Investors love to look for signs of markets tops, a difficult task, except in hindsight. A favourite of the GFC of 2008 was the infamous comment by Citigroup’s Chuck Prince in July 2007; “As long as the music is playing you have to get up and dance." Now we have another Prince, this time Bob, co CIO of Bridgewater, who proclaimed at Davos the other day that we have seen the end of the boom bust cycle (remember the great Gordon Brown saying much the same in 2007?).
This is up there with many examples of insanity occurring almost daily at the moment and suggests that we may be close to the top, but those who think that the Coronavirus scare will prove to be the catalyst for this are, I think, barking up the wrong tree. The real elephant in the room is the massive infusion of cash into passive funds chasing returns forced upon investors by the monetary policy of all major Central Banks. This means that a few big liquid stocks drive up the market irrespective of any fundamental rationale. Take the big daddy of them all: Apple (NASDAQ - AAPL). It is clearly a first-rate, well-run, company and the biggest holding of all index funds of course, but also every type of both growth and value ETFs. But is it a growth stock?
Q1 results for the three months to December were treated with unalloyed rapture. In calender 2019 the company earned net income of a staggering $57 billion (until recently the entire market cap of Tesla (NASDAQ - TSLA)) helped by brisk sales of the iphone 11. Few analysts pointed out that in calender 2018 (with no help from the iphone 11) net income was $59.44 billion, 3.3% more. Granted, it is true that EPS rose 4% thanks to massive share buybacks, but is this really what we would normally expect from a growth stock? I don’t think so. What about value? A p/e of 25 times earnings for a business which contracted year on year? I don’t think so either. The fact is that passive funds which now make up for approaching half of all equity investment buy Apple not for growth or value but because they must buy it, and the more they buy the more they have to buy. With interest rates unlikely to rise anytime soon, it is difficult to see when this process will reverse.
Such a reversal is normally preceded by inexplicable collective insanity. What happens to a company which posts its twentieth consecutive annual loss since its inception and shows a 45% decline in net income in H2 2019 from the prior year (with H2 EPS down 48%)? Its share price rockets 10% of course. To give a hint it makes cars and is valued currently at more than VW. Welcome to Teslaland. I have a hunch that it is only when Tesla finally gets a reality check that the wider market finally comes to its senses. That time cannot be too far away.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve THIS FRIDAY, along with a new shorting piece too, click HERE
Filed under: Apple, Tesla, ShareProphets Radio podcast, XLMedia, Micro Focus, Julie Meyer, N50 website
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