- Martin Sosnoff
Read Em and Weep
2022’s Alarming Performance Outages
Tesla 384 121
Disney 159 95
Amazon 171 88
Netflix 544 316
Meta Platforms 336 130
Walmart 161 145
Eli Lilly 375 350
Costco 612 479
Citigroup 69 48
Cisco 63 47
Intel 56 29
Deere 448 428
Caterpillar 250 246
American Airlines 21 15
Alphabet 151 88
Alibaba 138 111
When Alan Greenspan dropped the Fed Funds rate 50 basis points, some 22 years ago, NASDAQ rallied nearly 15%, overnight. Drug stocks declined sharply, same day. Everyone managing money got busy discounting the coming economic recovery.
Maybe today, we’re in the same spot, maybe six months away. Some of us believe the inflection point for Fed Funds bumps tops out in 6 months around 5%. The awesome shrinkage in Tesla, Meta-Platforms, et al is listed above. Conversely, non-tech properties with competitive muscle thrived or at least held their own in such a turbulent setting. Include Caterpillar, Deere, Walmart, and Eli Lilly here. The concept is never own a stock that can’t make a solid come-back.
Why so many wipe-outs? Start with earnings surprises. Few properties listed here proved exempt from earnings hiccups. There’s still plenty of disbelief in an economic come-back next 12 months. Profit margins for tech houses trace a downward slope. Nobody as yet can point to any proof for industry recovery.
Even after awesome punishment, Tesla is still selling around 30 times forward 12–months earnings power. Automobile stocks like GM and Chrysler need to see a pick up in 10–day selling rates for new cars. In a violent downturn the Big Three could become wards of The State.
The market traded at 18 times earnings fifty years ago. Not so dissimilar from today’s setting. Walmart was an upcoming regional discounter. Microsoft didn’t go public until 1983. In the sixties, when growthies like Polaroid and Xerox sold at 60 time earnings, the Street pointed to their “scarcity” value. This was typical bull market patter that proved out as dangerous nonsense years later.
Expanding profit margins, historically, buck up traditional growth stocks as in the 1990–2000 decade I don’t see this around the corner. We are now in the stage of harsh cost control, particularly in redundant employment with haircuts ranging north of 10%. Note the sizable surge in profit margins for growth companies in the 19 90–2000 decade. All such growth touched off a massive capital spending spree by tech houses. Such largesse stopped working by 2001 and touched off a recession that crumbled NASDAQ properties.
PROFIT MARGIN 1990-2000
Traditional Growth Average
Next chart on high multiple properties shows the enormous valuation shrinkage from this cycle's peak. Little more than a year ago this group comprised over 45% in market valuation. By yearend, stocks selling at 50 times earnings dropped to 15% of total market valuation. Extrapolating this condition today suggests the market could turn less volatile, a plus for money managers trying to catch inflection points with their reserves.
Past month or so, there’s buoyancy in the airline sector, a highly cyclical group that periodically runs operating deficits and needs capital infusions. This started over a year ago when American Airlines floated a five-year 6.5% convertible that I bought. The only way you could lose money was AAL ceased to exist. Months ago, I pressed into Delta, United Airlines and American Airlines common stock.
Surprisingly, airlines are attracting new believers that the end is in sight for bad numbers in a resumption of GDP momentum. I’ve seen no Street commentary on the recovery in airline stocks as a leading indicator of the country’s coming resurgence.
As yet, nobody’s talking about timing the turn in high yield bonds of at least BB quality with moderate duration. I won’t go out more than five years in duration. Truly fearless, I’d margin 2-year Treasuries for hundreds of millions, now yielding 4.13%. There’s a persisting negative yield curve to 10-year paper yielding, 3.45%. Such market insanity cries out for a response.