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The kind of stocks this market likes and dislikes...


yudeng2004
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I noticed some patterns in this current market sentiment, and found it kind of interesting:

 

Look at these particular names and how similar their financial profiles are:

Apple (AAPL) - huge cash pile, 8x PE after net cash, low debt, STILL has growth left since the smartphone market itself is not done growing, CRASHED after earnings.

Baidu (BIDU) - huge cash pile, 18x PE after net cash, low debt, grew revenue 40% latest quarter, and China's internet penetration is still only at 42%, and search is still by its nature a very wide-moat business, CRASHED after earnings.

LeapFrog(LF) - huge cash pile, 4.5x PE after net cash at end of Q1 2013, still the leader in the growing children's tablet market and won more toy awards this year than Mattel/Hasbro/VTech combined, CRASHED after earnings.

 

Notice how the above companies' financial profiles are still insanely good but their growth prospects went from "HOT" to "Decent" but is no longer at the forefront of a "Paradigm Shift".

 

Then take a look at these companies:

Netflix(NFLX) - huge debt with boatloads of off-balance-sheet content obligations, creating their own VERY expensive shows (which is a hit-based business), top-line growth actually not that great. LOW return on equity/assets.

Amazon(AMZN) - low margin, and actually LESS than 25% growth and slowing, HUGE capital expenditures, low return on equity/assets

SalesForce(CRM) - has growth, but it's very expensive growth at the expense of income.

 

But these companies all scream "Paradigm Shift" and now really reminds me of the Internet Bubble craze where no price was too dear to pay for the changing nature of business models.

 

Do you guys feel the market is behaving like VC's right now?  They want companies to spend, spend, and spend more to catch the "Paradigm Shifts" and the price paid does not matter.

 

The ironic part is the companies in good financial shape still have decent growth prospects ahead of them, just without the "Paradigm Shift" label.  BIDU had more revenue growth rate than Amazon, Netflix, and SalesForce.

 

The capital flows of this market is turning increasingly speculative.  It thinks one group of companies is taking over the world, and the other group will soon die.

 

Of course, this trend might diverge further but I think the current state is the most divergent we have seen in years.  It'll be interesting to see how much further the divergence will continue!

 

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Hi Yudeng! Glad to see you back! Interesting and a smart post as asual.

 

Do you remember this expression being used on CNBC not that long ago: "Risk ON, Risk OFF trade"? In other words, this was all about investing long term or in equities vs short term or in cash. Now what you are describing seems to be an extension of the Risk ON trade where individuals are now willing to make even longer term bets. Fear is gone and can also be seen in the volatility numbers.

 

I was trying to point this out regarding Amazon, but the answers that I am now getting are much more based on faith in Mr. Bezos and the future that he may create vs looking at current fundamentals. One even mentioned that he would buy on a pull-back. I honestly seriously doubt that a value investor would buy Amazon on any market correction since other major bargains would have emerged with ton of value right in front of you and no need to envision profits appearing in 10 years from now. I have never seen Amazon being named in 2008-2009 on this forum as a great buy when obviously they had 5 years of large growth in front of them.

 

So sentiment appears ultra frothy and I would not be surprised to see a major correction now that we are approaching all time highs for the third time. It may be needed to finally end this secular bear market.

 

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The Bezos effect - it's puzzling isn't it, considering that great value stocks today actually have growth, and often GREATER growth than the bubble stocks.  I think if someone is crazy enough to pay 100 PE for 50% growth, and say 5-10 PE for 0-10% growth, then it's understandable to some extent.  But when they pay 500-1000 PE for 8-30% growth, and 5-20 PE for 20-40% growth.  That's when I check if I accidentally took some pills or something.  So they want to pay MORE for LESS growth in earnings??

Anyways we probably will get that blow-off-top then our opportunities will emerge.  Netflix may move to 210 simply because everyone is looking at it and says "It's in a perfect Pennant Formation!" and it will be a self-created reality.  I see a lot of people out there who are saying they will buy Netflix until 200-220 then they'll short it because of the Pennant Formation -> Blow Off Top -> Crash pattern.  And it may actually happen because they all believe it.

 

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