Snowflake, Carvana, and FuelCell Energy All Crater

Extreme Greed Continues

The stock market inched up on Wednesday to a new record high. It continues to defy gravity. The CNN fear and greed index rose 2 points to 87 which is extreme greed. NAAIM index this week will be above 100 again since stocks haven’t fallen from last week. The AAII investor sentiment survey shows 49.1% bulls and 22.7% bears. Bulls were up 1.8% and bears were down 4.8%.

As you can see from the chart above, advisor sentiment has rarely been this optimistic. We don’t know if we will get a true washout by the end of the year. Usually, momentum stocks do well in December and poorly in January which means it might take until early next year for the software, SPACs, and EVs to peak.

Tesla Bear Catalyst

Tesla has its own special catalyst in that it will be added to the S&P 500 on December 21^st. The last day for index funds to buy Tesla will be December 18^th. The stock will peak ahead of this date because the catalyst is overhyped. The stock may have already peaked. It was down 2.7% on Wednesday. 

Maybe it falls another 15% in the next 2 weeks, pops on December 18^th, and then continues its descent. As you can see from the chart below, Subaru has greater sales than Tesla, but Tesla’s market cap is over 30 times as big. Subaru has higher profit margins than Tesla.  

Nio also sticks out on this list as its profit margin is -145.9%. Nio stock was up 5.78% on Wednesday as it recovered some of its recent losses. FuelCell Energy stock was crushed as it fell 20% due to its secondary offering. The heavily shorted Carvana was down 10.23% because of a 2 million block trade at $241.1. 

The stock closed at $225.45. Some don’t believe in the business model because Carvana is paying way too much for the cars it buys and sells them for too little. That sounds like common sense, but right now investors love money losing firms.

Boring Wednesday

Wednesday was mostly boring as the market was flat. The S&P 500 rose 18 basis points, the Nasdaq fell 5 basis points, and the Russell 2000 was up 11 basis points. However, there was some movement under the surface as energy was strong again. The oil services index was up another 3%. It’s up 63.35% since October 28^th. 

Don’t let the market’s boring performance distract you from how overbought it is. As you can see from the chart below, the smallest 10% of stocks in the Russell 1000 were up 28.5% in November. It was a month for the ages. Even stocks like Cinemark, which benefit from the reopening, are now too high. Cinemark is up 89% from November 6^th.  

Spotify was one of the hottest stocks on Wednesday as it rose 12.6% to a new record high. The news websites said the stock rose on no apparent news. It’s a sign of the times. These crazy valuations can’t be justified. Spotify trades at a -95 current PE ratio.  

Deals Of The Week

The beloved Salesforce.com was down 8.93% after its decent earnings report with weak guidance. Weakness is more about the Slack acquisition. Salesforce is desperate for growth. It’s so desperate that it bought an expensive underperformer. This was a bad deal. Salesforce is down 21.5% from its peak on September 1^st, yet it is still highly overvalued.

The other big deal of the week was S&P Global’s acquisition of IHS Markit for $44 billion. This is an all stock deal. S&P Global is expensive, but Markit is a worse business, so I think this is another bad deal. After initially rising on the news, S&P Global is down 5.3% in the past 2 days. Markit has fallen back down to where it was before the deal. Markit trades at a 29 2021 PE ratio and is expected to have low double digit earnings growth in the long term.

Dollar Is Oversold

The 10 year yield is now at 94.3 basis points which puts it close to a 6 month high. It will get above 1% in December and above 1.5% in 2021. The dollar is oversold in the near term, but I think the decline in the index continues into next year. The index is now at 90.96 which is right above its support. Maybe it bounces off its support before falling. 

As you can see from the chart below, asset managers have a record short position in the dollar. This short positioning could blow up just like how every crowded trade tends to end.

Snowflake Falls On Earnings

Snowflake had its first earnings report as a public company on Wednesday. This has the distinction of being the most expensive SaaS stock in a SaaS bubble. The firm’s 2022 PE ratio is -324.6. It isn’t expected to make a profit for many years. The firm reported a loss of $1.01 and sales of $159.6 million. 

That’s 119% yearly sales growth which is gold in this market. Traders love when firms grow sales and lose a ton of money. The stock fell 3.7% after hours after falling 4.2% on the day.

Tech stocks like Snowflake and Salesforce trade at crazy multiples that imply performance that is unlikely to be achieved. As you can see from the chart above, from 1980 to 2019 only 4.4% of S&P tech stocks sustained greater than 5% yearly earnings growth. Just 0.2% did it for 10 years. 

It's unlikely that Salesforce will keep achieving above 20% sales growth for the next 5 years. They know they can’t either which is why they are buying a bunch of firms like Slack. Salesforce is within a few years of being the next IBM. It’s not fun being a tech stock with no growth. Just look at the performance of IBM, Intel, and HP in the past few years. It has been a bad time for value stocks, but is it ever a good time to buy a weakening tech stock?