Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
Happy Fri-YAY, High Note fam. Hanukkah is underway and we are a couple of weeks away from Santa. The market continues to be in a festive mood still bouncing around all-time highs. The marquee story this week is that the FDA has approved the Pfizer COVID vaccine. Orders have been placed and supply chains are busy little elves, but we are yet to realize the full scope of the timing. So as that sorts itself out the country continues with the hardship of the virus. Hospitalizations are up, cases are up and new shutdowns/closures are popping up left and right.
With a vaccine on the way, one has to hope this a “darkest before the dawn” situation. The stock market has more or less determined the pandemic is over because it’s always looking ahead. We mere mortals are left to slog through the end of this chapter, but it is made easier with the comfort of knowing that the market isn’t a mess. We’ll take it.
Still no new stimulus deal, but that’s probably because Majority Mitch and Speaker Nancy are waiting to do a surprise announcement when the clock strikes midnight on 12/31. And who are we to spoil a good surprise? With places like NYC closing restaurants and indoor dining again the pressure to help small businesses is going to ramp up hard in the next week. In addition to their contingents, scrutiny will come from governors and mayors to get something done. But you know how it is when you have your New Year’s Eve outfit planned out and ready to go – you don’t want to have to wear it early…
We hope everyone is staying safe and warm and happy and healthy.
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Delivering Irrational Exuberance
The market welcomed DoorDash and Airbnb to public trading this week by way of Initial Public Offering (IPO) and oh boy. Speaking in 1996, Alan Greenspan warned of the upcoming tech bubble by famously coining the phrase “irrational exuberance.” A supremely educated man, it was his nice way of saying, “oh boy,” while observing dot com stocks entering the market at crazy valuations. The new listings this week have a bit of that feel. In most new offerings it is more about the potential of the company than what they have already accomplished, which makes it hard to value them. It’s speculating and there’s nothing wrong with that. Tesla for the most part has been a speculative play its entire existence and has worked out well for many investors. That said, there is speculating and then there is SPECULATING with a capital “S” and capital ALL OTHER letters. The table below shows some usual suspects with the two new editions. Price-to-Sales is certainly no end-all-be-all valuation technique, but it’s one of the few relevant comparisons we can make for growth stocks.
How to read it – Amazon, for example, is the “cheapest” stock with a PS Ratio of 4.5…which means the value of the company is equal to how much they sell in four and half years. Tesla, as you can see, is at twenty-one years as speculators think what they are selling now is a mere fraction of what they will sell in the near future. With explosive growth, that will bring the 21 number much more in line with the other names if they can deliver on that growth. After the initial market pop, Airbnb slots in at 31 and DoorDash comes in at a LOL number of 63. A price-to-sales ratio of 31 is pushing it, but 63 is on a different planet (and on that planet, all Americans are required to order seven meals a day via the DoorDash app). To give context, many of the companies coming to market after Greenspan’s “irrational exuberance” warning were around 40. While the valuations of these companies are nutty for sure, we still aren’t seeing the quantity coming to market that we saw in the late 1990s, so that’s not necessarily the takeaway. The good news is that there is a very strong appetite (insert food delivery joke here) for super growth companies. As we saw with High Note newsletter favorite, electric-vehicle maker Nikola, that crazy speculation crashed back down to earth while the market was going up. Classic bull markets always have strong speculation which is healthy as long as we see significant losers as well.
Good Chat, Nikola
Did somebody say “significant loser?” We’ve been writing about Nikola all year, so everyone knows the story at this point. After the valuation drama, the accusations of fraud and the ousting of the founder and CEO, the stock has tumbled from $80 a share down to $17. In addition to that fun, they lost their partnership deal with General Motors to build their highly anticipated electric pickup truck, the Badger. With hat-in-hand, Nikola sent Dear John letters to everyone that pre-ordered. Easy come/easy go.
14 Records in One Year Must Be a Record
Readers of this newsletter could have written this story – same stuff, new day. If you’ve lost track of mortgage rates the past month, worry not as your assumption was correct – new record low. What’s a little different than earlier in the year is that interest rates in general are moving higher, but not mortgage rates. You can read more about it here.
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