Five predictions for 2022

At the start of every year, I like to do some posts based on what I’m seeing in the markets. For example, last year I did a “state of the markets 2021” piece to start the year, as well as 10 predictions for 2021 (five non-SPAC predictions and five SPAC related predictions).

As I was prepping for this year’s 2022 preview post, I reread those 2021 posts…. and my enthusiasm for a state of the markets piece kind of went out the window. I just feel like it’s de ja vu all over again; my state of the markets piece for 2021 was titled “speculative excess and opportunity everywhere,” and I think that’s still pretty apt for today’s market. While the speculative excess in the markets now is much lower than the start of 2021 (thanks to the SPAC bubble popping, EV stocks cooling down, and hyper growth stocks coming back to earth), there’s still plenty of speculative excess out there (hello, NFTs and shady crypto projects!)… but I’m still seeing all sorts of opportunity. I’ve never seen a market with so many companies reporting great results and retiring shares as aggressively as possible where the market just continues to yawn at them and trade them for single digit earnings multiples. As an investor, it’s both infuriating and exciting!

So I’m skipping the state of the markets piece. Instead, I want to make a few predictions for 2022 that are very much tied into what I’m seeing in the markets right now.

In total, I’m going to give five prediction. But, before I get there, a brief detour: in the stock market, it’s really easy to give an opinion. Anyone can say, “O I think Facebook is attractive” or “I think EV stocks are overvalued.” Opinions are cheap. What really matters to me is if someone is putting money behind their opinons. If you hear someone say “I’m pounding the table on Amazon” and they have a 1% position in the stock (or don’t own any), that’s kind of meaningless to me. But if they’re pounding the table and tell you they have a 10% or 20% position in it…. well now I’m interested in what they have to say!

So I’ll note that the two predictions I feel most confident in are predictions #1 and #2, and while I won’t talk specific portfolio sizing or stocks, it’s a safe bet that I have “pounded the table” in a big way on those predictions. Outside of those two high conviction bets, I don’t have any money in prediction #3, but I could see myself doing it at some point (it’s more a function of just believing the risk/reward is much more skewed in predictions #1 and #2 than not believing #3!). I have no money in predictions #4 and #5; they’re more just things I’m monitoring / believe in but don’t think they are particularly edgy / actionable.

That said, here are my five predictions for 2022:

1. Value outperforms

   • Ok, that’s weak. A more specific prediction: Deep value cyclicals and retailers that aggressively return capital outperform the market substantially

2. Cable stocks rip higher

3. A basket of beaten down COVID winners outperform.

4. The law of large numbers finally catches up to Apple, Amazon, and Tesla

5. Waves of pre-deal SPACs fail

And here’s my rationale for each prediction:

Prediction #1) Value outperforms: I know, I know. What a lazy prediction. For years, you’ve heard people say “Netflix is a bubble! Viacom is trading at 10x P/E!” and get crushed because Netflix was actually creating value while Viacom was a mismanaged melting ice cube. So I’ll slightly revise that prediction….

Prediction #1 (revisited): Deep value cyclicals and retailers that aggressively return capital outperform the market substantially: Ok, hopefully that’s better. I get the past ten years has taught investors to buy “compounders” at almost any valuation and hold on to them for dear life, but I think 2022 is finally the year deep value starts to work. There are just too many deep value retailers that are trading a single digit multiples of cash flow while hammering their share count or cyclical commodity players trading that will earn more than half their market cap in the next twelve months out there. Combine those cheap valuations with aggressive capital return programs (often through share buybacks, but through dividends as well), and it seems really, really difficult to lose. On the retail side, something like BBBY would serve as a great example: hammering their share count, trading at ~4x EBITDA, several possible growth levers that would just be a cherry on top if they could pull them off. On the cyclical side, my buddy TWEBS has put together a “double dog” basket that’s got a few good examples, or Plum Capital has recently mentioned UAN as a good play. I think TWEBS has the right idea; if you’re into this type of trade, just buy a basket of different commodity players trading at super cheap valuations that are returning capital. These are commodities; a few management teams will find ways to screw it up by doing awful deals, but on the whole the combination of super cheap plus capital returns should lead to some pretty juicy gains.

• On the retail example: I’ve used BBBY tons of times recently because it’s such a visible and easy example, but there are plenty of other easy examples you can find. For example, ANF is a popular one; they have a ~$2.2B market cap, have bought back ~$230m in shares so far this year, just increased their repo authorization to $500m, have ~$500m in net cash on their balance sheet, and trade at ~3x EBITDA. Honestly, I don’t even know how to comprehend those numbers.

• Or take Aaron’s (AAN). I think their future is challenged, but they’re reporting strong results in the short term, trading for ~3.5x EBITDA, and they’ll probably repurchase >15% of their shares out this year. That’s a powerful combination; with a multiple that low and repurchases that aggressive, you’ll probably do fine in the stock even if it turns out the terminal value there is zero!

• If you’re looking for other names that fit this bucket, I tweeted this prediction out yesterday and the replies have plenty of excellent recommendations on both the cyclical / commodity side and retail side.

• I’ll note I’m still looking for more on the cyclical / commodity side. Most of them are leaning towards returning capital through dividends, not repurchases. I’ve been leaning more retailers for this trade than commodity because I like the operating leverage from repurchases (and, honestly, I’m just a little more comfy with retailers). So if you’re aware of a cyclical commodity player that’s going ham on repurchases…. I’m all ears!

Prediction #2: Cable stocks rip higher. I’m a broken record here, but cable stocks across the board are too cheap. I’ve mentioned the cable companies extensively on the blog (most recently with thoughts on Charter here and Altice here), so I won’t recount the full story… but a quick summary is that the cable companies gushing cash flow and buying back shares aggressively while trading for a significant discount to the multiples inferior assets are transacting at in the private markets (for example, CHTR is trading for <11x EBITDA; WOW just sold overbuilt cable assets for 11x EBITDA). In 2022, I think that combination finally makes a difference; the share repurchases are just getting too aggressive, the cash flow numbers too strong, and as we get to the back half of the year investors should feel a lot better about the competitive dynamics from cable / FTTH overbuilds (plus start to see value in cable’s burgeoning wireless business). Note that when I say cable stocks rip higher, I don’t just mean domestic cable stocks (though those are the ones I focus on and that most of my readers probably do too). International cable stocks look way too cheap as well; LILAK, LBTYK, TIGO, and a handful of others are all trading below private valuations (in some cases, they’re trading substantially below the valuations that strategic acquirers offered in the recent past; for example, LILAK offered ~$79/share for TIGO in early 2019; TIGO currently trades for <$30/share. Altice offered to buy CGO for >$120/share last year; CGO currently trades for ~$80/share) with some combination of improving fundamentals, good balance sheets, and share repurchases.

• I think there’s a case to be made for cable M&A domestically; all of the major players would clearly love to increase their exposure to cable, and synergies in mergers are pretty significant… but I don’t think 2022 is the year for M&A because the regulatory environment is not exactly ripe for multi-billion dollar cable mergers!

Prediction #3: A basket of beaten down COVID winners outperform. Companies like Peloton, Stitch Fix, Zoom, and several others were insane COVID beneficiaries. In the back half of 2021, all of them substantially underperformed, driven by some combination of “comping the comp” (i.e. last year’s numbers were incredible, driven by COVID headwinds, and now they’re reporting results that are generally good in an absolute sense but poor when compared to those great quarters) and investors starting to worry about their businesses as the world opened back up. COVID took these businesses to new heights, and I think at current prices investors are way underestimating them. For example, Peloton is trading for ~7x their annualized subscription revenue right now; that’s bonkers for a business that is roughly as addictive as cigarettes (yes, yes; I know the comp is a stretch and there are all sorts of issues with it, but it’s still an interesting figure and shows you just how ingrained Peloton can become to people’s lives). Stitch Fix is trading for <1x revenue and <2x GP; you can find legacy department stores that trade richer than that. I get that each of these businesses face headwinds going forward (both related to COVID in general and for idiosyncratic business specific reasons), but these are businesses with insane upside potential that customers love. Some of these business will continue to struggle, but a few of them will figure out their issues and see their stocks double or more, and on the whole a basket of them will do very well.

Prediction #4: The law of large numbers finally catches up to Apple, Amazon, and Tesla: Great companies all (well, I have some doubts about Tesla, though bulls like Eric Markowitz lay out a nice case for upside), but the valuation on these is simply too rich and all face some combination of looming increased competition, regulatory scrutiny, and management / cultural changes. Not saying any of these are going down 50% or anything, but all of them substantially underperform the indices in 2022l I know the internet breaks a lot of what we know about returns to scale, but the largest companies in the world simply can’t continue to outperform like this.

• Amazon’s performance this year isn’t quite rip roaring, but it’s obviously had an insane run over the past decade. And I worry about the execution there with Bezos gone; so Amazon is more a culture / regulation / valuation bet, while the other two would fit that definition plus have “their stocks have been en fuego” mixed in.

• Note that I didn’t include Facebook, Google, Netflix, or Microsoft in there. I’m not an expert on any, but honestly they seem reasonably valued than the other three IMO.

• Again, I’m just mouth betting here, but other names that seem ripe for large numbers catching up to them include COST, CRM, and a ton of consumer staples like PG or KO.

Prediction #5: Waves of pre-deal SPACs fail. One of my resolutions for 2022 is to talk about SPACs less, so I’d better get some SPAC talk out now! Still, I don’t think that resolution is going to be hard: we’re going to see waves of SPACs fail to successfully complete deals and eventually liquidate in 2022. There’s simply too many SPACs searching for deals, and the recent performance of deSPAC’d companies across the board has been so bad that I think all but the most reputable sponsors are going to have trouble getting their deals over the finish line (see chart below; you simply can’t have a SPAC index drop ~30% while the indices go up >10% without having investors question if they want to hold any SPACs thought deals!).