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Sunday Reads
Speculating and making money on tech / growth stocks is soooo 2021.
In November 2020 I wrote: “This highly scientific and accurate visual below depicts what Value investors have felt like in recent years.” To Value investors’ delight, however, Growth investors are now seated in this death trap.
This was the worst week for U.S. indices since COVID-19 first eviscerated markets in March 2020 (FT).
For the NASDAQ in particular, this marked a brutal week in an increasingly brutal year. The technology heavy index has fallen 11.53% year-to-date on the prospect of higher interest rates and waning demand for pandemic darlings’ products. As we discussed a few weeks ago (Surprised by The Inevitable), this monster rally in technology and work-from-home stocks largely originated from an assumption that life would never be the same post-pandemic. Business travel would never return because now we have Zoom. No one would go back to gyms because now we have Pelotons. Streaming services like Netflix can keep adding more subscribers indefinitely because everyone will always be stuck at home in need of content, right? Woops!
Sentiment Check: Boom, Roasted.
There are countless examples from recent weeks demonstrating just how sharply sentiment has shifted away from exciting speculative and innovative assets. For those that watched The Office (US), it reminds me of the scene where Michael Scott goes around “roasting” each one of his employees, saying “Boom, roasted!” after each insult.
With that said, let’s get some updates on how some of the speculative assets that dominated headlines during the pandemic are faring:
- Bitcoin: The cryptocurrency is down roughly 50% from it’s recent November high. Boom, roasted!
- Cathie Wood & ARKK: The ARKK ETF returned 153% in 2020, and investors poured money into the fund. However, this year performance is so bad that there is an “anti-ARKK” ETF that shorts Cathie Wood’s flagship strategy, and it’s handedly outperforming. Boom, roasted!
- MicroStrategy: In a December 3rd letter, the SEC told Bitcoin community hero Michael Saylor and his company, MicroStrategy, to chill out with the Bitcoin antics. The SEC stated “we object to your adjustment for bitcoin impairment charges in your non-GAAP measures. Please revise to remove this adjustment in future filings. Refer to Rule 100 of Regulation G.” Boom, roasted.
- Netflix: The streaming service is representative of the broader issues that “work from home” stocks are experiencing as shares plunged 22% on Friday after reporting lower than expected subscriber growth for 2021. This was the company’s largest one-day decline since 2012. Boom, roasted!
- Peloton: Things just keep getting worse for this pandemic darling. Shares of Peloton have fallen 83% over the last year, and the company is now being removed from the NASDAQ 100 on January 24th. The fact that it was only added on December 21, 2020 is symbolic of just how fast circumstances changed for companies linked to a “work from home” paradigm. Boom, roasted!
- NASDAQ: The technology heavy index is now in correction territory. Boom, roasted!
- SPACs: Perhaps nothing epitomizes the speculative craze during COVID-19 lockdowns more than SPACs. Yet, the fact is that the returns for most of these SPACs have been disappointing. The Wall Street Journal recently reported that investors are increasingly pulling their money out of SPACs before any deal has been completed. Boom, roasted!
Now I’m sure there are other headlines and stories that I’ve accidentally omitted, but you get the picture.
A Poisoned Chalice
It seems to me that the problems facing all of the assets covered above stem from their own success. In other words, they are the victims of their own success. The pandemic has been a poisoned chalice for many stocks as investors now expect companies that thrived from a work-from-home environment to continue generating similar results regardless of the extraordinary pandemic conditions.
For example, Peloton was the classic pandemic darling because it sells at-home fitness equipment at a time when everyone was forced to stay home. During lockdowns, sales soared. The problem, however, was that investors began setting these exceptional sales in unique circumstances as the new benchmark or baseline for future results. As expected, Peloton could not meet expectations as people started returning to gyms and the unique work from home environment driving Peloton’s sales faded.
Netflix felt the brunt of this poisoned chalice on Friday as shares fell 20% due to disappointing subscriber growth figures. Like Peloton, Netflix was poised to benefit from the pandemic as people are stuck at home in need of content to consume. Two years into the pandemic, however, most people that would subscriber to Netflix have probably done so by this point.
“Netflix posted its best subscriber growth ever in 2020, when billions of people were stuck at home. But the company has said that pulled from future growth and led to a slow start to 2021.” (Bloomberg)
Bloomberg summarizes this issue perfectly. The problem for growth stocks is that their accelerated growth in this unique WFH environment has “pulled from future growth”. For investors, this inevitably means disappointment going forward unless baseline expectations are reset.
During the 19th century railway booms, for example, expectations of growth and demand became decoupled from reality. Leading up to the Panic of 1857, much of the speculation in land and railroads was tied to the expectation of settlers in a given territory. More settlers meant rising land prices, and meant that railways would be encouraged to run their lines through town, further increasing land prices. This was particularly true in Kansas:
“These new lines, with their aggressive land-purchasing policies and far-reaching plans for transcontinental expansion, provided the principal speculative opportunities for railroad investors of the 1850s. Their fortunes depended on a continuing inflow of settlers and the growth of commerce on the frontier, which required confidence in the viability of expansion westward.
In the spring of 1857 confidence abounded. The Cincinnati Enquirer reported “railroad fever”… According to Allen Nevins, a “fever of speculation in Kansas lands was raging, men selling homes, giving up well paid positions, and even borrowing money at ten percent to purchase farms.” Newspapers published along travel routes to Kansas in early 1857 described “a veritable torrent of humanity.” The lure of Kansas lands led some to expect Kansas to “increase by seventy thousand people that year.” In April settlers arrived at the rate of 1,000 per day.
The link between immigrant traffic and expectations of railroad profitability is visible in the responses to this great influx. As passengers to Kansas increased, the roads lowered rates for through traffic, indicating expectations of a lasting increase in the volume of business (and perhaps the railroads’ desire to encourage immigration to stimulate development).” (Calomiris)
Since the success of their speculations were largely contingent upon the growth of settlers, and that growth was significant, investors in Kansas began to extrapolate booming short-term growth into long-term assumptions. This is often where the problem arises. Just because settlers were arriving at a rate of 1,000 per day in April 1857, that does not mean there would always be 1,000 new settlers arriving daily. Just because Peloton sold a ridiculous amount of bikes during quarantine, that does not mean they would always sell that many bikes.
So What?
Flashy growth stocks and speculative assets are starting to lose their shine. The work-from-home trade that pushed stocks like Peloton higher is fading as companies inevitably struggle to maintain the extraordinary performance achieved during extraordinary times (COVID-19). This sentiment is visualized in the graph below, showing performance for the Direxion Work From Home ETF and Russell 1000 Value Index:
The increasingly negative sentiment for growth stocks is even important for investors not owning Netflix/Peloton/etc, as history shows that problems in one corner of the market can quickly spread. When a large company or institution falls from grace, investors tend to start scrutinizing their own investments more closely. There are countless historical examples of financial institutions collapsing during a speculative mania, causing investors to question how speculative their own investments might be and withdraw funds from other institutions. Bank runs ensue. The same logic holds for less extreme scenarios as well.
For instance, the recent underperformance of tech stocks has had knock-on effects in the private markets as startup valuations are being questioned and IPOs get delayed. The Wall Street Journal reported:
“Waning enthusiasm for tech stocks in the public markets is casting doubt on valuations in the private market, where prices last year hit stratospheric levels.
The public arenas have begun to dial down their fervor for high-growth tech stocks, with investors in particular punishing companies that don’t make money—startups in tech and biotech, blank-check companies and others still finding their feet. Venture investors, in turn, are rethinking how much they should pay in private deals…
Founders of later-stage companies are getting pushback on their hoped-for valuations from some growth funds that now use lower public-market metrics to assess them… Market conditions have [also] put a brake on public listings by some venture-backed companies.”
Maybe the events of recent weeks are just a blip, or maybe the unchallenged dominance of growth stocks and speculative assets is waning. Either way, this episode has offered a useful reminder that investing isn’t always as easy as just buying the hot new thing. Investors may be wise to start re-examining the recently ignored corners of the market. Now let’s dive into today’s Sunday Reads articles covering past speculative tech booms, their collapse, and more.
The Railway Mania of the 1860s and Financial Innovation
Visualizing History:
Riding the Bubble or Taken for a Ride? Investors in the British Bicycle Mania
Visualizing History:
An Undertaking of Great Advantage, But Nobody to Know What It Is
Why This is Relevant:
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