1999 again?

[Liberty]

 

[SHDL]

 

Interesting, this is probably the most optimistic valuation number I’ve seen regarding the current market.  One thing to note though (besides the points about SBC, CapEx, and taxes that are already discussed in the Twitter thread) is that changes in working capital tend to provide a cyclical boost to OCF (and therefore the author’s version of FCF).  I’d be interested in seeing a decomposition that shows how important this was for the final numbers. 

 

Details aside, the fact that TTM P/FCF isn’t at an extreme level is probably not too surprising, since TTM P/E isn’t at an extreme level either.  What we have instead is a combination of a relatively high P/E and somewhat high E/GDP, which together give us a historically high P/GDP.  The key question to me here is what will happen to E/GDP going forward: will it stay elevated or will it mean revert?  My vague worry at the moment is that politicians will crash the party one way or another, but we’ll see. 

[RuleNumberOne]

S&P 500 does not have the cloud stocks. For example, ServiceNow has a market cap of $50 billion, the smallest S&P 500 companies have a market cap less than $5 billion.

 

Russell 1000 is a better index to look at because I think market cap is the only criterion for entry. S&P 500 requires profitability for entry.

 

The bubble lies outside the S&P 500. Uber, Lyft, WeWork, Crowdstrike, Zoom, Slack, along with FT's list of cloud stocks do not exist in the S&P 500.

[ukvalueinvestment]

I agree that there are bubbles in pockets, including VC, certain cloud stocks and other Tech.  But other markets, especially outside the US, do not seem obviously expensive.

 

In 1999, I and my college housemates maxed out our student loans to try and invest in an IPO of a UK company, lastminute.com - a sort of booking.com of its time that has since fallen by the wayside.  We were disappointed when we didn't get an allocation, but of course it was actually for the best.

 

I'm not seeing this sort of behaviour at the moment ... in the UK at least.

 

Think this current "bubble" is more US centric...

 

[Gregmal]

S&P 500 does not have the cloud stocks. For example, ServiceNow has a market cap of $50 billion, the smallest S&P 500 companies have a market cap less than $5 billion.

 

Russell 1000 is a better index to look at because I think market cap is the only criterion for entry. S&P 500 requires profitability for entry.

 

The bubble lies outside the S&P 500. Uber, Lyft, WeWork, Crowdstrike, Zoom, Slack, along with FT's list of cloud stocks do not exist in the S&P 500.

 

This is 100% spot on.

 

It seems many are confusing a bubble in certain areas with "the market" being in a bubble. I don't think many people here are buying the bubble names anyway, so its a non event as I have no interest in shorting these. But there's always areas of froth in the markets. Nothing new here.

[stahleyp]

I like ajc's thread but what does this chart mean?

 

https://twitter.com/tonyjclayton/status/1142741798554624000

 

Sure it looks scary but I'm not so sure. It says "value vs growth has never been this extreme." I disagree. As I posted earlier, "value" got absolutely destroyed in the late 90s. "Growth" stocks were killing it. This time, growth stocks have been doing very well and value stocks haven't been doing as well but the discrepancy is not nearly as large.

 

What does "standard deviation from the trend" mean? What is the trend here anyway?

[Guest ajc]

 

 

I like ajc's thread but what does this chart mean?

 

https://twitter.com/tonyjclayton/status/1142741798554624000

 

Sure it looks scary but I'm not so sure. It says "value vs growth has never been this extreme." I disagree. As I posted earlier, "value" got absolutely destroyed in the late 90s. "Growth" stocks were killing it. This time, growth stocks have been doing very well and value stocks haven't been doing as well but the discrepancy is not nearly as large.

 

What does "standard deviation from the trend" mean? What is the trend here anyway?

 

 

 

Thanks, Paul. There's some discussion of it in this thread -

I'm open to correction, but I believe that is the relative outperformance of either value vs growth stocks or growth vs value stocks over that time frame. I'm not a stats major, so I'll leave the standard deviation explanation to someone more qualified. I can tell you they're using data from Fama and French, and my understanding is that graphic is based on price-to-book ratios.

 

If you look at price-to-cash-flow ratios, for those who'd like to say price-to-book is no longer relevant, you get something similar (see image below). Value hasn't performed this badly versus growth, since 1951. In other words, people are paying up for cash flow growth at a higher rate versus looking for traditionally cheap cash flow stocks, than at any time during the last 70 years. That's my reading of it. Happy to have someone more knowledgeable explain it better.

 

My takeaway from it all is that now is the time to be buying traditionally and statistically cheap value stocks on price-to-book or price-to-cash-flow ratios. The opposite also applies, now is absolutely not the time to be buying stocks that trade at 33x book value like Zoom, Okta at 57x book, Atlassian at 44x book, etc. For fast-growing stocks trading at extreme multiples of cash flow, you currently also want to be avoiding them like the plague and instead should be buying traditionally cheap value cash flows.

 

[RuleNumberOne]

If you were to screen the Russell 1000 for unprofitable companies trading at a P/S of 10 or more, my guess is you would get a number higher than in 1999.

 

For example, ServiceNow with a $50 billion market cap has been excluded from the S&P 500 even though most S&P 500 companies have a smaller market cap. Any SaaS IPO of the last 8 years would fit in the S&P 500 if we were to look at market cap alone, but they have all been excluded.

 

Comparing today's S&P 500 with 1999 would require the S&P committee to use the same membership criteria today that it did in 1999. It is comparing two very different things. Maybe in 1999 S&P just used the market cap. Now it requires a track record of profitability instead of market cap.

 

 

[jschembs]

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

[jschembs]

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

 

Here's the data. I also excluded a few names that recently reported earnings where CapIQ hadn't updated their LTM financials, but the impact is insignificant.

R1K_Data.xls

[RuleNumberOne]

@jschembs Thanks for that spreadsheet. The P/FCF multiples are what I expected.

 

Looks like there have been many IPOs over the last 9 months that have not yet made it to the Capital IQ database. The newer the IPO the greater the current P/S multiple. Pager Duty, Crowdstrike, and so on.

 

Zscaler IPO'ed in early 2018 but is also missing from Capital IQ. It trades at 50x 2018 sales.

 

https://www.iposcoop.com/last-100-ipos/

[scorpioncapital]

What difference if you buy value or overpriced growth in a crash ? Didn't Berkshire get cut in half even In 99? Graham said during the great depression everything went down, even cash was worth less than cash . The best time to buy anything is when nothing is particularly inflated ?

[Cardboard]

Just thoughts or prophecy from SaintPeeter on Stockhouse:

 

"War is a great means to purge bad blood. It is inevitable as all of human history has shown. We are afraid of war because we are having such a good life living off of future generations tax. But that could change.

 

Many intelligent historians would say we are just about due for a global conflagration. Certain powers are rising and feel that they can challenge Uncle Sam. Cultural strife and social division are making America look vulnerable.

 

I believe the American Empire will last for quite a while still but that doesn;t mean that other parts of the world won't try to cause havoc.

 

When large scale war occurs, society will revert to survival mode and the essential parts of society need to be preserved. Food, energy, heavy machinery, banking, medical. Facebook and Amazon only do well in a world of abundance and gluttony. Their time of reckoning is near."

 

Cardboard

[Broeb22]

Communication seems like a pretty essential part of human life to me.

 

There is unrest all over the world, and as far as I am aware Facebook has not called out war in Syria or drug wars in much of Central America as a reason for slower growth or lower engagement. Additionally, cable subscriptions did not decline very much at all during 2008. Why would you expect people to give up a free utility like Facebook just because a war is occurring? Would their Ad monetization decline in a war? Almost certainly, every advertising medium probably would see the same impacts.

 

Using history as an example, Sears grew right through the Great Depression and while its growth did slow during WWII, its growth resumed after WWII's conclusion. So, I am less concerned about Amazon enduring business quality, even during something terrible like a war or economic recession. Now, valuation with AMZN is another matter, but you're suggesting these companies' businesses will not perform well, which I disagree with. 

 

https://www.smithsonianmag.com/history/rise-and-fall-sears-180964181/

 

"By 1929, on the eve of the Great Depression, it operated more than 300 department stores.

 

Growth continued even during the economic downturn, because Sears wisely championed an aesthetic of thrift. The chain made its name selling dependable staples such as socks and underwear and sheets and towels, rather than fashion items like those found in traditional department stores such as Marshall Field’s in Chicago or John Wanamaker’s in Philadelphia or New York.  Sears outlets were spare, catering to customers who were interested in finding good value, to meet practical needs. By the end of the Depression decade, the number of stores had almost doubled.  "

 

http://www.searsarchives.com/history/history1925.htm

 

In 1931 Sears retail sales topped mail-order sales for the first time. Stores accounted for 53.4 percent of total sales of more than $180 million. Despite the Depression, Sears continued to open stores during the 1930s. When war broke out in 1941, more than 600 stores were operating. World War II called a halt to Sears retail expansion and even forced several stores to close. After the war, however, Wood resumed his expansion program.

 

 

[Guest ajc]

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

 

 

 

Good post, jschembs. I think it's relatively safe to say that the person who posted those tweets didn't put in much comprehensive thought or research.

 

 

 

[UK]

What difference if you buy value or overpriced growth in a crash ? Didn't Berkshire get cut in half even In 99? Graham said during the great depression everything went down, even cash was worth less than cash . The best time to buy anything is when nothing is particularly inflated ?

 

https://money.cnn.com/magazines/fortune/fortune_archive/2002/11/11/331843/index.htm

 

"As for Berkshire's stock--well, it has certainly held its own recently. On March 10, 2000, the Nasdaq peaked (interday) at 5,132. That same day Berkshire hit a multiyear low of $40,800. Recently the Nasdaq traded for 1,270, down 75%, while Berkshire traded for $74,000, up 81%"

 

 

[Guest ajc]

 

Shot: The RealReal held an IPO today opening at 40% above the initial offering price. The online luxury goods reseller currently trades at around 11x revenues.

 

Chaser: The last company RealReal CEO Julie Wainwright took public was Pets.com in the year 2000.

 

 

[RuleNumberOne]

The Russell 1000 is updated just once a year. That is why all the IPOs of the last year are missing. Getting updated next week.

 

I think the cutoff date is May 10, some recent IPOs may not make it into the Russell 1000 this year.

 

https://www.barrons.com/articles/uber-lyft-beyond-meat-stocks-will-join-the-russell-1000-next-week-51561736049?mod=md_home_pan_mkt_news

 

@jschembs Thanks for that spreadsheet. The P/FCF multiples are what I expected.

 

Looks like there have been many IPOs over the last 9 months that have not yet made it to the Capital IQ database. The newer the IPO the greater the current P/S multiple. Pager Duty, Crowdstrike, and so on.

 

Zscaler IPO'ed in early 2018 but is also missing from Capital IQ. It trades at 50x 2018 sales.

 

https://www.iposcoop.com/last-100-ipos/

[Guest cherzeca]

https://www.barrons.com/articles/the-realreal-is-no-pets-com-todays-ipo-market-is-not-the-dot-com-bubble-51561748039?mod=hp_HERO

[rkbabang]

You can't artificially create demand by printing money and giving it to poor people.

 

Not to derail the thread, but I actually think you can.  For instance I have like $200 sitting in my file cabinet, it’s been there for years, and it likely will be there forever.  If the government takes that away and hands it out to 10 alcoholics on the street I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.  I guess we can reasonably call that “demand creation.”  Now if the government finances the handout by printing money instead, things become a bit more complicated but more or less the same thing should happen in the end.  The only difference is that my cash holdings gets diluted by the money printing instead of going down in nominal terms by government confiscation. 

 

Now whether that’s good government policy is another matter … which I guess we can all have fun talking about in the Politics section. 

 

Yes, I agree. You should only be required to pay taxes with money that you plan to never use.

[DooDiligence]

You can't artificially create demand by printing money and giving it to poor people.

 

Not to derail the thread, but I actually think you can.  For instance I have like $200 sitting in my file cabinet, it’s been there for years, and it likely will be there forever.  If the government takes that away and hands it out to 10 alcoholics on the street I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.  I guess we can reasonably call that “demand creation.”  Now if the government finances the handout by printing money instead, things become a bit more complicated but more or less the same thing should happen in the end.  The only difference is that my cash holdings gets diluted by the money printing instead of going down in nominal terms by government confiscation. 

 

Now whether that’s good government policy is another matter … which I guess we can all have fun talking about in the Politics section. 

 

Yes, I agree. You should only be required to pay taxes with money that you plan to never use.

 

https://www.newyorker.com/magazine/2015/11/23/printing-money-books-john-cassidy

 

 

https://www.debate.org/opinions/should-the-us-eliminate-all-taxes-print-the-money-we-need-for-government-spending-and-simply-allow-inflation-to-increase

 

---

 

How do you think crypto will fit in to all of this?

 

I promise to never take uninformed jabs at crypto on here again.

[rkbabang]

You can't artificially create demand by printing money and giving it to poor people.

 

Not to derail the thread, but I actually think you can.  For instance I have like $200 sitting in my file cabinet, it’s been there for years, and it likely will be there forever.  If the government takes that away and hands it out to 10 alcoholics on the street I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.  I guess we can reasonably call that “demand creation.”  Now if the government finances the handout by printing money instead, things become a bit more complicated but more or less the same thing should happen in the end.  The only difference is that my cash holdings gets diluted by the money printing instead of going down in nominal terms by government confiscation. 

 

Now whether that’s good government policy is another matter … which I guess we can all have fun talking about in the Politics section. 

 

Yes, I agree. You should only be required to pay taxes with money that you plan to never use.

 

https://www.newyorker.com/magazine/2015/11/23/printing-money-books-john-cassidy

 

 

https://www.debate.org/opinions/should-the-us-eliminate-all-taxes-print-the-money-we-need-for-government-spending-and-simply-allow-inflation-to-increase

 

---

 

How do you think crypto will fit in to all of this?

 

I promise to never take uninformed jabs at crypto on here again.

 

Ah, you are starting to see.  To be honest, I'm not sure why governments tax at all when they have complete control of the money supply.  Maybe it is just to keep their funny money from being abandoned by the population (dollars are necessary, because taxes must be paid in dollars).  Still they could keep taxes low and print the rest. To the average guy on the street taxes are real and painful, but inflation is just a force of nature that they don't understand.  No one can print more Bitcoin however.

[Guest ajc]

 

Folks, if you're focusing on tech IPO valuations then great. On the other hand, if you're discussing the benefits of crypto or monetary theory then kindly take those conversations to their respective threads so this discussion doesn't get derailed.

 

 

 

[LC]

Yes, never be so sure about humans, especially those who are drunk all the time.  ;)

They may be the only humans you can be sure about :D

[RuleNumberOne]

Bundesbank is the only honest central bank, every other central bank is crooked.

One thing that has juiced US stocks is the negative rates in Europe. If the ECB is forced to raise rates to pop their housing bubble, there will be an earthquake. Searching for "European house prices" at ft.com:

 

"Soaring German housing costs leave Merkel vulnerable" - October 25 2018

https://www.ft.com/content/8f96a698-d82d-11e8-a854-33d6f82e62f8

 

 

"Eurozone housing prices rise at fastest pace since crisis" - July 10 2018

https://www.ft.com/content/d5a3dae4-843f-11e8-a29d-73e3d454535d

 

Home prices over the last year.

    Ireland    - up 12.3%

    Portugal  - up 12.2%

    Latvia    - up 13.7%

    Slovenia  - up 13.4%

    Slovakia  - up 11.7%

    Netherlands - up 9.3%

 

"Germans warn on high property prices" - March 12 2018

https://www.ft.com/content/3cf612aa-1642-11e8-9c33-02f893d608c2

 

Nationwide rents rose 7.2% over the last year