Category: Historic Capital Rotation

Posted on

Model Portfolio Performance 3/5/2021, Member Compliments, & Understanding The Bigger Picture

  • 2021 year-to-date Model Portfolio performance has been exceptional, following a banner 2020.  In aggregate, our model portfolios have trounced the S&P 500 Index since their December 2015 inception.
  • Through March 5th, 2021, the Best Ideas Model Portfolio was up 36.8% YTD, ahead of SPY’s 2.6% YTD return.  The Best Ideas Model Portfolio was higher by 51.1% in 2020.
  • The Stuck On Yield Model Portfolio is higher by 28.0% YTD, and this Portfolio is now ahead of the S&P 500 Index since its February 21st, 2020 inception.
  • Our long/short model Portfolio, which we call The Contrarian All Weather Model Portfolio, is up 19.7% in 2021 through March 5th, 2021.
  • Last, but not least, Uncle Tony’s Model Portfolio, which was funded in August of 2020, has gained 32.7% YTD in 2021, and is ahead of SPY by a greater amount since inception.

“On the day that I die, I wanna say that I, Was a man who really lived/loved and never compromised.”

-Zac Brown Band from Day That I Die

Introduction

First, I want to say thank you for the folks along this journey, which has not been an easy one. even though it has been a very profitable one for those who had the endurance, patience, and fortitude to stick with positions that were very different than the broader market indices. Second, last week, for the week ending 3/5/2021, we saw another banner week for our targeted equity positions and our model portfolios.

Occidental Petroleum (OXY), which I wrote about in this hotly debated “Too Cheap To Ignore” article, which was published on August 7th, 2020, saw its shares gain 17.4% last week (they are higher this week too).  Since I wrote that article, OXY shares have gained over 100%, as of this writing, ahead of the SPDR S&P 500 ETF’s (SPY) gain of 18% over the same time frame.  

Building on the narrative, OXY shares sport impressive free cash flow yields at today’s prevailing oil prices.

Continuing the narrative of out-of-favor energy companies, Exxon Mobil (XOM) shares, which are also featured in the table above, gained 12.1% last week, for the week ending March 5th, 2021.  Since Exxon Mobil was removed from the Dow Jones Industrial Average (DIA) on August 31st, 2021, its shares have significantly outperformed Salesforce.com (CRM), which replaced Exxon in the DJIA.

I wrote about this outperformance in a public article published last week, titled, “Exxon Mobil Far Outpacing Salesforce.com Since It Was Removed From The Dow“.  This article was a follow-up to one of my favorite articles I have written, which was titled, “Exxon Mobil Exit From Dow Reveals S&P 500 Index Structural Flaws.” 

Also contributing to the outperformance last week was Antero Resources (AR), which I cover prominently in our dream scenario member articles at The Contrarian, and in a series of private and public research, including this recent article, saw its shares gain 9.8%.  As I write this post, Antero shares are up 92.8% year-to-date in 2021, after gaining 91.2% in 2020.  Members at the Contrarian have documented gains, for those who have reported, of over $80 million in Antero Resources alone.

There were many other equities that contributed to the positive model portfolio performance during the week ending March 5th, 2021. These included Devon Energy (DVN), whose shares gained 18.9% last week, Cenovus Energy (CVE), whose shares gained 10.8% last week, BP (BP), whose shares gained 9.7% last week, U.S. Steel (X), whose shares gained 9.3% last week, and whose shares are up over 111% versus a roughly 10% gain in SPY since I wrote the public article, “U.S. Steel: Too Cheap To Ignore Again“, on November 13th, 2020, Chevron (CVX), whose shares rose 9.0%, and Antero Midstream (AM), whose shares rose 7.3% last week, after being the best performing midstream firm for much of 2020.

There were a host of other equities that contributed to strong model portfolio performance, including quite a few financials, led by Barclays (BCS), whose shares gained 8.2% for the week ending March 5th, 2021, and Brighthouse Financial (BHF), whose shares rose 5.5% last week. 

These are just a few of the equities highlighted that we cover, and who contributed to the positive performance. There were down weeks too, for stocks like First Solar (FSLR), whose shares fell 9.0% last week, RH (RH), whose shares fell 8.4% last week, yet are higher by 1383% since we bought these in the long/short Contrarian All Weather Portfolio in October of 2016, and Brookfield Renewable Partners (BEP), whose shares declined 8.1% last week.

In summary, a historical capital rotation is in full bloom, something I have outlined privately, and publicly.

Understanding the bigger picture, then having the understanding of the bottom-up fundamentals (link to an important member article) has been the key, and it has not been easy, yet that is where the historic opportunity has been, and that is where it still stands, from my perspective.

Model Portfolio Performance Through March 5th, 2021

Bet The Farm Model Portfolio

  • 2021 – Up 69.1% YTD (this portfolio has been all cash for a little while now)
  • 2020 – Up 161.1%

Best Ideas Model Portfolio

  • 2021 – Up 36.8% YTD
  • 2020 – Up 51.1%

Stuck On Yield Model Portfolio (Inception February 21st, 2020)

  • 2021 – Up 28.0% YTD
  • 2020 – Down 6.0%

Contrarian Long/Short All Weather Model Portfolio

  • 2021 – Up 19.7% YTD
  • 2020 – Up 13.3%

Uncle Tony’s Model Portfolio (launched August 21st, 2020 for a family friend with $650k looking at retirement)

  • 2021 – Up 32.7% YTD
  • 2020 – Up 12.4%

For perspective, the SPDR S&P 500 ETF is higher by 2.6% YTD in 2021 (through March 5th, 2021), and finished higher by 18.3% in 2020. For additional perspective, it has not always been rosy, particularly from 2017-2019, yet perseverance and understanding the bigger picture, along with bottom-up fundamentals has led to extremely strong relative and absolute performance since the inception of the model portfolios with the Bet The Farm & The Best Ideas Portfolios dating back to December 7th, 2015.

Member & Future Member Compliments

The success of others has been extremely gratifying to watch happen in real time, with a lot of naysayers drifting aside, yet still a fair amount of skepticism and criticism remaining.  The following are a couple referenced newer member compliments and a couple of member compliments from 2020.

Exceptional work

“Unquestionably one of, if not, the best services on SA. The latter is what I’ll go with. That said, if you can’t have conviction in your thesis and ride (and add) when prices are working against you, this isn’t for you. Very grateful for this group and the community Travis created.“

– Posted As A Formal Review On January 24th, 2021

Life changing

“I have never written a review of an investing service, although been on the receiving end of many over a number of decades. The Contrarian stands out alone among them all. Travis brings integrity and intellectual honesty and deep and relevant experience, none of which I have found anywhere else. His insights are so perceptive that my lack of such vision caused me to take a high powered magnifying glass to his description of AR. I was highly skeptical and slow on the uptake. What I found, and reconfirmed from multiple angles, allowed positioning in March/April which has been life changing. Ideas presented are well worth investigating. Chat is incredibly helpful and noise free.“

– Posted As A Formal Review On January 21st, 2021

Separate the Forest from the Trees

“Travis is one of the best writers on SA in my opinion. He stays true to his value orientation and contrarian roots and has guided his subscribers towards very profitable investments through the years. In addition, the group of contrarians are active in sharing ideas, analysis and investment philosophy which are valuable to both beginner and expert investors alike. One word of caution, this is not a service which will provide daily trade ideas / signals nor dozens of in-depth single stock research (although key focus investments are covered in great detail); it is however an invaluable resource to gain insights in undervalued sectors, understand deeper industry and company fundamentals and ultimately unearthing deep, multi-bagger value investment ideas. It is not hyperbole for me to say that this service has changed my life. Absolutely worth the subscription 10x over.“

– Posted As A Formal Review On January 19th, 2021

Beconan Premium Comments2

@KCI Research Ltd.

“I want to thank you for your timely article on 2/19/2020 Antero Resources is A Generational Buy. Your article helped me reached a conclusion that AR would not file for BK. Soon after studying your article carefully, I started betting my farm ( funds from all my IRA accounts) on AR. 1/3 @1.83, 1/3 @1.40 and 1/3 @1.30. I accumulated about 500,000 shares of AR. Then AR fell to all time low of 0.67. A thought of cutting loss flashed in my mind. I overcame the fear eventually and stayed all the way up to now. Lately I ask myself where should I get off the moving train. Most target price mentioned is $17, some say $26, a new number mentioned is $50. I am going to try to get to $35 which is about 1/2 of all time high. I do not know if we can get there or not. I worked for McDermott for a year in 2002, a thousand dollar company matched stock in my 401K account grew to over $30,000 as company stock went from single digit to over $100 in a few years. That personal experience also helped me to decide to bet the farm.

You helped me and my wife to be able to retire comfortably and help my children go to Universities. Thank you so much. I will be your The Contrarian subscriber soon.“

– Posted January 13, 2021

myk3077 Premium Marketplace Comments96

“@ KCI research… I have been a member of your investing service for a couple of years. I want to share with everyone that Travis’ research going all the way back to 2018 is unbelievably outstanding. My knowledge has grown 5 fold in the space just from pouring over his previously published members only articles. The valuation work and detailed analysis of individual basin characteristics is second to none and to be honest.. is better than many professional energy consulting firms research reports i have read over this time. Simply put… Travis will probably be the single largest reason why i am able to retire early… His service is invaluable..and it doesn’t matter if you disagree with his research.. just having it to offset/make better investment decisions is the idea. There is nobody better at his size in the industry… The fact that unaccredited investors have access to him is truly unbelievable.“

– Posted January 13th, 2021

“And I want to thank you for the research, without which I wouldn’t have the conviction to concentrate my portfolio. It is up more than 200% this year. Very likely I will be able to retire in the coming year.”

– Member compliment received December 15th, 2020.

“I have accumulated over 96K shares from MAR 10th until 2 weeks ago (in Antero Resources shares). My average price is $1.67 (the stock was trading recently around $5 per share). KCI research is the reason for this… Its about the thoroughness of research that led me to have the conviction to jump in.. I simply added his analysis coupled with understanding the ramifications of the oil price war and Covid on the Energy Sector. I wrote this to thank KCI for his insight, research and investing service which is outstanding.”

– Member compliment posted here on December 8th, 2020.

“Before 2020, I thought it would have been crazy to pay over $1,000 for a subscription. Yet after reading one of Travis’ articles and a 2-week trial, I realized that the value offered here, vs other services, is substantially greater. I initially subscribed to The Contrarian for knowledge and if I made money, then great; I’ve become a better investor due to this close-knit group and the return potential has been far more extraordinary than I imagined coming into this year. The crazy thing is that things are just getting started, as financial markets are at relative extremes, rarely reached historically, according to The Contrarian’s analysis. Travis is not your typical go-with-the-flow investor, hence the group name, The Contrarian. The group focuses on the most undervalued sectors of the market that have outstanding growth opportunities and while our gains have been extraordinary this year, I am still in awe of the enormous future return potential. Here, you will find many highly competent investors contributing towards a variety of topics that will leave you learning something new every day. If you are looking for an author who is competent, respectful, formally educated, and thinks outside the box, then give The Contrarian a try – I’m glad I did, and my portfolio is happy too.“

– Member compliment posted as part of a formal review on August 27th, 2020

“Thanks for your input Travis. I must say you do have a very pragmatic and calming way of framing things and make some really good points. I don’t think I have ever come across anyone with so good hand holding skills regarding stock investments.”

– Member compliment posted on August 22nd, 2020.

“I completely agree that Travis’ style is calming, professional, poised and (positively) unique. It’s Travis’ style and professionalism (especially responding to rude responses in public articles) that really distinguished him (besides good research and a shared contrarian view) and attracted me to The Contrarian.

Travis enables counterpoints to be shared and, as he’s done here, actually encourages it. Iron sharpens iron and an echo chamber is dangerous. Many of us have very (probably irresponsibly) high portfolio percentages allocated to our favored names so I think it’s important for us to continue enabling these questions and this dialogue.“

– Member compliment also posted on August 22nd, 2020.

“I think of you as the Wayne Gretzky of analysts. A couple things I remember you saying that have happened – PM’s would lead the way higher for commodities in general, then E&P stocks would lead the way up before the underlying. We’re starting to see some strength in natural gas here recently. Things are looking pretty darn good to me.”

– Member compliment received on August 11th, 2020, and as a sports fan for most of my life, I appreciated the context.

“The investment commentary is first rate. Also, Travis has expert knowledge of the natural gas industry and specific high potential stock picks in this area. (Lots more besides.) All this builds confidence in his stock picks. Another real plus is the member chat area, which is full of really excellent ideas, observations, forecasts, etc. Am grateful to the lords of investments for allowing me to discover The Contrarian.“

– Member compliment was received on August 8th, 2020, and this was also posted as a formal review.

“I’ve been a subscriber to KCI’s research service and all I can say is that I wish I had done so sooner. Definitely the best of the 4-5 I’ve tried so far.“

– Member compliment was posted on August 7th, 2020.

“Having spent my career as a market research analyst, being surrounded by competent analysts, I observed what we might call the “analyst fallacy”. Indeed, I subscribed to The Contrarian despite a high price compared to other Seeking Alpha subscriptions, because it is explicitly anti-herd or orthogonal to the herd. Indeed, the more I study it, the more I find The Contrarian subscription price to be a relative bargain.“

– Member compliment posted in a series on July 30th, 2020.

As I like to say, the feedback, positive and negative, indicates that I am headed in the right direction with The Contrarian.

Closing Thoughts – Perspective & Perseverance Are Needed

All the detailed spreadsheet models in the world are not a substitute for understanding the bigger picture, being able to position ahead of a move, and being able to look forwards instead of looking backwards or look forwards instead of focusing on the present situation. Ideally, getting the “macro” and “micro” right is what you want, however, this is hard to do in practicality, and there are going to be unexpected twists and bumps along the way. Said another way, investing is a full contact sport, and you have to be prepared for the mental and physical capital challenges if you want to materially outperform.

Ironically, right now, the best thing most traditional investors could do, meaning those that focus in traditional stocks, bonds, real estate, etc. is to take a vacation for the next seven years. I will be expounding on this topic more shortly (update, which I did here, and it is important to read the closing paragraphs for the true conclusion). Alternatively, investors who want to stay in the game should consider non-correlated and alternative asset classes.

For now, I am going to close with the same refrain I have been hammering in with these blog posts.

Many investors operating in the commodity equity arena have had to run a long/short portfolio to simply survive the past seven years, however, the irony today, is that the most operationally leveraged companies, which are generally the short positions in these aforementioned long/short portfolios, have the most upside return potential at historical inflection points.

We are seeing that right now, and two specific public examples that I have highlighted include U.S. Steel (X), which I wrote about here, and Occidental Petroleum (OXY), which I wrote about in this public article. If those two are too high octane for you to look at as a investor, consider Wells Fargo (WFC), which has some of the same out-of-favor characteristics, as I detailed in this recent article.

In summary, investors chase performance, that is just part of human nature, and many investors are chasing performance in the hottest sectors today, including the technology sector, even though energy equities (XOP), (XLE) at a broad lever are outperforming technology equities (XLK) over the past four months by a substantial margin. Having said that, market participants will generally not consider the out-of-favor equities today, even acknowledged industry leaders, until they have a long-run of outperformance.

I witnessed this first hand with Realty Income (O), which I have written about this here, in late 1999 and early 2000, trying to sell this position as part of a portfolio in my role at Charles Schwab (SCHW) and Chicago Equity Analytics, yet very few investors would even consider it. This was the case, even though Realty Income shares had roughly a 10% dividend yield back then, and most investors have it as core holding today, with a dividend yield that is less than half what it was, and a narrowing growth runway after a twenty-year good run of strong performance.

I also witnessed the same thing when I was buying out-of-favor REITs, specifically General Growth Properties, and First Industrial Real Estate (FR) in late 2008 and early 2009, which I chronicled in this article that I published on February 27th, 2020.

Use Panic Selling To Your Advantage – Highlighting A 14% Yielding Model Portfolio – KCI Research Ltd.

The key to build real wealth, IMO, is to own concentrated positions, ideally buying into panic selling, in the best outperforming companies of the next 20 years, not the best performing positions of the past twenty years.

We have been able to do this real time at The Contrarian.

$50 Million Plus In Profits On One Stock – KCI Research Ltd. (Updated, This Is Over $80 Million Plus Now)

For help in that endeavor to outperform, consider a membership to one of my research services. On that note, I am continuing to offer a 20% discount to membership (I am extending this through March of 2021 due to popular demand and my desire to help the greatest number of investors and then pricing will return to the normal levels, and then we will raise prices at some point to maintain the level of dialogue we have now) to “The Contrarian” (past members can also direct message me for a special rate). Remember, this compliment when it comes to pricing.

Indeed, I subscribed to The Contrarian despite a high price compared to other Seeking Alpha subscriptions, because it is explicitly anti-herd or orthogonal to the herd. Indeed, the more I study it, the more I find The Contrarian subscription price to be a relative bargain.

And this one on pricing too.

Before 2020, I thought it would have been crazy to pay over $1,000 for a subscription. Yet after reading one of Travis’ articles and a 2-week trial, I realized that the value offered here, vs other services, is substantially greater.

Additionally, I am offering a limited time 20% discount for the first 10 new members (I expect these slots, some of which I view as a stepping stone to “The Contrarian”, to fill up fast as they have done previously) to a host of research options, including a lower price point. If you subscribe to a premium option, I will set-aside time for a personal phone call to get up to speed. To get these offers, go here, and enter coupon code “march” without the quotes.

Reach out with any questions via direct message.

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point, which I believe will supersede 2000-2002, and 2000-2007, in the growth-to-value rotation.

Best of luck to all,

Travis

P.S. Resilience is perhaps the most important ingredient to be successful in life, and in the markets. Keep that in mind right now.

Posted on

Monday, November 9th, 2020, Marked A Historic Inflection Point Following Up On The March 9th, 2020, Inflection Point

2020 has been a year that will stand out in the history books. Financial markets have seen their own share of history in 2020, including significant inflection points, both those readily apparent, and those that have existed behind the scenes.

In the energy sector, March 9th, 2020 was a significant inflection point, where many energy equities, including Occidental Petroleum (OXY) declined over 50% in a single trading session, and alternatively, leading natural gas equities, including EQT Corp. (EQT), Cabot Oil & Gas (COG), and Southwestern Energy (SWN) actually finished higher amid the energy carnage, as I chronicled and outlined in the following two public articles.

The Long Oil, Short Natural Gas Trade Is Officially Dead

The United States Natural Gas Fund Was Up On A Historic Down Day For Energy

While natural gas equities have shined in the energy complex in 2020, energy stocks, and value stocks have generally continued to be out-of-favor, however, the inflection point might have been reached on November 9th, 2020.

A Record Change In The Relative Performance Of Momentum Stocks Occurred On November 9th, 2020.
S&P 500 Equal Weight ETF (RSP) Had Its Best Relative Performance Day Versus SPDR S&P 500 ETF (SPY) Ever On November 9th, 2020!
FAANG Stocks Had Worst Relative Performance Day Since Acronym Gained Popularity On November 9th, 2020!

Takeaway Thoughts

Sometimes an inflection point is obvious, hitting an observer over the head, and sometimes it is more discreet, requiring some time to appreciate what has transpired. With energy stocks, which are the fulcrum of the value opportunity, continuing to outperform this past week ending Friday, November 20th, 2020, including the Energy Select SPDR Fund (XLE) rising 5.7%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rising 6.6%, and the VanEck Vectors Oil Services ETF (OIH) rising 10.9%, while the SPDR S&P 500 ETF (SPY) declined 0.8%, and the Invesco QQQ Trust (QQQ) declined 0.2%, market participants may look back to November 9th, 2020, and view it as a line of demarcation between the “Have’s” and the “Have Not’s”.

Posted on

Time To Take A Bite Out Of Apple On The Short Side

Summary

  • On May 13th, 2016, I wrote a public Seeking Alpha article stating that Apple was trading at its cheapest valuation in a decade.
  • The total return for AAPL shares since that articles publication was close to 400%, with the S&P 500 Index up roughly 60% over this time frame.
  • In 2020, I have been more bearish on AAPL shares, securing a 221% gain on AAPL puts, with a February 28th, 2020 closing transaction.
  • That first sale of the put options was too early, given the melt-down the broader equity markets suffered over the course of March of 2020.
  • Today is a perfect time to use Apple as a market hedge on the short side, again, as its enormous market capitalization and elevated price-to-sales-ratio will make it hard for shares to move higher going forward.

“I will go to my grave… believing that really loose monetary policy greatly contributed to the Financial Crisis. There were obviously problems with regulation, but when we had a 1% Fed Funds rate in 2003 after, to me, it was pretty obvious that the economy had turned (up) and I think the economy was growing at 7% to 9% nominal in the fourth quarter of 2003 and that wasn’t enough for the Fed. They had this little thing called ‘considerable period’ on top of the 1% rate just so we would make sure that their meaning was clear. And it was all wrapped around this concept of an insurance cut… I’ve made some money predicting boom-bust cycles. It’s what I do. Sometimes I am right. Sometimes I am wrong, but every bust I had ever seen was proceeded by an asset bubble generally set up by too loose policy…” – Stanley Druckenmiller

(Source: Image From Author’s May 2016 Seeking Alpha Apple Article)

Introduction

On May 13th, 2016, I wrote a public Seeking Alpha article stating that Apple (AAPL) was trading at its cheapest valuation in a decade.  The total return for AAPL shares since that article’s publication was close to 400%, with the S&P 500 Index up roughly 60% over this time frame. 

(Source: Author, Seeking Alpha)

More recently, I have turned somewhat bearish on AAPL shares, especially as the company has continued its climb towards the $2 trillion market capitalization mark.

In fact, earlier this year, I purchased January 2021 puts on Apple shares, and then on February 28th, 2020, I cashed these puts in for a 221% gain, which was too early with the benefit of hindsight, even though I wrote publicly about the risks of COVID-19, including this article, titled “Two Black Swans“, which was published on Seeking Alpha on February 25th, 2020.

Alternatively, you could say I cashed in at a decent time, given the broader stock markets seemingly parabolic rise from its March 23rd, 2020 lows, which has been led by the largest market capitalizations stocks, including Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), (GOOG), Facebook (FB), and of course, Apple.

Whatever logic you subscribe to, I think it is a perfect juncture to take a bite out of Apple shares on the short side again. 

Why?

I feel this way for three reasons.  First, the company’s sheer size and elevated price-to-sales ratio is going to make it hard to grow robustly going forward, secondly, on a broader valuation basis, shares are no longer cheap, like they were in May of 2016, and third, market participants are using the leading growth stocks as a bet on continued disinflationary pressures amdist the COVID-19 pandemic, yet some combination of a vaccine, treatments, or herd immunity is likely to usher in a historic capital rotation towards value equities and economically sensitive equities.

Apple’s Sheer Size Is A Headwind

Apple’s market capitalization at Friday, July 31st, 2020’s closing price of $425.04 is a remarkable $1.84 trillion.  In fact, with a 10.47% share price gain during Friday’s trading session, Apple shares added over $174 billion dollars in market capitalization.

Breaking this down further, that $174 billion gain in market capitalization, if ascribed to one company, would make that hypothetical company roughly the 35th largest company in the SPDR S&P 500 ETF (SPY).

For perspective, the market capitalization of Pepsico (PEP) is $191 billion, the market capitalization of Abbot Laboratories (ABT) is $178 billion, the market capitalization of Saleforce.com (CRM) is $176 billion, the market capitalization of Oracle Corporation (ORCL) is $170 billion, and the market capitalization of AbbVie (ABBV) is $167 billion.

Again, for perspective, Apple gained roughly the amount of market capitalization in a single day, that some of the largest companies in the S&P 500 Index have taken lifetimes to build.

Overall, AAPL shares now compromise roughly 6% of the S&P 500 Index (SP500), and with Friday’s move, they should surpass Microsoft as the venerable index’s largest holding, which will be mirrored in State Street Corporations (STT) SPY product.

The problem with being this enormous, is that Apple is going to have a hard time growing revenues, profits, and cash flows at a rate that make a material impact on the overall size of the enterprise.

Building on this narrative, at a trailing-twelve-month revenue run rate of $274 billion, Apple is selling at an almost 7x revenue multiple for the past twelve months, and revenue has not really grown at all from 2018’s annual levels ($266 billion).

On this note, given this price-to-sales multiple, we have to remember what Scott McNealy, the former CEO of Sun Microsystems said about his company trading at a 10x revenue multiple at the peak of the dot-com bubble era.

‘At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?’

Scott McNealy – Business Week 2002

Now Apple is not Tesla (TSLA), which sports a price-to-sales ratio over 10 (though to be fair to Tesla, revenues could surge higher on higher vehicle volumes), however, with Apple’s revenue growth already slowing to a crawl, and the sheer size of Apple’s revenues being so large, it is going to be hard to grow revenues and profits to simply maintain the company’s stock price anywhere near today’s levels, let alone grow it, at least in my opinion.

Apple’s Valuation Ratios Today Are Head & Shoulders Above Where They Were In May Of 2016

Remember, we just established that Apple shares are trading for almost a 7x price-to-sales multiple, with very little revenue growth the past two years.  Building on this narrative, the valuation table image below, with underlying data from Morningstar (MORN), is taken directly from my May of 2016 public article.

(Source: Author’s May 2016 Article, Seeking Alpha, Morningstar)

Notice that back in May of 2016, Apple shares were trading at 2.3 times price-to-sales multiple, a 10.3 times price-to-earnings ratio, and a 3.9 times price-to-book ratio.

Today, those valuation multiples for Apple are 6.9 for the price-to-sales multiple, 32.2 times for the price-to-earnings multiple, and 25.2 times for the price-to-book multiple.

(Source: Morningstar)

Given these extended valuation ratios, it should be no surprise that Morningstar had a $285 fair value target on AAPL shares as of July 31st, 2020, which is a tidy 32.9% below Apple’s recent closing price. 

Growth Stocks Could Be Hurt In A Capital Rotation

It has already been established that Apple is a growth stock without revenue growth, as their trailing-twelve-month revenues of $274 billion are only modestly above their 2018 fiscal year revenues of $266 billion and their 2019 fiscal year revenues of $260 billion.

This flat-line in growth is decidedly different than their large-cap growth peers.  On that note, an analyst can say whatever they want about Alphabet, Amazon, Facebook, and Microsoft, and some of these companies are ridiculously overvalued too, in my opinion, however, at least these companies are firmly growing revenues.

Building on this narrative further, we know that growth stocks have outperformed their value counterparts for the better part of 13 years now.

(Source: Nomura)

This outperformance has grown amidst the COVID-19 outbreak, with growth stocks actually less sensitive to asset manager’s modeled COVID factors than their value peers.

(Source: Los Angeles Capital Management)

This makes sense as many of the leading growth stocks like Amazon, Netflix (NFLX), and Shopify (SHOP) have actually benefited, on both a relative and absolute basis, from the lifestyle changes that COVID-19 has engendered.

Apple has fit firmly into this camp, with shares making new all-time highs, as they have gotten a revenue boost from more employees working from home, and the resulting technology spending.

(Source: Author, StockCharts.com)

The fly in the ointment here is that Apple is really not a growth stock these days, even with their recent quarterly earnings that came in better than expectations, so it has been lumped in with the positive leading growth stock beneficiaries of the COVID-19 pandemic, yet Apple has not yet seen a commiserate, sustainable boost in their business, at least on the same percentage terms as some of their peers. 

For example, Amazon is Apple’s closest peer in terms of market capitalization, and Amazon reported earnings on the same day as Apple, and the company topped their consensus revenue estimates by roughly 10% for the second quarter of 2020, showing overall revenue growth of 40% year-over-year that dwarfed their larger capitalization rival, with Apple reporting 11% revenue growth year-over-year.

Closing Thoughts – Apple Is A Terrific Company That Is Significantly Overvalued

Back in May of 2016, I could not say enough good things about Apple’s stock from a value perspective.   Today, with Apple’s price-to-sales, price-to-earnings, and price-to-book multiples all significantly higher than they were in 2016, and with the company showing a lack of revenue growth the past three years, I am much more skeptical on shares.

So skeptical, in fact, that I purchased Apple January 2021 puts on January 24th, 2020, and then took a 221% gain on these a few weeks later.

(Source: The Contrarian)

With Apple shares climbing even higher in the summer of 2020 than they were earlier in the spring of 2020 before the COVID-19 outbreak, I think now is the ideal time to use a short position again in Apple shares as a hedge against a broader market decline.  This hedge serves dual purposes for me personally, which are protecting my long positions, and guarding against a capital rotation where in-favor stock like Apple are sold, and out-of-favor stocks that are undervalued, like Antero Resources (AR) that I profiled recently here, appreciate.

Given how overvalued Apple shares are today compared to where they were in 2016, it is also possible that Apple’s common stock underperforms the market, and even declines on an absolute basis, irrespective of the broader markets overall direction.

The possibility of outright declines in Apple’s common shares seems farfetched now, with the afterglow of Apple’s recent multi-year bullish performance fresh in investors’ minds, however, we only have to look back to the first half of 2016 to see an environment where Apple’s stock was out-of-favor.

Shares do not have to go all the way back to their May 2016 levels of $90 per share for current Apple investors to suffer, as simply going back to Morningstar’s fair value target of $285 would imply an outright decline of roughly 33% below Apple’s closing price on Friday, July 31st, 2020.

Wrapping up, without a doubt, Apple has been one of the most remarkable growth stories in U.S. business, particularly over the past two decades.  Personally, over the last decade, I have owned Mac’s, iPod’s, iPad’s, iPhone’s, and Apple common shares, so you could even say I am a connoisseur of Apple’s products.

Common shares have appreciated by roughly 500x from their 2000-2002 lows, propelling Apple to become the largest market capitalization stock in the world. Whether you own Apple shares outright or not, most investors have an implicit stake in the company, because Apple has a roughly 6% weighting in the S&P 500 Index and a roughly 12% weighting in the Invesco QQQ Trust (QQQ). 

The significant weightings in benchmark indexes are a result of historic run of growth, and many traders front running valuation insensitive and price insensitive index/ETF buying, however, Apple’s revenue growth has slowed and stalled, and its once formidable free cash flow yield (the company generated over $66 billion in FCF in the past twelve months) has shrunk to under 4% as its market capitalization has ballooned.  Apple remains a fine company, just an expensive one on a valuation basis, and this poor valuation starting point is a recipe for poor future stock returns. 

Disclosure: I am/we are short SPY in a long/short portfolio, I plan on shorting AAPL shares again via put options in the next 72 hours, and I am long AR.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.

Posted on

Natural Gas Equities Are Leading & They Are Just Getting Started

The broader equity market bottomed on March 23rd, 2020, and since then the SPDR S&P 500 Index ETF (SPY) is higher by 29.1%, and the Invesco QQQ Trust (QQQ) is higher by 34.8%, as shown in the chart below.

Somewhat inconspicuously, precious metals equities, as measured by the VanEck Vector Gold Miners ETF (GDX), have risen 73.0% since the March 23rd broader market low, energy equities, as measured by the Energy Select Sector SPDR Fund (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), have risen 52.1% and 62.0%, respectively, from the March 23rd broader market low, and basic material stocks, as measured by the SPDR S&P Metals & Mining ETF (XME), which have risen 39.5% since the March 23rd broader market low.

Said another way, inflation sensitive and economically sensitive equities are quietly outperforming.

Leading the pack above, all, are natural gas equities, led by Antero Resources (AR), which I have previously called a generational buying opportunity.

At the time of this publication, I was routinely mocked, much as I was in 2008 and 2009, before this happened.

How did I achieve this performance?

Simply put, it was buying undervalued equities, like General Growth Properties, in November of 2008, that almost nobody else wanted.

As I have said previously, these purchases, in aggregate, totaled $53,593.71, which was not a big dollar total in aggregate, however, the 120,000 shares were a nice stake in what would become the best performing S&P 500 equity in the bull market, at least through March 10th, 2017, as this CBS MarketWatch article on the bull market turning 8 years old chronicled.

In March of 2018, in the Brookfield Property Partners deal, these shares could be exchanged for $23.50 in cash.

Not a bad return at all, however, the key was to buy into the panic. That is the same thing we have done this time, and now we will see if the proverbial Main Course plays out in front of our eyes.

Best of luck to everyone. Stay healthy, safe, and happy,

WTK

Posted on

Interest Rates Are Poised To Move Higher

So far, the bond market has diverged from the stock market, and the commodity market. Most think the bond market is the “smart money”, however, Adam Robinson has proven that this has generally not been the case since 2000, as I shared with my members earlier this week.

What does this mean in practicality?

In simple terms, Treasury Yields could be finally poised to rise materially, particularly at the longer-end of the curve.

What could be the catalyst?

How about new Treasury issuance that outpaces the reduced scope of Fed Treasury buying? This is more probable than it seems, in my opinion, as Fed Treasury buying has gone from a full gusher, at $75 billion per day, to a relative trickle, ending last week with the Fed buying $6 billion in Friday’s trading session.

Posted on

Everything Is A Function Of Interest Rates

We have clearly followed the path of the classic bubble that GMO laid out in 2008 for the S&P 500 Index ($SPX), (SPY), which is shown below.

The timeline has been slightly different, I call it an extended classic bubble, the slower ride to the final destination. Regardless of the course, we are here now.

The key question is where do we go from here, and the answer, from my perspective, is all a function of interest rates, particularly longer-term sovereign interest rates. With the yield curve close to inverting again, and two Fed Funds rates cuts priced in right now as of this writing (February 21st, 2020) through the December 2020 FOMC meeting, a lot of pessimism is priced in.

Additionally, sovereign interest rates are so low, the question needs to be asked, “How much could they go down in the next recession?”

Last, but not least, what if a recession is averted, or we experience a mild recession, similar to what happened in the midst of the 2000-2002 bear market. On this note, the current investment landscape reminds me an awful lot of late 1999/early 2000, with the moonshot blow-off in Tesla ($TSLA), and the greater concentration in the top-five S&P 500 names ($SPY), which are Apple ($AAPL), Microsoft ($MSFT), Alphabet ($GOOGL), ($GOOG), Amazon ($AMZN), and Facebook ($FB) than in late 1999/early 2000.

We all know how that story ended, however, almost all market participants have forgotten that 2000-2002 time frame, hyper-focused on a fear of a reprisal of 2007-2009, which has led us to where we are today.

And where is that, you may ask?

The answer is that we are on the cusp of a historical capital rotation. Stay tuned.