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The Curious Investor - Apr 12, 2021
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What the Market?
Mr. Market is getting his strut on! After a jobs report that blew analysts’ expectations and the Fed’s commitment to market recovery policies the Dow and S&P closed at record highs and the Nasdaq Composite exited correction territory.
How come?
Leaving the Pandemic behind: Economic data released this week will provide depth into the underlying strength of inflation pressures (March CPI figure) and growth expectations (retail sales report) for the recovering economy.
Show us what you got, it’s Earnings Season!: As the economy stabilizes and the Fed doubles down on providing further long-term support, companies may be able to provide clearer guidance on their recovery and growth. Analysts and investors are looking to see if their bets on a V-shaped recovery will pay off as we begin a return to normalcy.
What’s an investor to do?
Investor mindset
Hit the pause button and review your investment strategy for 2021. Equity markets have rallied for 3 consecutive weeks on improving economic data. The IMF revised its global economic growth forecast up to 6% for 2021, its highest measure in over four decades, with the US GDP expected to grow 6.4% and China 8.4%. The IMF also warned of diverging rebounds for developing economies and nations due to vaccine development and deployment constraints. Take this time to review your watchlists and look for discounted opportunities as corporate and economic data rakes in.
Portfolio management
Current valuations of many companies have been pumped up due to optimistic views of an impending recovery. As Q1 earnings are released, investors will need to assess how much of the good news has already been baked into the price, and what sort of growth is still yet to materialize. Evaluate current positions that have rallied over the past year and consider taking profits as market dynamics drift away from pandemic fears and transition to inflation-related uncertainty.
Consider balancing speculative growth exposure with still-cheap value plays in sectors positioned to benefit from overarching growth themes (i.e., clean energy, commodities, reopening economy). Check our watchlist for ideas.
Keep an eye on the economy:
CPI Report (released Friday): To date, we have seen limited broad inflation data but analysts expect figures to start upticking soon (March expectations 0.5% vs. 0.4% February reading). Keeping tabs on the acceleration of inflation data will be critical in understanding the economic recovery along with other data points like manufacturing and production indices (the PPI rose 1% in March vs expected 0.5%).
Retail sales (released Thursday): Retail sales are expected to have been boosted by the last stimulus package kicking in. Analysts expect a monthly gain of 5.4% in March, led by increased consumer spending and better weather as we move away from the winter months.
The Curious Investor:
Coinbase (COIN) is expected to go public via a direct listing on Wednesday: Coinbase announced their preliminary Q1 results and they’ve been crushing it! Activity, users, volume, and revenues have all doubled and then some over the past 3 months compared to the S-1 filing in February. Coinbase will be the first crypto company to go public and the public offering may give many hesitant investors new confidence in the crypto market.
Important considerations:
Measuring performance based on price cycles: Coinbase will be measuring its performance and setting guidance based on price cycles rather than offering quarterly forecasts. Monthly-transacting users (MTUs), and trading volume is highly volatile and therefore transaction revenue will fluctuate accordingly and comparing quarter to quarter revenues won’t make (much) sense. Instead, Coinbase will provide guidance via different scenarios based on crypto-asset price volatility. What it also means is that a bet on Coinbase is also a bet on Bitcoin and other crypto-assets. Coinbase stock is likely to be highly correlated with the price of leading crypto-assets.
Continued crypto investment: Coinbase will continue to invest in crypto-assets even if trading activity or prices decline. The cryptocurrency industry is still in its developmental stages and the company plans to maximize its exposure as it believes in the underlying, long-term directionality of the sector. Coinbase will not reduce investments and expenditures due to price fluctuations and volatility, as it believes cryptocurrencies will become a competing asset-class. Coinbase is being clear in its messaging to investors: don’t buy Coinbase expecting the company to tune its results to quarterly expectations.
No lock-up periods: There will be no lock-up periods for investors currently holding equity. If many holders act on it early and look to exit and it could potentially sink the price in early trading. Either way, expect some volatility as Coinbase goes public. To learn more about the risks regarding the differences between a Direct listing vs IPO, click here.
Valuation
According to Bloomberg, the company is expected to be valued between 90b and 100b (roughly 350-375 per share). As a frame of reference, the Intercontinental Exchange (owner of the NYSE, Endex and Creditex amongst other exchanges), and Nasdaq trade at roughly 30x earnings (while the London Stock Exchange, trades at 63x earnings at the high end of the range, and EURONEXT, owner of most european exchanges, trades around 20x earnings). Annualizing Coinbase’s 2021 Q1 revenues would suggest a valuation close to 30x earnings… Although not direct comparables, and only considering ONE metric, it sounds fairly reasonable, considering the traditional exchanges’ markets (with low two digit growth ahead) are mature and the crypto market is in its early days (with mid three digit growth ahead).
Closing remarks:
Diversifying asset-class exposure: Great way to gain indirect exposure to cryptocurrencies without suffering the volatile nature of the underlying asset. A strong play if you believe in the directionality of crypto assets down the line.
Strong growth and unlevered balance sheet. The company has shown extraordinary growth with growing adoption of cryptocurrencies, and was able to capitalize the opportunity as one of the first entrants to the mainstream market. Also impressive, Coinbase has been able to do this with almost no leverage (debt).
High risk / high reward: As you may know, the crypto market is kind of volatile… Investing in a company that will prioritize its mission over your money as an investor may worry some people. Also, naysayers suggest cryptocurrencies are not currencies and are worth nothing. However, bitcoin is deemed the best performing investment in history. Enter at your own risk.
Checking in on Alibaba (Disclosure: WTM is long BABA): Alibaba was recently hit with a $2.8b antitrust fine by the Chinese government. BABA announced it will accept the fine and ensure future “compliance with determination.”
How bad is the fine? The antitrust fine is a substantial figure but to a behemoth like BABA, it’s a mere slap on the wrist. The fine represents 4% of BABA’s 2019 local sales and only 5% of its current cash position. Chinese regulators have been known to be more severe in the past and able to charge up to 10% of annual sales by law. While the opportunity cost of the capital is significant, the fine is more emblematic than anything; it's a clear demonstration that China is looking to play ball with US and European regulators that are pursuing similar strategies.
The good news: BABA has been under significant regulatory scrutiny with talks of forced breakups, divestment of assets and nationalization of its financial arm. Fortunately, with this investigation closed investors can breathe easier knowing BABA has avoided all of those worst-case outcomes for now.
What happens now? Eyes are on China’s antitrust watchdog, SAMR, which is adding staff and beefing up competition laws. SAMR is expected to move on to its next prey (Tencent?), but BABA is not off the hook quite yet. Expect further probes, particularly into Ant Financial.
How is BABA performing?
The conglomerate has integrated itself within every imaginable aspect of the Chinese economy including, delivery services, mail, shipping, payments, and streaming among others. Furthermore, there are no true challengers to BABA in China (partially why they were hit with the fine…).
Sustained top and bottom-line performance: Retail and wholesale-commerce continues growing across the spectrum and cloud services continue dominating the Chinese market despite its low impact on total revenues (2020Q4: 8% of total revenues, 42% market share and finally profitable!). The company is aggressively investing in it’s own tools (i.e. chips and cloud) to streamline and improve operational efficiency that should translate into stronger margins down the line.
Conclusion: BABA is not off the hook yet, but the worst seems to have passed. The company will continue getting heat from its Chinese peers as they go through antitrust probes and internal changes. Long-term growth expectations may be lowered due to the stricter regulations and potential new fines from an increasingly active regulatory body. BABA and its Chinese peers are currently trading at a fear discount driven by the media and future regulatory concerns. We will continue to hold onto BABA and keep tabs on the regulatory environment.
Earnings Season - First up, the Banks: Expectations are high heading into this week’s reports. Economic conditions have created a friendly environment for banks as steeper yield curves should improve bottom-line revenues, increased trading activity driven by the recent market swings and rallies, and the controlled backlash of the Archegos Capital scandal. Pay close attention to guidance regarding growth expectations that may be driven by the overarching economic recovery and implicit recovery of loan portfolios. Need help understanding how to evaluate bank earnings?
Upcoming Earnings:
Banking: JP Morgan, Bank of America, Wells Fargo, Citi, Morgan Stanley, BlackRock, Charles Schwab, Goldman Sachs, US Bancorp
Healthcare: UnitedHealth
Reopening: Delta Airlines
Spinoff Watch:
AT&T announced that they will be spinning off DirectTV as its own company later this year. An official date has not been announced.
Economic Calendar:
Monday: Chinese FDI, Eurozone and UK retail sales, US Federal monthly budget statement
Tuesday: Chinese trade balance, US CPI, Eurozone economic sentiment, UK industrial and manufacturing production
Wednesday: Eurozone industrial production, US Federal Reserve Beige Book
Thursday: US Jobless claims report and retail sales
Friday: Chinese GDP data, Eurozone finance ministers meeting, CPI and Trade Balance, US Consumer sentiment report and housing starts
If you didn’t know, now you know
Tensions are rising in Eastern Ukraine as the military clashes with Russian-backed separatists who have seized control of the Donetsk and Luhansk regions. The conflict began shortly after Russia’s 2014 annexation of Crimea and has continued despite numerous ceasefire agreements. The latest escalation comes from an increasingly larger presence of Russian troops along Ukraine's border. Ukraine fears Russia is planning a full-scale invasion to annex the separatist region while Moscow claims the troops are there to protect their border in case the situation escalates to a full blown civil war.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
Una Rosa Blanca by Ibrahim Maalouf: This tune is jazzy, soulful, sexy, upbeat, inspiring, and will have you Latin dancing by the end.
Covers by Justice Der: To be honest, we don’t know who this guy is but thank YouTube for this random recommendation. Enjoy 3 hours of soothing electric and acoustic guitar while you read or stare out the window on a rainy day.
Resources
WTM Mentions Performance Tracker
A content guide to investing (books, books, books!)
Disclaimer
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.