Predictability & Confidence

Something the market is lacking

Predictability and confidence, or lack thereof, drive stock performance.  Would you agree?  Target and Walmart shocked the markets this week with ok comps but massive margin contraction, blaming transport costs and consumer mix shifts.  Cisco guided revenues to decline next quarter versus expectations of growth given its strong backlog.  Applied Materials insisted demand is thru the roof, but the supply chain is postponing their growth to a longer upcycle.  Tesla’s CEO is playing footsie with Twitter and is now changing voting parties and being accused of sexual harassment.  However, the Fed is quite confident they can drive down inflation by crushing demand, but not so much on just how hard they need to apply the brakes and if a slowing means a recession.  The Demark price exhaustion signals predicted several pivots but confirmation didn’t last more than a day or so.  For us, the market is screaming it hates the lack of predictability in earnings ahead and it lacks confidence in the Fed to land the plane safely. 

At the same time, the market is a discounting mechanism, right?  If everyone is cautious as per the investor surveys, Fear & Greed by CNN is showing extreme fear, then hasn’t everyone sold who isn’t willing to see the cycle through?  That takes time.  It takes investor disdain for looking at their monthly account balance statements.  It is May, so isn’t 5 months of selling enough?  In some names, yes.  Let’s take Facebook or Paypal as examples.  They have been in multi month declines, complete and utter realization that their businesses had growth challenges ahead.  Estimates came down dramatically to what seem like realistic expectations.  The valuations are pretty compelling with $FB at an EV/EBITDA of 8x (less than IBM, PARA and other troubled growth entities).  Paypal is now trading at a multiple like old school merchant processor types $FIS $FISV and $GPN.  Isn’t Venmo monetization still a big deal for this company?  See our point?  Let’s keep going with this line of thinking.