Work From Home Trade Is Back
Large caps fell and small caps rose slightly on Friday which isn’t what you would normally associate with the work from home trade doing well because tech dominates large caps and banks dominate small caps. However, that’s what happened. It’s a very tough trade to make because 5 U.S. government agencies stated vaccine shots would be ready in 8 weeks. It’s tough to buy Zoom ahead of that.
We could see progress on limiting the spread of COVID-19 in the spring. A rally might be driven by algorithms or momentum chasers. Old school investors look at discounted future cash flows. Work from home traders are just looking at the next quarter. Quarters following that will have tough comps, but the market is very shortsighted right now.
As you can see from the chart above, the stay at home stocks underperformed in the 2nd half of October and the first half of November. In the past few days, the market has ignored the vaccines and focused on the spike in cases. These work from home stocks are a conduit for traders to flee to when COVID-19 gets worse.
Valuation is irrelevant. There are certain stocks traders put in long and short baskets that they trade based on news flow. You can make money on these in the long term if you do due diligence on their individual fundamentals. People that trade baskets don’t care about how the business is doing because they assume a certain number of stocks will have company specific issues/positives. However, those are supposed to be overwhelmed by the macro trend.
Market Madness
Keep the faith if you are an investor that looks at company specific data points. It still makes sense to review annual reports and fundamentals in the long term. In about a year, no one will look at the market through the lens of COVID-19 because the virus won’t be a factor.
If you are long long-dated Zoom puts based on valuation, you will still do fine because sales and profits will be important again. As for now, Zoom will rally in the next couple weeks if COVID-19 gets worse. Zoom stock was up 6.11% on Friday. It’s up 16.9% since November 10th.
The chart above shows another example where investors don’t care about individual company fundamentals. As you can see, in the last 5 years Altria had 36% operating growth, while Apple had a 7% decline. Including Altria’s high dividend, its cumulative 5 year return is -22%.
Apple’s cumulative 5 year return is 294%. Altria had massive multiple compression and Apple had massive multiple expansion. Altria is in the hated tobacco industry, while Apple is in the beloved tech sector.
Altria has been hurt by its 35% stake in JUUL and its 45% stake in Cronos which is a marijuana company. Those investments have been disasters as JUUL has faced regulatory issues and the marijuana bubble popped. Apple has been helped by its move towards subscription revenue.
However, Altria got rid of the CEO that made those deals and Apple’s iPhone is still in decline. Macro headwinds/tailwinds have mattered more than company specific details. Altria’s JUUL stake was made 2 years ago. How long can investors punish it for this mistake?
Massive EV Bubble
Even though the work from home stocks are off their peak and the Nasdaq 100 still isn’t back to its record, the EV bubble is alive and well. Tesla is leading the charge. It was down 1.9% on Friday, but that’s off its record high on Thursday. The stock is up 469% year to date. Nio was the headliner in October as it is up 76.7% in the past month. It rose 1.7% to a record high on Friday.
Somehow, Nio has a $67 billion market cap despite being years from profitability and selling just 12,206 cars in Q3. It lost $154.2 million in the quarter. This bubble is just like the pot stock bubble that Altria got in trouble with when it took an expensive stake in Cronos.
Arcimoto is the latest hot electric vehicle stock as it is up 215.6% in November. This firm sells 3 wheeled vehicles. It only had $684,000 in sales last quarter, yet it has a $542 million market cap. This gives it a 169 price to sales ratio.
The fact that Arcimoto has a vision to get to mass production within the next couple years is enough for speculators. An obvious problem is we don’t know if people will want these 2 seaters. Electric vehicles might be the future, but are 3 wheeled cars the future?
COVID-19 Update: Disaster Gets Worse
It is looking more likely that December will have the most COVID-19 deaths of the year. Only personal behavior can stop the spread in the next few weeks as the vaccines will be a non-factor. On Friday, there were 1.92 million tests which was by far a new record.
We are getting closer to where we need to be, but my thinking has been if a vaccine is widely available in 2-4 months, testing is less important. We needed to reach testing goals 3 months ago to stop this outbreak.
It seems there were 192,805 new cases on Friday which was a new record. There were 82,178 people in the hospital as some states have run out of healthcare workers to take care of sick patients. There were 1,862 deaths which pushed the 7 day average up to 1,412. It’s inevitable that the 7 day average will get above 1,500. Next step is 2,000 which is why December could be the deadliest month of the pandemic.
Conclusion
For the next few weeks, it looks like the headlines will allow the work from home stocks to outperform as December will be a disastrous month for COVID-19. The market is insane for the multiple compression Altria has had and the multiple expansion Apple has had.
EV industry is the biggest bubble in the market as Tesla, Nio, and Arcimoto are overvalued. SPAC EV stocks are even more insanely overvalued.