Zooming to new heights. Stocks rose yesterday, ringing in the historically weakest month of the year, as traders look far past the present and focus on a rosy future. Large tech stocks continue to dominate the rally confounding value investors.
N O T E W O R T H Y
Growth hormone. What is it? What is that secret sauce that differentiates a company as a future fast-grower. I have been in finance for a long time (trust me) and one of the most common things I have heard over the years is something to the effect of “I knew Apple was a buy at $2.” When I hear that, I usually chuckle and follow up with two questions: 1) What was is that Apple was doing back then that helped you form your thesis? 2) Did you actually buy and hold it until now? The answer to question 2 is usually “um, no”, which I am sure doesn’t surprise you. Question 1 usually gets an answer like: “They were so radical and forward looking with their multi-colored computer laptops, it was clear that a company that would make a purple laptop would eventually come out with the first touch screen phone, change the way we listen to music, invent the pod cast, and go on to produce movies… I just knew it.” You should be chuckling by now as well… or crying that you did not have the foresight to have a similar thesis… and act on it.
I have been writing a lot about large cap technology's dominance in the popular stock indices. As a reminder Apple, Microsoft, Amazon, Facebook, and Alphabet/Google make up nearly 20% of the S&P500 weighting, so when they go up, the index is likely to follow. In the wake of the pandemic-led lockdowns those stocks have been more popular than ever as they are perceived to be insulated from economic turmoil, and the rush into those stocks had a big hand in helping the S&P500 to be trading at all-time highs… while the US is still in a recession. An interesting way of looking at tech’s dominance is by comparing the S&P500 Index to its sibling S&P500 Equal Weighted Index. The S&P500 Equal Weighted Index has the same top 500 market cap companies, but each company has equal weight, making Apple (a tech growth stock) an ordinary citizen, on equal grounds with Gap Inc. (a retail value stock). If we compare the two indexes year to date, the S&P500 has risen by +9.16% and the Equal Weighted Index is down by -3.27%. So bigger stocks have done better than average, and that group of bigger stocks is dominated by technology growth companies. So what is that secret sauce? More importantly, what is the Apple of the next 20 years?
Yesterday, Zoom Video Communications’ stock rose by +40.78% after announcing earnings after Monday’s close in which Q2 earnings doubled analyst expectations. Days like those are not uncommon for the stock which is up by +572% year to date. FYI, Zoom is not part of the S&P500. Yesterday Zoom’s market cap climbed to $129.12 billion, which is more than IBM’s $109.9 billion. IBM earned $18.1 billion in Q2 compared to Zoom, which logged earnings of just $663.5 million. Clearly investors believe that great things are in store for the neophyte enterprise video provider. The company’s earnings have grown rapidly as home-based work and education have become so prevalent in these past months. But even if the trend persists, does Zoom have the secret sauce to make it a future Apple? That depends. Back when Apple was a legacy hardware maker, it had a lot of competition. IBM, Compaq, Dell, Gateway… the list goes on. Apple was still a good company and its products were favored in education and by creatives, however it was not until the company pivoted and began innovating with its launch of the iPod, iTunes, and ultimately the iPhone that the stock began its now-legendary growth path. Google in its youth, similarly had lots of competition in the search engine space, but its innovation and pivot into other web services and advertising allowed it to zip past the competition to where it sits today. Tesla, also yet to become a member of the S&P500, is up by +467.8% this year. Tesla is expensive by all conventional means of stock valuation leaving many analysts scoffing at the stock price. Side note: I recall similar arguments for Amazon, now the third largest US company. Tesla is in the crowded Auto industry, but in its case, Tesla is a company that innovates, versus one like a traditional manufacturer that imitates. Other companies are capable of building electric cars but they are all trying to beat one company: Tesla. In the case of Zoom, it too is in a crowded industry with many of the tech giants having vast experience in the space. Zoom has enjoyed its recent growth in this very unique world created by the pandemic. Can Zoom become the next Google? It’s too early to tell, but it is clear that they will need to have some secret sauce of their own at some point if they want to have the chance. Remember AOL and Yahoo?
THE MARKETS
Stocks rose yesterday as investors cheered slowing pandemic figures and a surge in manufacturing. The S&P500 climbed by +0.75%, the Dow Jones Industrial Average rose by +0.76%, the Russell 2000 Index traded up by +1.07%, and the Nasdaq Composite Index jumped by +1.39%. Bonds also rose and 10-year treasury yields fell by -4 basis points to 0.66%.
NXT UP
- ADP Employment Change (Aug) is expected to show an increase of +1mm jobs compared to last month’s +167K.
- Factory Orders (July) may have risen by +6.1% compared to prior month’s growth of +6.2%.
- The Fed will release its Beige Book, which details economic health throughout the various Fed Bank regions.
- This morning, Macy’s beat expectations and Crowdstrike, Cloudera, PVH, Five Below, and Rocket will release after the close.