12/13/20
S&P 500: 3663
Nasdaq: 12377
10 year Treasury: 0.9%
David R. Snyder, CFA
Over the last month or two speculators have made 30 to 50% daily gains in “story stocks” a normal occurrence. I read and hear about all of these investors who believe they can do better on their own rather than having their money managed by professionals. The Robinhooders are now in control of the stock market, or so they say. Believe me, I have been there before and it doesn’t end well. Remember the 3D printing stocks stocks a few years ago? How about the cannibus stocks two years ago. How did they work out? Not too well if you consider declines of 90% or more from their bubble peaks not very rewarding.
Now we have the EV (electric vehicles) stocks and the SPACS (Special Purpose Acquisition Companies) running wild to the upside. Most of the SPACS have little or no revenues let alone earnings at this point. And of course everyone is bringing a SPAC public these days. Then we have the sizzling IPO market where deals are being priced two to three times higher than their indicated price just weeks before the IPO and yet still manage to double on the first day of trading.
I have seen a lot in my 34 years as an investment advisor and this mania is right up there with some of the biggest bubbles, even the late 1990’s tech bubble. Lets start with the EV stocks since they seem to be the center of the SPAC universe. For context in 1908 there were 238 auto manufacturing companies in the US when the combustion engine car industry was in its infancy, similar to where the budding EV industry is now. By 1928 (before the Depression) there were only 28 companies left with most of the other start-ups going bankrupt or being acquired at not so great valuations. By 1938 there were only a few domestic car manufacturers remaining. An investor would have been better off buying a lottery ticket back in 1908 than investing in a car company.
China has several hundred start-up EV companies, many of which are just entering the market. Even in the US there are many new start ups in the EV industry that are scheduled to have products in 2021 or later. Yet investors treat every EV stock as if it will be a big winner in this new frontier. And they already discount success out five to ten years from now.
The trading in Quantumscape (QS 76) is reflective of the crazy nonsense. In early September the SPAC announced it was acquiring a developer of a solid state battery for EV’s that has the potential to charge faster and last longer than lithium batteries. The stock rocketed from $10 to $27 on the news. Then the stock slowly faded back to $11 over the next two months as the Robinhooders lost interest. When the deal closed in November the stock surged again to $47. In early December QS issued a news release that repeated a news release from a month ago promoting their technology and the stock soared to $77.
There was never any doubt that the deal that QS announced in September was not going to be completed, so why would the stock give back all of its initial gains and then surge again at the time of the deal closing? Not rational. And why did the stock rocket higher on the second repeat news release hyping their technology? It contained no new information. Complete insanity!
The trading in JinkoSolar (JKS 54) is also very revealing. This solar company has traded sideways for years on inconsistent results but surged from $19 in late August to $88 in October with no known catalyst. Their earnings results in late August were nothing special but solar stocks began to get hyped as prospects for a Biden victory were highlighted. But the Biden prospects were known for several months before the stock popped and in any event the stock price movement was way overdone.
Jumia Technologies (JMIA 37) stock trading over the last couple of months is another example of hopes and dreams overtaking fundamentals. This online retailer in Africa reported disappointing earnings results in early November and the stock justifiably cratered 20% to $13. JMIA may be the only online retailer to report year over year declines in revenue during the Covid crisis although EBITDA was better than forecast on cost cutting. Repeat users, a key metric were actually down. Moreover they lowered their revenue forecast for the next 12 months by a whopping 20%. Not only will they not be profitable for the next four years, they won’t even be EBITDA positive. Yet the allure of the underpenetrated African market and some big promotion by speculators including ironically a well-known short seller, caused the stock to explode to $37 over the last month.
The good news is that there is still good value in the stock market. Next year will see a big bifurcation, similar to this year only in reverse. There is still upside in the Covid recovery stocks, especially in the financials. Don’t know when the speculative bubble will pop but still expect the overall stock market to advance through March of next year. However I expect a nasty correction in January of 2021 that will be swift and quick and without warning, very similar to the January 2018 correction. Some of the speculative stocks will decline as much as 50% in a matter of days. Just don’t see it occurring this month with the current set-up.
Market tells just released data revealing that a decline in the first week of December has always led to a higher close within weeks, and most of the time the stock market was higher within a week or two with big gains far exceeding big losses. We are also very close to entering a very strong seasonal period at the end of December.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.