Stocks start 2024 at the same level they started 2022. Does that mean Wall Street’s outlook for companies is unchanged?
Perhaps it is odd to suggest the outlook could be the same as two years ago. However, if the price you’re paying is unchanged, intuitively shouldn’t the asset you’re buying also be unchanged?
Let’s consider two widely held names that are important components of the S&P 500 index, Alphabet (aka Google) and Meta (aka Facebook). Both had a huge 2023 and over the past 12 months are up 58% and 173%, respectively. Each name is trading just below its previous all-time high. Are the outlooks for these two businesses the same as two years ago? No. Both have higher earnings expectations today. Published earnings per share estimates for GOOGL and META are about 10% and 12% above levels of two years ago, respectively.
Taking a different example, last week I attended an investment conference for consumer-oriented companies in sunny Orlando, FL. The ICR conference happens each year in early January and this year about 200 companies attended along with 2,700 professional investors and analysts. A few of the companies included athletic retailer Lululemon, Swiss running shoemaker On Running, Domino’s Pizza, the largest pizza company in the world, and Walmart. Even Peter Lynch was there. I met with or attended presentations from about 30 of these companies. If we rewind two years to the start 0f 2022, the ICR conference had been converted into a virtual format due to the omicron variant. Instead of face-to-face meetings, this left me listening to webcasts from Long Island where the weather was considerably less enjoyable. How did 2024 compare to the virtualized conference of two years ago? 2022 was filled with caution around lingering Covid effects, supply chain challenges, inflation, and unprecedented price increases with uncertain outcomes. This year, few companies confessed weak results or lowered their outlooks. Updates provided at the conference were mostly bullish and the feeling was that the consumer is stable as we kick off 2024. Restating with emphasis, this year ICR felt completely different than two years ago.
Taking this sample overview including two of the largest and most owned stocks and the broad takeaways from a consumer conference with 200 companies, it seems that the answer to my question is that expectations for companies are not at all like those of two years ago. Google and Facebook are earning more than they did two years ago and the consumer appears to have weathered a period of high inflation and fewer government handouts. Some former students are even paying back their loans! This invites us to invert the question: if the future looks so different, then why the heck are the prices the same?
The main takeaway from this little exercise is that you should not look to stock prices to tell you about future return potential. The value of a stock, in my opinion, is primarily determined by the underlying business’ future earnings and cash flow. Over the long-term, stock prices should reflect changes in value. Over the short-term, however, the unsatisfying truth is that price of a stock or stocks can be influenced by literally anything you can imagine. If we think about the last two years, times were dominated first by a narrative of impending recession in 2022 and then by the slow unwind of that narrative in 2023. This leads to my second takeaway, which is just how difficult it is to forecast macroeconomic outcomes. Macroeconomic forecasting can’t predict or incorporate exogenous events like geopolitical change or commodity price shocks, nor can it fully anticipate disruptive innovation within economies. Full respect to the economists but tying an investing strategy to or picking stocks based on macroeconomic forecasts is like using a cocktail recipe to play chess.
What are the implications for 2024? If prices are the same, earnings are higher and the consumer outlook remains improved, it argues for prices to move higher. This is assumes all else remains equal, which is rarely the case. Nonetheless, I think the setup and momentum support near-term continued gains. We’ll see what happens.
Approval of Crypto ETFs Proves that the Regulator Sees the Profit Motive for Firms > Protecting Consumers
I was disappointed but not surprised that the SEC approved an ETF for speculating in Bitcoin and similar items. I will try to be gentle as people I know and respect are involved with Bitcoin. I am not. The value of a bond is based on the stream of cash payments it will make. The value of an equity (stock) is partial ownership in a company, its assets and earnings. The value of an apartment is that you can live there and it’s composed of real materials. The value of a piece of art is that it looks nice on the wall. The value of a Bitcoin is that it occupies a unique node on a digital ledger? I’m sorry?
What about the argument that owning a Bitcoin is a hedge against the US dollar (& other currencies) becoming worthless or near worthless. The relationship is the opposite. Bitcoins ONLY have value because people are willing to trade valuable dollars for digital tokens. If we imagine a hyper-inflationary world where faith in the U.S. Treasury has been lost and U.S. dollars can no longer be used to buy regular goods like food and gasoline, then by extension, dollars will not be able to support a higher price or even the current price of Bitcoins. Demand for digital tokens, which is currently a function of the public’s willingness to speculate, will not increase in an environment when everyone is poor due to economic collapse.
The bottom-line is that if your advisor suggests you should put your real money into a crypto-ETF, please do yourself a favor and ask hard questions.
Upcoming activities At the end of January, I am attending the ValueX Klosters conference in Klosters, Switzerland (two hours from Zurich by train). The Klosters conference will be very different from the corporate presentation and hedge fund audience I enjoyed last week in Florida. Firstly, it is a very international event that brings together professional and private investors from all over the world. Secondly, it’s organized around the theme of value investing as popularized by Warren Buffett and Charlie Munger, although what “value investing” constitutes is constantly up for debate. Thirdly, it is a user-generated content conference, meaning that attendees present to their peers. There isn’t a presenter and audience distinction. The audience are the presenters. Of course this means I will be presenting an investment idea and I really enjoy pitching stocks, so it should be fun. If you’d like a copy of my slides, please email me. Alternatively, you can check out condensed videos of the talks I gave last year at The Cyprus Value Investing Conference and at ValueX Vail on the Quo Vadis Capital youtube channel
Feedback and commentary welcome. Would you like to learn more about how we invest in the markets? Please click here to get in touch.
John Zolidis
President & Founder
Quo Vadis Capital, Inc.
John.zolidis@quovadiscapital.com
Mr. Zolidis founded Quo Vadis Capital, Inc., a Registered Investment Advisor (RIA) and research consultancy, in 2017. He started his career in finance in 1996 following degree studies in Philosophy at Kenyon College and the University of Oxford. He has followed U.S. consumer companies as a senior analyst since 1999, mostly on the sell-side, writing research for institutional investor clients. He also managed money in a buy-side role at a long-short equity fund over 2013-2014. He was named in the Wall Street Journal’s Best on the Street list in 2005. Mr. Zolidis and works from New York, NY and Paris, France or wherever he has his laptop.
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