Stock markets started 2023 on a strong footing with gains across global equities. China’s re-opening after dropping the zero-Covid policy in late December helped propel the advance. Signs that inflation is easing from its autumn highs in several major regions also supported sentiment, amid hopes central banks may be close to the peak of their rate hiking cycle. Emerging markets outperformed their developed counterparts. In fixed income markets, bond yields fell (meaning prices rose). Commodities saw a negative return for the month.
It is fair to say that 2022 will go down in history as the year where investors’ portfolios were turned on their head. Many things that worked in the previous decade have become a drag on performance, most notably the large declines seen across mega-cap US stocks including a 60% decline in Tesla and a 48% drop in Amazon.
Rather than being a long-overdue market correction, some experts believe the investment landscape has just experienced a large structural change. This could require an overhaul of your investment portfolio.
Howard Marks from Oaktree suggests we are experiencing the third major sea change for investment markets of the last 50 years. He says: ‘We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets.’
Marks highlighted: ‘If you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead. That’s the sea change I’m talking about.’
Between 2009 and 2021, interest rates were very low which made it easy for companies to borrow money to grow. Now it’s more expensive to borrow and lenders – be it through loans or bonds – or investors through share placings are less willing to back loss-making businesses or ones with minimal prospects for decent profits near-term.
While I am glad that we had a good run in Jan 2023, there is a reason why I am a bit sceptical of the stock upswing in Jan 2023.
We are starting to see a return in investors’ appetite for risky speculative stocks with poor underlying fundamentals, often with little or no earnings at all.
Here are a few examples.
1) Carvana Co. (CVNA)
In its recent earning report, the company announced worse-than-expected financial results for the third quarter. The revenues came in at $3.39 billion, much lower than the $3.71 billion analysts were expecting. The quarter’s net losses increased from $32 million to $283 million year-over-year.
1) Carvana reported revenue of $3.386 billion, down 2.7% year-over-year and about $300 million lower than analyst estimates.
2) The company had a loss of $2.67 per share compared to a loss of $0.38 from the same period a year ago.
3) Retail units sold were 102,570, down 8.4% year-over-year.
4) The total gross profit per unit was $3,500.
5) Total gross profit was $359 million, down 31.4% from one year ago.
6) SG&A expenses were $656 million, up 20.1%.
In short, the recent earnings are terrible. In addition, it has a dismal balance sheet which shows a debt of US$ 8.07B, vs a total cash position of US$666 mil.
However, in spite of these dismal fundamentals, the stock is up approximately 217% for the past month, jumping sharply in volatile trading sessions. The moves are at complete odds with the broader gloomier outlook for the used-car industry, where prices for vehicles have been tumbling in recent months amid rising financing costs and consumer anxiety about an economic slowdown.
The rapid gains in Carvana shares follow 2022’s relentless selloff that wiped out nearly 98% of the company’s market capitalization, sparking fears about a possible bankruptcy and leading Wall Street analysts to warn about “the path forward.” The rally also brings to mind the meme-stock mania of early 2021, when heavily shorted companies saw massive gains as they were bid up on social-media platforms.
2) Bed Bath & Beyond Inc. (BBBY)
In a meme stocks frenzy nearly two years ago, retail punters bid up Bed Bath & Beyond’s shares by banding together on online forums.
However, the Union, N.J.-based chain is on a precipice, as a slow, years-long decline metastasizes within a haze of strategic missteps, bad investments, patchy inventory and indifferent shoppers. Executives warn that bankruptcy might be unavoidable, although many experts wonder whether the 52-year-old retailer will survive at all.
On 2 Feb 2023, Bed Bath & Beyond failed to make interest payments on its bonds just weeks after the company warned it was considering filing for bankruptcy, yet the stock is surging higher.
The company was due to pay more than $28 million on three tranches of notes on Feb. 1, totalling about $1.2 billion, a company spokesperson confirmed over email. The company has now entered a 30-day grace period to make good on the payments. But paying back its debt may be challenging for the cash-strapped retailer.
In spite of all these, the stock is up almost 80% in the past month.
By the way, the stock price fell from its high by more than 90% in end 2022.
Bed Bath & Beyond: The Market Has Lost Its Mind (read here)
3) ARK Innovation ETF (ARKK)
Cathie Wood’s ARK Innovation Scores a Record Month, Thanks to Tesla and Roku (read here)
Coinbase Bull Cathie Wood’s Ark Innovation ETF Has Best Month Ever (read here)
The Fed is ‘changing their tone,’ Cathie Wood says (watch here)
How can we leave out Cathie Wood and the ARK Innovation ETF?
At the end of 2022, the ETF’s price is down almost 80% from its peak.
Cathie Wood’s ARK Innovation ETF (ARKK) came roaring back in January, notching a partial bounceback from its tumultuous time in 2022.
Shares of the exchange traded fund closed out the month at $39.93, a near 28% increase from the end of December, marking its best monthly performance since launching in 2014. It is up approximately 38% for the past one month.
While it holds a significant amount of stock in companies like Tesla and Zoom, the basket of tech firms also holds millions of shares of cryptocurrency exchange Coinbase. The San Francisco-based crypto company accounts for a 4.5% slice of the fund, a position worth $347 million.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher
“Past patterns tend to recur. If you ignore that fact, you’re likely to fall prey to those patterns rather than benefit from them. But when markets get cooking, the lessons of the past are readily dismissed.” Howard Marks
Many people are excited by the bullish sentiments in the markets. I marvel at how fast yesterday’s Weeds are today’s Flowers.
Personally for me, in the short term, prices tend to be a distraction (more than anything else). While I am cautiously optimistic about the re-opening of China and the easing of the Federal Reserve rate hike with inflation coming down, I am wary of these huge price surges in stocks with seemingly poor fundamentals.
While the price upswings look tempting, I reckon this is probably FOMO. Many people (would rather) forget about past crashes in favour of short-term quick easy gains. My intention, however, is to invest for the long term.
As was mentioned earlier by Howard Marks, we are entering into a period of a sea change. What works in the past, may not work now.
Thank you for reading.
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