Hi Multis
It’s Sunday and at Potential Multibaggers, Sunday’s Funday because that’s when you get the Overview Of The Week. Tomorrow, markets are closed for Labor Day, so you have extra time to read. Let’s dive in.
Articles In The Past Week
This is already the fourth article this week. Let’s look back at the three previous ones.
On Monday, I added to the PM Forever Portfolio, like I do every two weeks. You can find what I bought here.
The second article looked at Rubrik’s earnings and whether the stock is attractive right now. You can find it here.
In the third article, I analyzed the developments at TransMedics. You can read it here.
Memes Of The Week
Just one meme this week. Or more a joke, actually.
Interesting Podcasts Or Books
I listened to three good podcast episodes this week.
Two were interviews with Gavin Baker. Gavin Baker is the founder, Managing Partner and CIO of Atreides Management. The fund invests in growth stocks, mainly in technology. Before he founded Atreides in 2019, Baker spent 18 years at Fidelity. He was a portfolio manager and also managed Fidelity’s venture-capital investing arm.
Gavin Baker was interviewed on The a16z Show from the venture capital company Andreessen Horowitz. Baker explains why many more data centers should be built, as failing to do so could cause token disparity. But that was just one of the many things he talked about. You can listen to the interview here.
The second interview with Gavin Baker I listened to was on Invest Like The Best.
The two together give you a pretty good idea of where we stand on AI.
The third podcast episode I listened to was with Doug Leone. He is a legendary venture capitalist at Sequoia Capital, which he joined in 1988. In 1996, the legendary founder of Sequoia, Don Valentine, made Leone the Managing Partner together with Michael Moritz. He backed companies like ServiceNow and Nubank. In the episode, he talks about Nubank’s founder and CEO David Vélez, by the way. You can listen here.
The markets in the past week
So, what did the indexes do this week? Let’s find out.
As you can see, the S&P 500 was up 0.09%, the Russell 2000 0.11% and the Nasdaq 0.40%.
Despite the slight move up, the Greed & Fear Index dropped to FEAR.
Quick Facts
1. Is The Market Cheap?
You have been hearing for years that the market is very expensive. Often this graph is used to prove that the market is expensive.
But there are reasons to believe the Shiller PE Ratio (or CAPE, cyclically adjusted price-to-earnings) no longer works well. The most important point is that companies now spend most on R&D and software. GAAP accounting sees this as an immediate expense, not an investment that can be written off over time. The fact that R&D and software are seen as expenses, not investments, means that earnings are understated. And that situation has become more and more so with modern companies. They are (or at least were before the big AI investments) not capex-heavy companies, like the railroads, car companies, and other capital-intensive industrials that used to be a much bigger part of the S&P.
There is another consequence. Companies can scale much faster than in the old days. The CAPE is ‘cyclically adjusted’ by looking at the average of earnings of the last 10 years. That was OK before modern times. If you wanted to scale, you needed time. Building new Walmart stores takes time. But nowadays, you can grow so much faster. If a company grows its earnings quickly, it’s not reflected in the CAPE because earnings from 10 years ago carry as much weight as current earnings.
Another reason that the CAPE is high is that the COVID period is still included. But the market is forward-looking. It doesn’t care anymore about the past.
Earlier this year, the Fed paper titled “The CAPE That Cried Wolf“ was published. What I wrote above is the conclusion of that paper. But it’s also very logical if you think about it. The paper estimates that earnings look 44% weaker than they would have been earlier. If you apply that to the current 42.38, the adjusted CAPE would be 23.7. Not cheap, but not extremely overvalued either.
That’s why I always love it when there’s a credible alternative data point. This is one.
The PEG of the S&P 500 has not been this low since the 80s. Of course, you can say a lot about this. For example, this uses the forward PE and you have to believe the earnings forecasts. But I do and I think they are often conservative for many companies.
Now, of course, that doesn’t mean I say the sky is only blue. There are clouds in the form of interest rates that keep going up. Usually, this means that more expensive stocks will have a hard time keeping their valuations. That means they will either have to grow into their valuations faster or that the stock price will drop. We will have to see.
Below: why Nvidia pays $13 billion for Hugging Face, the lawsuit that could cost Amazon more than $20 billion, the week's moves of the Potential Multibaggers, and much more. Don't want to miss anything?