“The market can remain irrational longer than you can remain solvent”
- John Maynard Keynes
The Portfolio Performance
The portfolio is UP +6.17%
Our benchmark, the S&P 500 closed UP +2.26%
What's Happening in the Market is Important For over a year, Wall Street has been turning up their collective noses at new investors who seemingly buy anything and run the price of the stock up to the moon. This momentum trading is viewed as reckless and having no basis in fundamentals. This may be true, but that doesn't mean a new paradigm isn't developing in the wings.
Examples included the bankrupt Hertz rental car business being run up in excess of $20 per share in February before collapsing back below $2 per share. Anybody renting cars from Hertz?. Spirit Airlines saw retail investors gobble up shares and drive the stock from a March 2020 low of $8/share to a whopping $26.86 today for a gain of 235.75%. Anybody flying yet? Dave Portnoy, founder of BarStool Sports has been one of the most influential day traders during the pandemic, influencing an army of day traders estimated at 1.8 million. Prior to the pandemic major brokerage houses were struggling to get retail investors excited about investing again. When the COVID-19 lock downs began, retail investors were looking for a way to make money from home and opened 800,000 new accounts at TD Ameritrrade, Robinhood, Schwab and eTrade. And all these new investors coincided with some industry changes where brokerage houses eliminated fees and introduced stock slices, enabling any investor to put $5 to work on almost any stock.
The latest extreme trade has been retailer GameStop. On January 4th the stock closed at $17.69 and the retail investors got ahold of it, driving the stock to $147.98 today. Over 92% gain today alone, and another 40% after hours. Anybody shopping for games at the mall?
The Reddit Rebellion is real, the rebellion is changing the stock market...and that's a good thing - clay baker
All of these examples and many more suggest that the market is in a bubble and everything will come crashing down with all these uninformed investors getting burned in the process. I think the outcome could be very different. The most likely investor to get burned is the entire bond market.
Because of the seemingly extreme valuations for stocks, professional investors have been shorting stocks. Shorting is simply betting on a stock declining instead of rising. However, shorting comes with a cost, the investor who borrows shares to short has to pay interest on the shares. Otherwise investors simply buy PUT options to bet on a decline.
GameStop has been one of the most heavily shorted stocks in the market. In August 2020, Chewy co-founder Ryan Cohen got involved and began to steer the company away from the legacy bricks and mortar and pursue digital sales, esports, streaming and mobile gaming. Cohen and two other Chewy executives have been appointed to GameStop's board and are tasked with transforming this mall relic into an eCommerce powerhouse. That's the fundamental story that inspires investors to believe in growth; but something else happened. All those short sellers were investing and paying big bucks to short the stock figuring it would collapse to around $20-$25 per share. That was probably a good bet, even with the new vision and direction, but that army of retail investors made a collective decision on Reddit, bought GameStop heavy, driving the price higher and eventually forcing the short sellers to cover their losses and go long. As the volume sky rocketed at ever higher prices, these investors turned a business on life support into a company with a $10 billion dollar market cap. By the way, I'm sure the management at GameStop realizes that a shelf offering at these prices would be a great way to raise cash.
Was that short squeeze by retail investors just a lucky play? I don't think so. I think the retail investor is a lot smarter than the old guard is giving them credit, and considering the amount of cash the retail investor has available to invest in stocks, we probably need to reprice the whole market and consider P/E ratios of 30-35 being more common than the long term rate adjusted ratio of 26.
Retail investors collectively control $100 trillion dollars that is sitting in cash, houses, and other assets. Over the last 10 years retail investors saved $3 trillion and 94% of that went into bonds. Potentially, $6 trillion could come into the stock market, most flowing out of bonds. $3 trillion saved over the past 10 years, another $3 trillion over the next 10 years, that's $6 trillion of inflows to stocks. Currently retail investors are light on equities, and they have a lot of buying to do to get back to a traditional 60/40 bond/stock portfolio. I think that 60/40 portfolio is going to look a lot more like a 10/90 portfolio with the majority of assets in stocks. The boldest estimates for the S&P 500 earnings this year was $194. Looking at Q1 earnings the S&P 500 is tracking for over $200 in earnings, well above the $170 consensus.
Retail investors have been piling into heavily shorted stocks like AMC Entertainment 33.27% short, Workhorse 29.75% short, Blink Charging 29.70% short, Tanger Factory Outlets 71.37% short, and SunPower 56.67% short. All of these and many more heavily shorted stocks are candidates for retail investors who gather on Reddit and collectively buy a handful of these companies. Given the speed at which retail investors can move in and out of holdings, with little to no commission on trades, it is high time, professional investors take note and recognize that they may not be driving the market any longer. Should retail investors decide one day to move their collective cash out of passive index funds and into individual stocks, institutional investors will be in for a big shock.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
ENTER YOUR NAME & EMAIL ADDRESS TO SUBSCRIBE
Keep Me Honest 2021
The S&P 500 will achieve year-end earnings of $170-$175 (1-1-2021).
We are likely to have a significant pull-back during the 1st quarter, about 5%-10% (1-1-2021).
Stocking picking will outperform algorithmic trading again as it did in 2020 (1-1-2021).
Rule #1: Don't lose money
Rule #2: See Rule #1
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
RULE #10: Being early and being late is the same as being wrong...move on.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
AMD, AMRN, AMZN, AAPL, ARKK, ARKG, CNRG, ENPH, FB, GNRC, GBTC, GLD, HRTX, HD, IPOD, MSFT, NVDA, PSTH, TWLO, VBIV
I am invested short in these securities mentioned in this post:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.