For months now there has been a heck of a lot of talk in the financial media about asset bubbles. For the better part of 2012 and the first half of 2013, the focus was on the Fed induced Bond bubble, which subsequently popped last May causing an almost 20% peak to trough decline in the TLT, one of the quickest % gains in ten year treasury yield in history.
Now in 2014, financial pundits have been tripping over each other to either call the top equities, or to coolly suggest that there has been an obvious decoupling between high valuation stocks and that of value. So far the latter has been the case. The broad market measured by the S&P 500 has been able to hover near all time highs (actually up almost 2% on the year) while its smaller cap brethren (measured by the IWM) and its higher valuation peers (measured by the QQQ) are in the red, down 7.5% and 5.5% respectively from their all time highs.
So while “bubble watching” gets clicks and viewers, the popping process is just that a process, and I suspect there will be few pundits that nail the top.
For those that are keeping score at home, Twitter’s November 2013 IPO was one of the first causes for alarm. The $2 billion deal valued the company at more than 20x sales, despite having no earnings. While TWTR was wildly successful out of the gate, the financials and fundamentals were in stark contrast to that of Facebook. FB’s near disastrous May 2012 ipo was 8x the size of TWTR’s and hindsight it is a bit shocking that in the first 6 months of FB’s public existence the stock was cut in half, while TWTR’s more than doubled. This was despite the fact that FB was profitable out of the gate with expected earnings growth of 50% a year for 2013 and 2014.
Today’s lock up expiration of almost 500 million TWTR shares will be a real test of high valuation investors’ will especially when you consider that as of last night’s close TWTR’s shares were still up 50% from their ipo price. The fundamentals are very murky, with analysts not projecting much in the way of profits until 2016 to 2017. Valuing a company like TWTR is a guessing game for everyone and huge swings (like $40 to $75 in Nov/Dec, or $55 to $35 over the last two months) are par for the course.
David Einhorn said in his most recent investor letter:
After all, twice a silly price is not twice as silly; it’s still just silly.
That applies all the way down as well – TWTR was a silly price at $75, but it’s our view that it’s still a silly price at $37.50. Nonetheless, the volatility in these silly stocks is such that we’ll take our gains when we have them, or at least adjust the position to lock in some profits. With TWTR down more than 5% in the pre-market due to the end of the lockup period we’ll be keeping an eye on our existing put fly. Stay tuned for updates on that position.