside. Valuing Ferrari by its cashflows implies a growth requirement of 3.5/4% per year, yet it has been growing its top line at 10% per year for the past 20 years.
There is room for further sales. Ferrari have sold almost no cars in China. Surprisingly the embedded fleet in China is less than 500 cars.
3 potential stocks to expand your portfolio
Thinking about which financial instrument to add to your portfolio is always a challenging task, especially in a market where almost everything is overbought. You may already own these three stocks, but if you don't they have good technicals and fundamentals to get in or to add up.
Starting first with Ferrari. At first, sounds like an exotic stock, but the race-car manufacturer is still on track. And it's not because of the newly born millionaires from the latest rise in the price of Bitcoin ...
Let's take a look at what's under the "hood" of Ferrari ($RACE). Technically we have a well-formed uptrend and Yesterday that trend was tested at the earnings which were good. Volumes activity was big since the bottom formed after the first lockdown. The candle formation ended with a pinbar . MACD and RSI are still lagging, but the trend holds. Fundamentally the financial look of the company is stable in revenue and EPS aspect. Also, the racing car manufacturer is decided to take on the electric cars market, as well as delivering three new models.
Next is Nio ($NIO). Already a familiar company and attracting more and more investors. Earnings are on the 9th of March. Revenues and EPS are shaky, but investors are betting on the long-term success of the company. Ford terminated their contract to manufacture electric cars in China, but Nio managed to cement their position in the Asian country. MACD here is lagging, but RSI is moving above 50 and the trend is intact. The price is currently forming a bullish flag on the daily chart and if it is triggered we may head towards the $70 range.
Last, but not least - Raytheon ($RTX). Technicals are looking better here as RSI is moving from oversold territory and above 50. MACD has a crossing and the histogram is starting to move into positive territory. The uptrend is intact. Earnings passed, although they are a bit disappointing, financials are looking stable for the company. The company recently won a $290 million contract with the U.S. Navy. That will attract more revenue for the company and will keep it busy in the long-term.
Earnings this week
Which ones are you most excited about?
Monday, February 1st
$TMO Thermo Fisher Scientific
Tuesday, February 2nd
$UPS United Parcel Service
$EA Electronic Arts
$MTCH Match Group
Wednesday, February 3rd
$RCL Royal Caribbean Cruises
Thursday, February 4th
$GILD Gilead Sciences
$ATVI Activision Blizzard
$ICE IntercontinentalExchange Group
$WYNN Wynn Resorts
$U Unity Software
Friday, February 5th
$EL Estee Lauder
Sources: Business Insider, Google Finance, and Yahoo Finance
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Interested to see $SPOT continued transition to podcast biz.
$NTDOY and $ATVI of course on the gaming side. Guess you can include $U in that but I'm focused on $U to track the ad biz, penetration outside gaming, gaming take rates, etc. etc.
$QCOM big stuff on the 5G side
$PYPL fintech booming
$PINS continued growth tracking
Earnings this week
Monday, Nov 2nd
$AMC AMC Theatres
$EL Estee Lauder Companies
$WM Waste Management
$CWH Camping World
Tuesday, Nov 3rd
Wednesday, Nov 4th
$MRO Marathon Oil
$SMG Scotts Miracle-Gro
$WYNN Wynn Resorts
Thursday, Nov 5th
$TTD Trade Desk
$Z Zillow Group
$TTWO Take Two
Friday, Nov 6th
$VIRT Virtu Financial
Sources: Business Insider, Google Finance, and Yahoo Finance
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Some earnings this week
Monday, August 3rd
$MPC Marathon Petroleum
$TTWO Take-Two Interactive
Tuesday, August 4th
$ATVI Activision Blizzard
Wednesday, August 5th
$CVS CVS Health
Thursday, August 6th
$Z Zillow Group
Friday, August 7th
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