1.I have discussed in detail my concerns over the S&P 500 and how it really is not great for diversification. A further example includes comparing the entire energy sector to the market cap of Apple. Energy currently occupies just 3.8% of the S&P 500, this includes companies like Chevron, Exxon Mobil, Valero, and Halliburton. Compare this to Apple’s market cap over $1 trillion and its weight in the S&P 500 of nearly 5% and you can see how little of an impact a surge in the entire energy sector would have on the gains for the S&P 500 vs. a large decline in Apple would have on the index. Currently, there is a major dominance by large companies as the 5 largest companies make up over 18% of the index while the bottom 300 make up just 16.8%.
2.As a follow up to my post last week concerning bonds as a questionable investment, I was shocked to see investors poured a record $23.6 billion into bond funds and ETFs last week. As the 10-year note sits at under 1.6%, investors are continuing to pump cash into bond funds at an annual rate of $1 trillion. Continue to think about how these low rates and interest rate risk will impact your long-term performance. I again recommend no bonds except for maybe the 30-day T-bill.
3. Are you part of the hard seltzer craze? Just a few years ago it was not even an industry, but now it is growing and last year had sales that were 2.6% of beer sales. While that may not sound like a lot, remember the beer industry has been around for years and it is estimated that just in the U.S. consumers buy $119.3 billion of beer each year. Credit Suisse estimates hard seltzer sales will double this year and that it will reach 8 to 10% of beer sales by 2023. The 2 major pl ayers in the field are White Claw and Truly. White claw currently is the dominant force with 59% of total market share, unfortunately it is owned by Mark Anthony Brands which is a private company so you cannot buy stock in the business. Truly is owned by Boston Beer and has 26% of the market, but Boston Beer (SAM) is a very expensive stock at nearly 35x December 2020 GAAP EPS. Other players are also entering the field as Anheuser-Busch InBev (BUD) is launching Bud Light Seltzer, Constellation Brands (STZ) is introducing Corona Hard Seltzer, and Molson Coors (TAP) is bringing Vizzy to the market (These are just a few examples). You can enjoy the new beverages, but overall, I’d recommend staying away from the alcohol industry as the stocks remain pricey!
4. I was shocked to see Walmart (WMT) trading higher this morning. The company reported EPS of $1.38 vs an expected $1.43, sales came in at $141.67 billion lower than the anticipated $142.49 billion, same store sales saw growth of 1.9% vs the expected 2.3% growth, and guidance for EPS of $5.00 - $5.15 for the full year fell short of the expected $5.22. This guidance was also not inclusive of the Coronavirus impact which Walmart has said they are unsure how it will impact the com pany. The company does have 430 locations in China, a stake in JD.com , and the company does supply some goods from China. It seems investors only cared about the online sales growth of 37% for the year which beat expectations of 35%. As a reminder, this part of the business is still losing money. For me, the quarter did not justify its expensive Forward P/E multiple of 21.1x.
5.Pier 1 files for chapter 11 bankruptcy which means the stores will still be around as the company provides a plan to reorganize and pay off creditors. This also means shareholders of the stock will lose their entire investment. The reason why my firm spends so much time understanding the financial statements of public companies is months ago we believed this company would likely have to go into bankruptcy as the liabilities exceeded the assets. One year ago, the stock traded at $28 a share and as of today, the stock is no longer trading and appears to be worthless. The total debt including capital lease obligations increased to $624 million from last year‘s third quarter of $199 million. Do not buy shares in this company thinking you are buying at a fire sale, you will see your investment down the road go up in smoke.
6.Do you think Jeff Bezos makes too much money? The truth is his salary is just $81,840 and it has been that way for 2 decades, before then he took even less. Bezos also does not take any money in stock-based compensation, his wealth has been built solely by his ownership of Amazon. Owning 16% of the business is what gives him his net worth of over $100 billion. I think this is truly remarkable as Bezos was able to build this company into something that so many people love and use. Don’t like that Bezos has so much money? Stop using his services, the demand for his company is what continues to drive his net worth higher.
7.I’ve discussed many times the strength that we have in this labor market, but the one thing that is holding it back from being even better is qualified workers. Currently there are still about 670,000 more job vacancies than unemployed workers. The problem is a recent survey by Manpower Group, a job placement firm, indicates nearly 7 in 10 companies report talent shortages. This is the highest level the survey has seen and compares to 2013 when only 39% reported the talent shortage. As time progresses jobs change, new jobs arise, and some industries fold. Employers are now having to pay up for top end talent and pay for training to better educate employees. It’s important we continue towards closing the skills gap that exists in this economy.
8. As a follow up to last week’s post on cannabis, I wanted to further illustrate my concerns with investing in this industry. People often-times think that because an industry is new and exciting those stocks will succeed. This is called momentum trading and can be very risky, as we have seen with this group of stocks. The reason I do not like this group is because the business fundamentals are atrocious and in the long term, fundamentals matter. Many of these companies have hi gh cash burn and little liquidity. A recent report shows that based on capital spending and negative cash flow from well-known companies, Aurora and Tilray, they have less than 6 months of cash left on the balance sheet. The stocks will likely remain volatile and could see periods of growth, but there is just too much risk in this industry. I’d rather find businesses making money and that have good cash flow.
9.As Tesla stock continues to remain at elevated levels, I can bet you the auditors at PricewaterhouseCoopers who have been auditing the books of Tesla since 2005 are not jumping into the stock. They have listed critical audit matters that concern them such as, how the company was reserving money for potential future warranty expenses along with the promises it made to guarantee a resale value or the buyback option for some of the vehicles that Tesla has sold. I don’t know about you, but the auditors are there for a reason and to ignore them, all I can say is investors beware!
This newsletter is for informational purposes only and should not be used as investment advice. If you would like to discuss more in detail your investment needs or have other investment questions, feel free to call me at 858-546-4306 or visit our website at Smartinvesting2000.com.