PE Multiple Broken?
Investors focused on the S&P 500’s PE multiple have missed out on the recent gains. To be clear, investors focused on the PE based on 2020 earnings missed out the entire rally. Investors focused on the multiple of 2021 earnings have only missed the past couple weeks of gains which haven’t been that large.
Yardeni Research is forecasting $150 in S&P 500 EPS in 2021. If you multiply that by 18, you get the S&P 500 at 2,700 which is below where’s currently at. Even if you use the consensus of $166 in EPS, you get 2,988 which is barely above where the market is now.
Problem with this analysis is cloud stocks are becoming a larger portion of the index and they command premium multiples. SaaS companies aren’t cyclical and have high margins. This industry deserves a higher multiple than energy stocks. Investors who think the S&P 500 multiple can’t go higher will miss out on some gains.
To be fair, if you’re worried about the shutdowns being extended or COVID-19 coming back, you should sell. Valuation as a reason to sell won’t work. Cloud stocks are very overheated in the short term, but nothing is stopping them in the long run. CLOU cloud stock ETF is up 50.75% from March 16th and 27.87% year to date.
Bulls like to say that you can’t value stocks based on trough earnings. Bears like to say stocks become very cheap at bottoms even versus weak earnings. This was an exogenous event which meant once COVID-19 was understood, stocks would move higher whether or not they were extremely cheap.
As you can see from the chart above, when there is high EPS uncertainty, stocks usually are cheap. That prices in the risk. Specifically, when the S&P 500 earnings dispersion is 15% to 20% the average PE since 1995 is only 13.6.
However, the current forward PE is 20.3. PE is high because the companies that benefit from this situation have high multiples. Funds typically flow towards staples in recessions as they are less economically sensitive. They have much lower growth and multiples than the cloud stocks. One staples stock that is outperforming is Clorox as it is up 34.86% year to date. This stock is way too high. It must be avoided.
Most Data Is Still Weak
There are 2 types of analysts: the analysts that say the economy has improved greatly from the bottom on a percentage basis and the analysts who say the improvements are very small. In some circumstances, the improvements are small and other times they are more significant.
As you can see from the chart below, Apple maps data shows driving has recovered significantly, while TSA checkpoint travelers have barely increased. There is more driving, but not much flying. In the past 3 days, yearly bookings at restaurants fell 97% versus the 100% they fell in the entire month of April.
We are seeing some anecdotal pictures of more people shopping in person. These are meant to show the potential spread of COVID-19, but they also show us the demand for brick and mortar stores is there.
2 Million People Stayed Home
Many people are staying home from work because they have to or out of precaution. The latter might be related to the chart below which shows there were 2 million workers who were employed, but not at work due to their own illness in April. That’s mostly because employers are telling everyone that’s sick to stay home. Working from home when you’re sick or not working at all should be promoted after this pandemic ends to support workers.
There’s no need to spread the flu. It’s not as bad as COVID-19, but it’s still unpleasant and can destroy employee productivity. A takeaway from this chart isn't that 2 million people got COVID-19. While antibody tests suggest more people have gotten COVID-19, many of those people are asymptomatic. This chart gives you a grasp of how much of a bigger deal COVID-19 is for the labor market than any other flu season in the past 10 years.
Speculators Going The Wrong Way
Smart money is shifting towards being negative on equities because there seems to be little upside. In my opinion, there’s a dramatic difference between saying there is less upside coming than saying there is no upside left. Many predicted the market would stabilize in May.
As you can see from the chart below, the major index combined hedger position shows there was a high amount of equity futures short in early 2019 as the stock market rallied. Currently, there is about $40 billion in index futures short. On the other hand, there was over $40 billion in short futures in September 2007 which was prior to the financial crisis.
Tanker Trade Over
Tanker trade is a way to show how weak the oil market is. When demand doesn’t exist, oil needs to stay on tankers which drives their rates up. Tanker stocks have been crashing. Nordic American tankers is down 31% since April 28th. The company is doing very well still, but sentiment got too heated when the CEO was on Mad Money and a famous Youtuber recommended it.
Scorpio Tankers has crashed hard as the stock fell 9.16% on Monday and 33% since April 28th. Scorpio Bulkers sold shares in this name which tanked the stock even though the company is doing the best since 2015. Problem with the trade in these stocks is almost everyone who owns them is just doing it for the short term.
If everyone likes a stock for 6 months, they will front run the trade by selling early at which point you will need to be very early to avoid locking in profits. On the other hand, once all these speculators sell, you’re left with the stock not rising much despite the company doing very well.