The Week That Matters (12-16 Feb, 2024)
"I assure you, an educated fool is more foolish than an uneducated one" Moliere
Most historical analogies are worthless in finance.
The bears might get their moment in the sun over the next two weeks. The market has done a lot. Some of the big guns, notably Nvidia, are reporting this week. And this part of the year tends to be a seasonally volatile one. Wake the author up when February ends?
The focus will naturally return to valuations. The Chicken Littles of the financial press will argue this is a repeat of the tech bubble in 2000. It will be a huge yawn! Do they make anyone any money?
It will be important to look through the noise IF a sell off does come. It will also pay to remember what Lone Pine’s Stephen Mandel once said:
"I don’t need an analyst to tell me when a 10 PE stock is cheap. I need an analyst to tell me when a 40 PE stock is cheap.”
This is no time for small cap stocks or value names. This is still time for growth.
If you overlay the charts of Nasdaq/Cisco in the late 1990s with the current market/Nvidia, they do look kind of similar. But rehashing false historical analogies will just make you sound smart at the golf club. It won’t make you any money.
History doesn’t always repeat the way you think it will.
Mark Twain gave us many insights during his life of penmanship. Unfortunately, the financial world fixates on only one of his quotes, the one about “history rhyming.” It’s natural for market watchers to embrace it. Markets are intrinsically interconnected with cycles, whether that’s business ones or ones based on sentiment.
The problem lies with choosing which historical period “rhymes” with the current one. It’s not a trivial exercise to get that right. If you choose wisely, you can make a lot of money. If you choose badly, you can underperform at best; you can hemorrhage cash at worst.
We had a great example of a false analogy over the last few years. Larry Summers (was Moliere talking about him?) argued the inflation we saw during Covid was a repeat of the inflation we saw in the 1970s. It was an absurd idea given where wages are, but Larry has been seeing an inflation problem around every corner since the Reagan administration. It was also dangerous for your portfolio. If you had listened to him, you would have missed the rally in equity markets we have seen since September 2023.
The inflation we saw during Covid had nothing to do with the 1970s. It was the result of a once-in-one-hundred-year event, namely Covid, and it was always going to pass. The author pointed out that if a historical analogy was necessary to place your bets, it made much more sense to look at the autumn of 2018. The market tantrum we saw up until September/October 2023 was just a prolonged version of the volatility we saw then, the last time Powell tightened too much.
Play for the recovery?
Indeed, the author wondered out loud whether looking to historical periods of recovery would provide a better gauge of what might be ahead of us. Consumer balance sheets are relatively strong in aggregate and “onshoring” has proven to be a great success (thanks Janet Yellen!). Couldn’t the US economy repeat what it achieved from 1958-1966? If Powell ignores Larry Summer’s counsel this week, and does cut at some stage, doesn’t that mean today could be more like 1994-1995? Could we see the multiple expansion we saw in 2016 when China went back to a pro-growth stance? China seems pretty serious about getting its equity market higher like it did in February 2016. The future surely doesn’t always have to be so bleak.
With this in mind, it might pay to re-examine your views about technology stocks being toppy. Nasdaq is nothing like the Nasdaq of the late 1990s. You just didn’t have beasts like Apple that produce USD$25billion of cash flow a quarter back then! You didn’t have the scale that we have today with an Uber or maybe even a AirBnB. Tech just didn’t play the role it does today in our lives.
And valuations were higher back then while the cost of capital was even more expensive! Why doesn’t anyone bring that up? The author doesn’t think the valuations of the Magnificent 7 look that bad at all. (Not financial advice)
Shouldn’t Buffet buy UBER?
Buffet’s got a problem. He’s been underperforming for years. He needs another Apple but his successor is an old economy guy and doesn’t have the foresight of Munger.
As discussed last week, Buffet’s best picks (KO, AAPL, AXP) were relatively cheap when he bought them. But they also did well because of share cancellations and stock buybacks.
Uber ran the gauntlet of scale and has won. Uber’s Investor Day this week was nothing like an Apple earnings call in terms of grandeur, but it didn’t disappoint. Q4 revs beat, and its free cash flow was $768 million (that only grows, no?). It also announced a buyback, highlighting its confidence to generate free cash flow and return capital to shareholders. The Japanese trading companies that Buffet owns are increasingly pro-shareholders too, but do they have someone like Dara Khosrowshahi (ex-Expedia) at the helm? For the author, he is the new Tim Cook, which means more buy backs/ share cancellations in the future, no?
Generational Trades
In the start-up private world, we spend a lot of time talking about the Founder. We are supposed to take a leap of faith that the business will be able to attract more capital and the best of the best when it comes to employees as well as having, hopefully, a category killer product. But in the public markets, we ignore huge opportunities to make outsized gains as we get bombarded by minutia every quarter.
The same principle from the start-up world should apply to some public stocks. It’s not about getting lost in the weeds about whether a company has booked a receivable properly. The business either has a great product/service and can attract the best financial and human capital or it doesn’t. Think Google vs Yahoo.
For the author, Hubspot has a great product and has been able to build on its momentum by executing better than the average. We saw that this week when it crushed its earnings. It has managed to get scale in the SME market. It may get better for the company from here. It might even accelerate now. The big question is what do you pay for that optionality now? It’s like Shopify in that way, which the author discussed last week. Answers on a postcard. The author doesn’t know. As Stephen Mandel said, you need an analyst to tell you when the stock is cheap when it’s optically expensive, not when it’s sub 10x.
As always, thanks for reading. Apologies for the tardiness of this newsletter and for its brevity but it was a busy weekend. Part of the reason for that was I got a chance to take my kids to see Taylor Swift in Melbourne. I can’t say I knew many of the songs but the 34 year old is on top of her game! She crushed it!
Until next week.
Best regards
Mateen