Last week, I held a Zoom call with my hedge fund partners since we can’t get together for a retreat or anything fun like that during the Coronavirus Crisis. We talked about valuations comparing ZM to TSLA, what can make the markets go down, how 2020 is a lot like 1920 and other things. Here are some of the edited highlights. I’ll send along another edited part of the call later this week.
Cody: I struggle with the valuations, even as I believe in my investments for 10,000 days, Zoom being the best example of what I’m trying to describe right now, where it’s valuation… Let me just pull it up. I mean, it was up another 5% today. So let me just pull up and see the latest valuation of Zoom. We’re talking about $160 billion company. Relative to Google video or Skype or the other open standard platforms, Zoom is the best way to interface right now. FaceTime would be easiest if it was available on Androids and PCs, but it’s just not. Point is that Zoom really doesn’t have a good moat. I’m a bit uncomfortable with Zoom at $160 billion, at this date and time as the stock is trading at 50 times next year’s revenue estimates, and if I discount another 5 years worth of 50% growth, we might be able to talk about this company being worth $160 billion in my mind. But already? Without a moat?
I’d invested in ZM because it was part of my COVID work from home concept basket that I bought in early March when the lockdown became apparent. And that turned out to be the right analysis, in retrospect. But I never thought that ZM would go up 500% in the next six months after I bought it.
Speaking of ZM, I’m trimming a part of ZM here, locking in part of the nice gains on this stock that is trading at 5 times the price we paid for it back in March.
Tesla is a different example of a stock that’s gone through the roof, but some of the same principles apply. I’ve long said that I could picture Tesla becoming a trillion dollar company over five or 10 years. And it is now worth $300 something billion. When I bought it, it was at $30 billion and the stocks up 800%. They issued more shares and more shares outstanding. So valuation has gone up quicker than the stock price has gone up, but I still get the concept that this company can justify its current valuation sometime in the next few years. I can, in my mind, run through numbers and come out and go, it’s still going to become a trillion dollar company at some point. I’ll do that in a minute.
I don’t know if the market is going to make it a trillion dollar company this year or next year. And I frankly think it might be an underperforming stock over a two or three year period at some point, because it’s run up so much. But I don’t sell it and I’ve not been trimming it much either for a while now. Rather, at least in the hedge fund, I hedge part of my TSLA long. I’m short calls and I buy puts. I try to balance those two things where I try to get some of the puts paid for basically with the income from some of the calls. But even when the stock goes straight up this quickly, I don’t want to sell all my stock.
I’ve been saying a lot of times that in a “normal market yada yada”. When I talk about valuations or even just the economy or the markets valuations or directions or anything, and give day-to-day moves to my wife in the morning and after months she was like, “Why do you keep using the phrase in a normal market? What does that even mean?”
And I’ve thought a lot about that since then. And what I realized I mean is that there are times when not every stock goes up huge and then down huge. And in a normal market some of the markets moves and those of individual stocks are more steady and other stocks are just higher beta versions of the market and/or are in the right trend.
This is why I go golf because these fricking back and forth thoughts are… It’s never good enough when you’re a hedge fund manager. If you make money should’ve made more. And if you lose money, you’re an idiot. So many to stress over. But then again, I have a 10,000 day time horizon.
And I will say, I feel pressure, even just like doing a stock pick for Trading with Cody tomorrow [this was the day before I sent out the FVAC Trade Alert last week]. It’s taken me two months to pull the trigger because I’ve been uncomfortable valuations pretty much overall. And I just wanted to double check triple check, think through everything before I put my name on a stock pick. And it’s the same thing in the portfolio, obviously where there’s real money, tangible money. I’m not just putting in my name on it, like we’re buying the stock.
So I don’t panic, but yes that’s why you pay me is to stress out about it all to figure out hedges, to buy. We’re running big money and sometimes I buy a little insurance that is scaled and then a little more insurance in the form of hedges. And a lot of times those don’t work out and that’s just okay, but that’s what the hedge fund by definition is here for.
Q. You said you worry about a serious pullback, what do you think would cause that given the current environment, low interest rates, more stimulus probably coming, regardless of who wins the White House. And I wouldn’t discount the possibility of a vaccine getting approved in the next couple months. I mean, if you look at the pandemic of 1918, 1919 once that finished in 1920, and again, that was also going to world war one, but the stock market went up 50% the next year.
Cody: Well, and obviously it took the US economy into the roaring twenties, which was the set up for the great crash and the great depression thereafter. Valuations, I come back to all the time. Value investing has actually been a big influence of mine over the years, but in a weird way that. It’s not like I see value stocks in the way that GE is trading at eight times earnings and think that therefore you should buy it because it should be a fairly valued at 12 times earnings.
My brain has never worked like that. But I do look at Tesla and can do a valuation thing where I’m like, it’s still sort of undervalued because look, I truly believe that over five years from now, Tesla’s going to do two or $300 billion of sales, 30%, 40% probably gross margin, even without autonomy in any of that, just sheer cars and solar. We’re talking three to 400 billion, 40% gross margin.
Let’s call it 30% gross margins at 300 billion. It’s $90 billion of gross profit. Cut that in half, $45 billion. Throw 20 multiple on that, now you’re a $900 billion market cap. So that is okay. But what I’m trying to get to is, most stocks you can’t do that with right now. You can’t look at OSTK and go, “You know how you can rationalize this at $75 per share?” You can’t look at lithium stocks and go, “You know why these things are up a 1000%? You know why this was worth 50 million and now it’s worth $500 million.” Because it doesn’t work. Lithium’s of commodity that’s mass produced and always will be and going to get more mass produced because people are buying it. And what are the margins?
So in the grand scheme of things, there are enough valuations that are wildly stretched to levels that even me as a long-term growth minded investor — one who pays attention to some value, metrics — that my brain can’t wrap around valuations for the random stocks, and even for many of the great stocks at this moment at these levels.
There are so many crappy companies and crappy stocks that are being valued in wild ways. I’m not talking Apples and things. Instead I see stocks of companies that want to someday get into the EV business that have no sales and might someday sell some electric cars to UPS or something. And it’s now worth a billion dollars or something. There are 500 stocks like that, that can go down 80% for no reason except to be more fairly valued. So that alone keeps me just cautious.
And along with that, the economic outlook. When there’s a vaccine, maybe the economy can stabilize and GDP won’t go down too much. Maybe people start going out again, maybe… How does the billions of dollars that was moving in Abu Dhabi that I was at a couple of years ago, when does all the trillion dollar money managers and the trillion dollars sovereign wealth funds and the jets and hotels and lives that were being lived…When does that come back?
Now extrapolate that down to the trailer parked down the road right here, and the people that were working in the small businesses and Ruidoso that have had to lay people off, even just temporarily. And now these recently employed but now out of work blue collar workers are trying to pay their rent in trailer house that they rented from some land lord whose not got any savings either.
That economic outlook has me more worried about the economy than I’ve been since 2007 when I turned bearish on account of the real estate crisis being about to hit.
Of course I can also see how the economy can get better, which makes me excited. We could improve from this moment, but then I look at the market and I’m like, what the heck is it looking at being at all time highs right now? This should be the setup where the market’s panicking and we can be the rational people who are like, “Zoom’s at $50, all right, dude, they’re giving away Zoom at $20 billion market cap, that’s a no-brainer!” Instead, Zoom’s at $160 billion market cap. So I can’t be the rational guy buying ZM at new lows right now.
Again, I’m just trying to sort of answer your question. What can cause a major market pullback?
These are things that can cause it. Not to mention that the FED doesn’t own interest rates — interest rates own us over time. Throughout the developed world from Europe and Japan, everybody’s keeping their negative interest rates and they’re forcing their citizenry to lend money at criminal levels, essentially taxing their people yet again. All their central banks are printing enough money for now. So that the citizenry that is forced into buying treasuries at negative interest rates continue to do so.
And when the rest of the world is offering negative interest rates — boy, the treasuries in the United States look pretty good and that half a percent of interest from the US is going to be attractive and people will buy it there. But in the grand scheme of things, this is not sustainable either. And I don’t know what the catalyst is. I know that at some point interest rates go natural. Natural forces rule.
What is long-term anyway? Martin Luther King Jr quoted some other preacher who once said “The arc of the moral universe is long, but it bends toward justice.”
The concept is exactly that… This is how again I sort of confuse the concepts of God and universe and stock market and economy — because in all of life, the arc of justice exists. You can’t just print money forever and think it will retain value. You can’t just kick cans down the road forever and think that it will always work out. The globe can not just have zero negative interest rates. It doesn’t exist. It doesn’t conceptually make sense. And therefore it’s unnatural. So it can’t continue to exist over five, 10, 20, 30 years. 10,000 days from now there will not be negative interest rates throughout the developed world. I don’t think the whole rate cycle is about to end anytime soon. But it will end. The universe, the economy, the forces of mankind will balance themselves in a long arc.
Back to the question of what could make stocks go down: If interest rates just go up a little bit, if the treasuries rates were to go up just 1% that would be more than a double to the cost of servicing the US’s debt. Rates are probably going to remain low here for a while still, but maybe not.
And finally, one the other thing I would say is it’s always classic that when my trading with Cody subscribers or partners of a hedge fund, say to me, something like “What could possibly make the stock market go down? There’s no catalyst.” Well, that’s often the catalyst. Everybody stayed in the market because “it can’t go down” so the market goes down.
[Cody back in real-time to sum up.] Look, I’m not outright bearish, but I’m definitely back in cautious mode again. Don’t try to time the markets. And let’s not try to use valuation as a timing tool either. Be cool. Mostly sit tight, as usual.