Rudderless

Rudderless.  Stocks struggled to find direction yesterday with the vaccine not quite there yet and the expected stimulus… not quite there yet.  Investors took the opportunity to rethink the benefits of growth stocks as money-losing mega-unicorn IPO rises +85% on its first day on the exchange.

N O T E W O R T H Y

Such potential!  I have covered this once or twice before, but I think it is worth taking a fresh look at the topic, considering market performance over the past 9 months… and yesterday.  What is it with these so-called  “growth” stocks?  What makes them so special?  First of all, let’s review the nomenclature.  Growth stocks are those that are expected to have significant earnings growth in the future.  The emphasis here is on the word future, as current earnings are given less weight by investors when it comes to growth stocks.  We can call it great expectations for the future. People often look at growth stocks versus value stocks, which has become a thing as of late. Technically speaking, a stock can be a value stock and a growth stock at the same time, but that is a topic for another day.  A value stock is one which typically has a stable business model but for one reason or another has a depressed stock value.  The pandemic, which caused significant economic damage to certain industries, caused many stocks to fall significantly earlier in the year.  Some of them fell for the right reasons (like losses, poor execution, and outdated business models) and some fell for the wrong reasons (temporary losses but solid business models and balance sheets).  Once the economy started to show signs of a recovery, those stocks that fell for the wrong reasons showed value, in that they were cheaply priced given the now-more-upbeat economic conditions. Really, the group of stocks which is most unlike and opposing to growth stocks are defensive stocks.  Defensive stocks are those that display stable, but slow growing earnings despite economic conditions.  These companies typically provide consistent dividends that result from strong consumer demand for their products during all phases of the economic cycle.  That group includes consumer staple, household names like Proctor & Gamble, Pepsi, and Johnson & Johnson.  Though these stocks are less volatile, they also tend to go up slower in a bull market. Cyclical stocks are those whose performance tends to mirror economic cycles.  These stocks tend to be in the consumer discretionary category and include Starbucks, Marriott, McDonald’s, and Ford.  When the economy is thriving, consumers have more discretionary money and tend to consume more discretionary goods.  In contrast, consumers purchase staples regardless of economic conditions.  Now back to growth stocks.  They are in a category of their own.  Because they are neither defensive nor cyclical and their share prices are almost completely based on future earnings growth.  Neither poor current economic conditions nor earnings affect a growth stocks price!  That makes it really difficult to apply standard methods of valuation to many of those companies.  For a defensive consumer staple, we can observe the company's fundamental strength by noting its current performance, financials, business models, management acuity, brand loyalty, and moat to competition.  Pretty straight forward. Most, if none of those, exist for companies which fit in the growth category.  For many growth companies we can only observe current performance and business models.  They tend to be younger companies focused on new market opportunities, so performance track records are limited and future market sizes are best estimates.  Take for example, DoorDash which IPO’ed yesterday, rising +85% in its first day, leaving its valuation at roughly $60 billion.  That makes the company more valuable than companies like MetLife, General Dynamics, Kimberly Clark, Du Pont, PNC Financial, and even Regeneron.  “Wow!”, you may be thinking, “DoorDash must make a lot of money.”  Nope.  The company has actually never been profitable, losing -$569 million last year and expected to lose another -$156 million this year. BUT, the company has great expectations.  Its revenues grew from $291 million in 2018 to $885 million in 2019, and it logged revenues of $2.214 billion in the twelve months through September of this year.  That is impressive growth, and it should not be surprising considering the explosive growth in food delivery services throughout the pandemic.  So, we observe great growth and acknowledge that food delivery is something that will most likely continue to be an important service beyond the pandemic, a new market opportunity for sure.  The big question is, will the market continue to grow at the same pace beyond the pandemic, and with it DoorDash’s revenues? Further, can the company become profitable at some point and grow earnings at the same pace as revenues over the past two years it has existed?  What about the competition from Uber Eats and Grub Hub?  How will that affect DoorDash’s ability to grow? Those collectively are the $60 billion dollar question.  The takeaway here is that the prospects look enticing but the risks are many.  Remember that when it comes to stocks, there is a relationship between risk and reward.  Higher risk means greater expected rewards.  If DoorDash does, in fact, meet those great expectations, investments today will pay off handsomely, if they fall short… well you know.

THE MARKETS

Stocks sold off yesterday after hitting new highs earlier in the session.  Stalling stimulus package talks between lawmakers and the White House spooked investors.  Anti-trust lawsuits being waged on growth-stock-poster-child Facebook caused investors to question growth-stock valuations, causing the group to sell off.  The S&P500 slipped by -0.79%, the Dow Jones Industrial Average lost -0.35%, the Russell 2000 Index fell by -0.82%, and the growth-stock-heavy Nasdaq Composite Index dropped by -1.94%.  Bonds slipped and 10-year treasury yields gained +2 basis points to 0.93%.

NXT UP

- Initial Jobless Claims (Dec 5) is expected to come in at 725k, higher than last week’s 712k.

- Continued Jobless Claims (Nov 28) is expected to have slipped to 5.21 million from 5.52 million claims.

- CPI Excluding Food and Energy (Nov) may have ticked up by +0.1% for the month after being flat for October.

daily chartbook 2020-12-10