If you’re following the stock market, the story of the year so far has been anything that touches crypto and particularly AI flying. But under that absolutely dominating storyline are a few other trends that, to be honest, I find a lot more interesting. One is
I think some of these name have been picked up in momentum/trend following baskets that are chasing AI stories. For example, COST is a 2.9% weight in MTUM ($9 billion AUM) vs. 75 bps weight in SP500.
I see some of these names as excellent funding shorts right now (COST, WING, WDFC), likely to get caught up in any momentum/AI drawdown, but without the upside explosion risk of something with true AI exposure.
The market is pricing in future rate cuts. Woth short term rates at 2.5% the earnings yield on Costco of 2% doesn't seem that crazy. We will see if the cuts materialize.
Maybe it is just the market becoming more rational in terms of longer time prefenrence and appreciation of terminal value?! Something quality investors have long argued the market is not properly valuing.
These valuations are definetly high but not completely excessive or seem too speculative.
Small pet peeve, thats not what the law of large numbers means: 'How much longer can they keep up that growth rate; don’t the law of large numbers start to drag it down eventually?'
Great note. And true broadly beyond your examples. This market rally has been far different than the 2020/2021 rally. There are a few chitcos that have rallied, but not like 2020/2021. There are pockets (AI) of exuberance, but good luck shorting that story. Finding decent quality companies trading cheap has become tough. And finding shorts has also become tough. The valuations in this rally are far more rational, if slightly rich. My sense is the entire mkt is 15-20% rich, but if every stock is 15-20% rich, that is a tough environment. I am focusing on finding event-driven and foreign names because the medium-term long/short environment is tough.
KRUS and WING are excellent short candidates. WING is likely up because chicken prices came way down and that is their #1 cost, I'd also wager they are benefiting from passive investing. A no moat company trading at an insane valuation. When avian flu strikes next it'll cull the longs along with the chickens. KRUS is even more laughable. Last quarters net income was 1.86M and it sports a 1.27B market cap. Generously might be worth $40 per share, which would also be a slight premium to where the stock was before the government went on the largest QE binge in history.
Qualify and Momentum a perfect combination for the crowd - at times the party can go on for longer than you think and even if there are small corrections the crowds will find it a buying opportunity - go with the flow with eyes open and a finger on the trigger ! If you are managing your own money it is easier as you can play multiple games at the same time
Awesome article. It is true that a 50 times valuation (or 40) doesn't look quite good. If I had Costco's shares, I would probably be out of them by now. You can see many more names in the market, and we would be wise to stay away from them!
I think some of these name have been picked up in momentum/trend following baskets that are chasing AI stories. For example, COST is a 2.9% weight in MTUM ($9 billion AUM) vs. 75 bps weight in SP500.
I see some of these names as excellent funding shorts right now (COST, WING, WDFC), likely to get caught up in any momentum/AI drawdown, but without the upside explosion risk of something with true AI exposure.
The market is pricing in future rate cuts. Woth short term rates at 2.5% the earnings yield on Costco of 2% doesn't seem that crazy. We will see if the cuts materialize.
Maybe it is just the market becoming more rational in terms of longer time prefenrence and appreciation of terminal value?! Something quality investors have long argued the market is not properly valuing.
These valuations are definetly high but not completely excessive or seem too speculative.
Small pet peeve, thats not what the law of large numbers means: 'How much longer can they keep up that growth rate; don’t the law of large numbers start to drag it down eventually?'
Great note. And true broadly beyond your examples. This market rally has been far different than the 2020/2021 rally. There are a few chitcos that have rallied, but not like 2020/2021. There are pockets (AI) of exuberance, but good luck shorting that story. Finding decent quality companies trading cheap has become tough. And finding shorts has also become tough. The valuations in this rally are far more rational, if slightly rich. My sense is the entire mkt is 15-20% rich, but if every stock is 15-20% rich, that is a tough environment. I am focusing on finding event-driven and foreign names because the medium-term long/short environment is tough.
KRUS and WING are excellent short candidates. WING is likely up because chicken prices came way down and that is their #1 cost, I'd also wager they are benefiting from passive investing. A no moat company trading at an insane valuation. When avian flu strikes next it'll cull the longs along with the chickens. KRUS is even more laughable. Last quarters net income was 1.86M and it sports a 1.27B market cap. Generously might be worth $40 per share, which would also be a slight premium to where the stock was before the government went on the largest QE binge in history.
Qualify and Momentum a perfect combination for the crowd - at times the party can go on for longer than you think and even if there are small corrections the crowds will find it a buying opportunity - go with the flow with eyes open and a finger on the trigger ! If you are managing your own money it is easier as you can play multiple games at the same time
Awesome article. It is true that a 50 times valuation (or 40) doesn't look quite good. If I had Costco's shares, I would probably be out of them by now. You can see many more names in the market, and we would be wise to stay away from them!