The stock market has rallied much further than I thought it would in late March, with the S&P 500 (SPX) up 40% from the March 23rd lows, down only 10% from its all-time highs made in February.
The SPX is expected to suffer its worst-ever year over year eps decline near 30%. Stock market investors don’t care, they are betting on a Covid-19 vaccine sooner than later, trump’s election, tensions with China die down, and a faster economic recovery than is likely.
Let’s be clear, the lower the SPX EPS number is, the more expensive it will obviously be for now, but the greater likelihood that 2021 will show a sharp increase, making valuations “investable” looking past the black swan of 2020. All of the high valuation talk is essentially moot with interest rates near zero for the foreseeable future.
It is worth noting though that in a stock market that is climbing a wall of worry, with the unknowables about as extreme as they have been in decades, there is some fairly tremendous speculative activity in the stock market which could act as a sort of incendiary device if the market were to correct sometime in the back half of the year.
For instance, Zoom (ZM) we are all using it, it is clearly the best product on the market, but sporting a $58 billion market cap, barely profitable on a GAAP basis, trading more than 50x expected 2021 sales, I am not sure where this stock can go in the near future up 200% on the year given current expectations. I wrote about ZM yesterday here as a little preview to tonight’s earnings.
And then there is DraftKings (DKNG) that recently went public through a merger with a SPAC which is a play on legal sports betting, but there is no sports to bet on and the stock has gained 280% this year, nearly sporting a $13 billion market cap. DKNG trades at about 26x next year’s expected sales of about $1 billion and is not expected to make money at least until 2024. The stock has been a retail-driven rocketship
Speaking of rocketships, shares of Tesla (TSLA) got a boost this week on CEO Elon Musk’s other company, SpaceX’s successful launch and dock with the ISS of two U.S. astronauts, and amazing feat, but I am not sure why investors are willing to tack on $10 billion in market cap to Tesla because Musk’s other company that has nothing to do with electric cars did their job. Shares of TSLA are up 112% on the year, up 155% from its March lows, sporting a $164 billion market cap, greater than… oh you know fill in the blanks, it doesn’t matter, but it is massive for a car company on almost every metric you could think of.
And of course, Shopify (SHOP) which has a $93 billion market cap, is up 96% on the year, up 155% from its March lows and trades 32x next year’s expected sales.
These are all amazingly innovative companies, with great products and services, that will be around for a long time, but the premium that investors are putting on them now, at this moment seems to be reckless. I get it, the economy is changing, no matter how bad the backdrop of the global economy and these companies are set to benefit in a big way. That may be true, but a stock market mania is a stock market mania and understanding that just as stocks can overshoot to the upside they can do so to the downside, and riding out losses that appear to be never-ending is a lot more painful than the joy of riding gains of a stock that you think will never end.
Which leads me to a quote from one of my favorite movies, True Romance:
That’s the way it goes, but don’t forget, it goes the other way too