Why should we buy shares of growth companies now?
Bert Hochfeld published an article today. I think it is Ticker Target and not Seeking Alpha so I am going to distill the essence of a couple of paragraphs and present some a couple of macro ideas. These might be self-evident, but here goes.
The first is a perspective that is magnified by a sentiment. It is almost impossible for shares of growth companies, whose valuation is, almost by definition, determined by future revenues and (hoped for) earnings, to achieve, let alone maintain, advances in their stock prices. Jeez, I need to channel my Hemingway and choke off my Faulkner…. Oh well.
Switching to Epsilon Theory perspective, common knowledge, everyone knows that everyone knows that the valuation of growth stock is welded to interest rates and interest rate expectations. Present value of future…., and all that. That is the tool of the analysts. A hammer, etc. Common knowledge begats sentiment and Fed dot plots, a coming (or current) recession, and inflation expectations are common knowledge. The growth stocks must sell at highly (?) compressed valuations. Of course, the valuations are highly compressed by recent measures but not so much by 4 to 10-year data—as Dreamer has pointed out for so many months. (By the way, Dreamer, are you going to be one of the 100 Saulinan Select? Do we need to take a snap poll of predictions on this?).
The market also has a show me attitude regarding the idea that we are in a super cycle of digital transformation and AI. Or, even acknowledging the super cycle, the fear of the business cycle dominates the equation.
It seems to me that the common knowledge is not going to change, and so these stocks are not going anywhere until we are further into the cycle, or until several more quarterly reports indicate durable demand for these companies’ products and services. (Whew!, Ernest, where are you when I need you?)
But KC, we are tickling 52-week lows! What could go wrong? Stock prices have never gone below previous 52-week lows? Let’s see. First stock in my port, AYX. 6 times made new 52-week lows in last 19 months. BILL, twice. BRZE 6 times. CRWD, 3 times…. O.k.? Let’s call it the First Law, It Can Always Go Lower. Since it can, and since gains cannot be maintained, why invest now to any meaningful extent?
Add to this, note what I will anoint Dreamer’s Second Law, Post-Earnings Pops Will Evaporate. This law is supported by Bert’s observation that ETF volumes dominate individual stock purchases so that stock prices tend to be homogenized to an average level for the sector. Democratization. An example, if you please. ZS. Remember (why should you?) my sale of calls a mere few weeks ago? $152.50, I believe. Got called away and rose to $193.60. At the moment, $!62.56.
This is my thesis for holding cash, and for increasing cash by selling into any strength that comes along. Then I need to rationalize holding and adding to SPG. 7% dividend. Management proven itself through business cycles. Recessions come and recessions go. Strong companies tend to come out stronger. I “need” to earn my RMD.
That’s it. Thesis recorded. See how it holds up.
It is Friday, options expiration. CRWD puts in the money. Probably will buy to close and take the small loss rather than hold the shares over the weekend. I have ZS puts at $157.50 so I need to watch those. Indexes as slightly down pre-market. Cleveland swept Chicago.