The market conundrum
The Market Conundrum
First, there is no great explanation for the Thursday reversal on terrible CPI news. I read it was technical, it was key levels hit and held, it was UK bond yields dropped, it was peak inflation as rent was a big contributor to the CPI debacle and it is “lagging”. All nonsense. The same way, on Friday, the market rallied big very early, up 1.5%, on Russia is “near done” with their terrorizing campaign, only to be followed by a silly UMich inflation survey causing the market to drop as much or more than it rose on Thursday. In both cases, the action drives the narrative.
On Friday, $TSLA lost 7% of its market capitalization despite Cathy and Ron Baron remaining in love. And, actually, for the first time I can remember the P/E is mid 30s on the out-year estimates. The stock has lost $600 billion in market cap from its peak. My twitter handle @Robeducated says “Stocks are just pieces of paper, tickers and narratives. P/E, P/S or any valuation metric to justify what’s working or isn’t.” 2020-2022 prove that point! A follower of our substack wrote me twice this week and said “just own good companies”. I wrote back that is a good strategy, Peter Lynch like, but I would add good companies at the right valuation?! $DDOG is a fabulous company, terrific products and is down 62% from its peak. Hey, but they grew revenues 66% in 2020, 70% in 2021 and almost 60% in 2022! My point? We are in the give-up phase. We are in a slow motion melt down and in the process of getting not just “good companies, but great ones” (probably with signs of slowing given the economic back drop) at valuations that finally look compelling! Yep, P/S investing remains dead. The very cool rules of 40, 50, 60, 80 are great for managements to aspire to and value creation over time for sure. Bankers love this for investment decks showing revenue growth with coinciding profitability. BUT, the buyers and sellers do not care right now! The sell-side analysts equally make up their price targets to fit where a stock is, the comps and their own insecurity on looking stupid recommending stocks that are going down. We once did an analysis (look back in prior substack write ups) of $CRWD, $HUBS and $AI to show you how to think about the risk-reward, tracking added ARR and cash flows in order to value the businesses in a range of growth circumstances. It might be time to dust that off and read!
For now, you have a few choices.