Tech stocks (the Nasdaq) dropped 5% in the first week of 2022, and nearly 40% are more than 50% below their recent highs. The bloodshed has torched the portfolios of investors who focus on high-growth “idea” stocks that promise revolution but have yet to demonstrate more mundane abilities, like turning a profit. It's worth asking: Are we at a peak?
A phenomenal year is quickly forgotten. Stocks are too pricey, inflation is eating into consumer spending, interest rates are going up, and there’ll be less monetary stimulus in 2022. It all sounds terrible. It could almost make you forget that stocks went up 27% last year and 91% over the past three.
Can unemployment at 3% tell us anything? Decidedly, yes. December monthly jobs growth was considered disappointing, but it was telling that unemployment broke below 4%. Weekly jobless claims numbers are at 50+ year lows. Our view: We’re going to spend most of 2022 with unemployment in the ~3% range. When people have jobs, they will spend. The U.S. economy is 2/3 consumer spending. Higher prices for many goods and services (inflation) and fewer stimulus checks sent by the government will be detriments but absent an external shock (Russia invading Ukraine is probably not enough) the economy is going to be very good this year.
Omicron is a yawn: There’s a disconnect with the media attention paid to omicron and the impact it is having on financial markets. We’re still seeing multiple articles every day about how scary everything is and discussions of the number and types of masks to wear. Meanwhile, professional investors with whom we speak are not spending any time worrying about or calculating the risks of omicron. There are exceptions to this observation, but even when the market is taking omicron (or coronavirus) into consideration, it’s usually limited to short-term impacts. On the day the U.S. recorded over 1.0M new cases, the market hit an all-time high.
Why We are Very Happy to Avoid Bitcoin, Cryptocurrencies and the Like
There is no place for these arnaques in your investment portfolio, in our opinion. Over the last several years, we have watched as a greater number of professional investors have gotten involved and made money in so-called cryptocurrencies. We are unmoved. Our investments in companies are based on the businesses’ expected future earnings and cash flows. Bitcoin, Ethereum and Wahtnotcoin and the others have no earnings or cash flow and never will. Thus, we are not interested. We have taken it one step further and even tried to avoid learning anything all about “crypto” as it seems a priori a waste of time. However, as a service to those that may be considering speculating in this area, we will address two of the arguments that crypto-acolytes cite. These arguments are 1) The quantity of Bitcoins is finite and demand is not, therefore Bitcoins will go up in value and 2) Bitcoins and digital currencies have a use as a medium of payment.
Regarding the first argument, the explosion of alternatives to Bitcoin (Solana, Dogecoin, Nonsensecoin, etc.) has reached thousands or tens of thousands. We observe: the number of digital tokens is not finite, it is infinite.
Secondly, if digital currencies really have a future use as a medium of exchange, then we believe governments will likely issue their own tokens. Non-government issued cryptos may continue to exist, but their use will be relegated to illegal transactions and tax avoidance. In this scenario, the value won’t be zero, but it will be close to zero.
That’s it. Our prediction is out there: The stocks of great companies that generate cash and earnings will outperform the price performance of fake money backed up mostly by jargon. Check back in 10 years to see if we were right.
Hedge Funds are Focused on Short-Term Negatives and the Media Can’t Stop Talking about Valuation and Risk
Recall that Wall Street makes money by driving transactions (charging you fees) and the financial media’s business model is based on capturing engagement (your time) measured by clicks. A theme of our letters is that these business models are inconsistent with your interests as an investor, which should be to take the long view, transact as little as possible, and avoid wasting time! The challenge is that individual investors are generally dependent on the finance industry and the financial media for nearly all their information. What to do? A first step is to understand and acknowledge the conflict.
Selected Investment from Client Portfolios: Alphabet, aka Google (GOOGL)
Returning to the question we stated at the onset. Are we at peak? Our opinion: It is not low interest rates that make technology companies attractive, they are attractive because they are changing the world. Of course, it is not sufficient to drive change, a technology company becomes an attractive investment if its innovation is attached to a highly profitable and durable business model. Ideally, we want to buy the stocks of companies like this at opportunistic prices, but we also won’t sell just because the price of a great company’s stock moves up and is temporarily too high. This is to be expected. Ultimately, our investment will do well if the company delivers on its promise to innovate, grow earnings and cash flow. We spend our time evaluating this potential, rather than guessing at whether the ratio of the company’s price today is too high or too low relative to earnings expected in the next few months.
If we consider Alphabet (GOOGL) which we have owned in client accounts since inception (8/20/18), everyone will agree that the company is essential to daily life. It’s difficult to imagine, five years from now, a world without Google, YouTube, etc. What about the financials? Google has been very successful using its position in search to generate growth and profits. The company has produced double-digit revenue growth every year for at least the last decade and its EBITDA margin (a proxy for cash flow) has stayed north of 30%.
These are the simple reasons to own GOOGL, in our opinion. We don’t know if we are at a near-term peak in the valuations investors are willing to pay for growth companies. However, we feel confident that it would be a huge mistake to sell GOOGL shares of shares of other fantastic tech companies (and pay taxes on gains) because interest rates might go to 2% from 1%.
Figure 1: Pandemic Winner: Alphabet, Inc. (GOOGL) three-year chart. Despite the fantastic 156% gain since the start of 2019, shares remain very attractive, in our opinion.
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President & Founder
Quo Vadis Capital, Inc.
Mr. Zolidis 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 founded Quo Vadis Capital, Inc., a Registered Investment Advisor (RIA) and research consultancy, in 2017 and works from New York, NY and Paris, France or wherever he has his laptop.
Attending the ICR conference this week and the ValueX Klosters conference in Klosters, Switzerland at the start of February. The ICR conference is an annual investment conference attended by mostly consumer companies that give presentations to professional investors (buy and sell side analysts and portfolio managers) and conduct follow up smaller meetings. The conference is a good chance to meet the management teams of newly public companies, of which there were several of interest last year. It’s also a chance to get information from a large number of companies at the same time, which yields a global view on what’s happening with the consumer from spending, expense and trend standpoints. The conference was scheduled to happen in sunny Orlando, FL starting tomorrow the 10th but, surprise, it was converted to a virtual format about 10 days ago. I will therefore be “attending” via my laptop screen on my dining room table in Long Island.
Early next month I am scheduled to attend and give a presentation at ValueX Klosters, in Klosters, Switzerland (next to Davos). This conference is attended by investors from around the world and the format is geared towards idea sharing and community. In other words, it has nothing to do with the usual Wall Street sponsored events. There may also be some skiing.