Roku, Zillow & Uber

Roku smashed their quarterly numbers, which led to a big pop at open yesterday & the stock was up over 25% on the day. They are winning on top of winning, with revenue per user up, users up, and users using their service more and more.

Zillow reported quarterly numbers which beat expectations & have their stock up about 6% today in spite of the market sliding on the trade war narrative.

I’m not seeing how the Zillow numbers were good. Their core high-margin business continues to decelerate.

  • their core (high-margin) Premier Agent business was up 2% YoY from $213.7 million to $217.7 million
    • in prior quarters they claimed slowing growth in this business line was from shifting the business model from selling email leads to selling a mix of email & phone leads
    • I think a couple other things hit them though:
      • the TCJA lowering salt deductions caused a slowdown in some of the bubble areas
      • some of the areas that were less bubble driven do not have as efficient of auctions for attention so Zillow is not able to capture as much of the vig on those markets
      • some state & local taxes have went up in a way that more than offset the federal income tax decline
  • Zillow claims they are already getting $200 million a day in dealflow to look through, with an offer to sell every 2 minutes. They refer sellers to local partner agents & in spite of this additional dealflow their Premier Agent business was still only up 2% YoY.
  • There is also an ongoing class-action lawsuit against the NAR which could blow up the 6% commission model.

I still see Zillow as having strong value that would be nearly impossible to recreate for less than the cost of buying the company outright. But you would think they would have more growth in their core Realtor-focused ad products given how dominant they are in their category.

Uber opened down about $3 below their IPO price of $45 a share. The wave of startups adding to the stock market could adversely impact aggregate share scarcity.

If this was just about economic growth, the S&P 500 this cycle would have peaked around 1,850, a thousand points lower than where we are now. … What has been the driver is this near-perfect symmetry we have seen: between a US$4 trillion expansion of the Fed’s balance sheet, a US$4 trillion surge in corporate debt, and US$4 trillion in share buybacks. By creating scarcity in the market for safe securities this cycle, investors were forced to move up the risk curve and this meant tremendous opportunity for CEOs and CIOs to issue gobs of debt to receptive yield-starved investors. And this debt, or at least 25 per cent of the new issuance, went to fund an unprecedented wave of share buybacks.

David Rosenberg

If the trade war goes astray, it could be a market top for some period of time, particularly if Uber has already seen their high.

“Gulf money is notoriously late to the party, purchasing Carlye Group in 2007 at the peak of the credit bubble, and anchor investors in Glencore IPO in 2011 at the peak of the commodity bubble. Now they are “all in” on Uber and opened offices in Silicon Valley to do more. … When the leading company in the hottest sector goes public, it reflects a peak in social mood and usually presents an important inflection point in financial markets. As a rule, insiders sell at the top. … The AOL Time Warner merger in 2000 culminated in the tech crash, the Blackstone IPO in 2007 presaged the 2008 meltdown, and the Glencore listing in 2011 marked the peak in the commodity super-cycle. Uber, we believe, will mark the peak in Silicon Valley and tech valuations.”

Jawad Mian

Update: The stock market turned up late in the day on (bogus) constructive trade talks, but Uber still closed off 7.6% down.

Those who expressed confidence in adverting a trade war based on the (bogus) constructive commentary get to wake up some presidential weekend Tweets stating otherwise.

There’s a very difficult problem with China and the trade situation: They have structured their entire economy around cheating and embedded it into the Community Party, which has top-level control over all of it.

Trying to change that is likely a bridge too far; it would require the Chinese Communist Party, and Xi himself, to acknowledge that (1) what they were doing was and is wrong and (2) they’ll cut it out.

The second you might get.  The first you won’t get.

Communists are never wrong, you see.  They can’t be.  To admit so is to admit their political and economic system is wrong and therefore that other competing ideas might be superior.  Down that road lies their own death and they know it.

Karl Denninger

The Credit Markets Drive the Stock Market

The following Brian Reynolds interview by RealVision highlights how important pension funds are for driving the credit markets & stock market.

A few notes from it:

  • pension funds are significantly underfunded & they roughly need to get about a 7.5% return to meet cashflow obligations
  • pensions tend to prefer the credit markets to the stock market & use leverage to drive further incremental gains over the yield on a particular bond
  • many companies issue debt into the hungry bond market & use the funds to buy back shares, goosing earnings per share by lowering the denominator with a lower share count
  • it is hard to outperform the stock market index with active management at scale & many active managers are short the market, driving further underperformance
  • it is much easier to outperform in bonds during a bull market by simply buying lower quality debts at higher yield, which works until it doesn’t.
  • the Detroit bankruptcy changed the actuarial assumptions for public pension plans because pensioners did eat a loss. thus state & local tax increases ramped significantly, which more than offset the much heralded Trump tax cut
  • market volatility dissipates & the market returns its grind ever higher until at some point pension plans ask to cash out of a particular issue & are unable to, which drives a rush for the exits.
  • the above sort of cycle has driven bubble after bubble. so far this century we have had bubbles in:
    • telecom / internet / information technology, which caused the Federal Reserve to lower rates, thus igniting
    • residential real estate / housing, which caused the subprime bubble crash after they began raising rates, which then led to large scale balance sheet expansion, which then led to a bubble in
    • commodities, in particular debt associated with oil fracking & then a commodity price decline, …
    • and now some sectors of commercial real estate
  • individual investors have favored ETFs over mutual funds, but largely that move has been a wash. most of the net buying of stock since the recovery has been from buybacks from companies.
  • he believes a while after yields invert there will be an LBO spree which will drive the final blow off top
  • in the next crisis pension plans are perhaps going to be more likely to receive a bailout than banks were in the last crisis
  • the pension-driven bubble cycle is likely only to end if we go from defined benefit pension plans to defined contribution pension plans

Scientific Games

Scientific Games (SGMS) reported earnings & the market reaction was beautiful with a powerful short squeeze causing the stock to jump 15%. I figured they were going to have a positive reaction to their earnings announcement, if for no other reason the ability to shift narrative.

  • they had just recently spun out their SciPlay mobile gaming subsidiary (SCPL) via an IPO, raising $301 million for a 17.4% stake. Funds were used to lower leverage on the parent corporation by paying down debt
  • as of this morning, SciPlay is valued at $1.86 billion
  • they still own most of that mobile subsidiary (much like IAC’s stake in Match)
  • outside of their 82.6% equity stake in SciPlay (valued at $1.54 billion), the remaining core business is highly debt leveraged but has limited enterprise value beyond the heavy debt load
  • many spin outs (or new line reporting) have led to a revaluation upward of the core remaining business
  • they would not have had strong incentive to spin out the other company while retaining the majority of its equity unless they felt the parent company was healthy enough to continue servicing the debt
  • Zynga’s stock (ZNGA) has been on fire this past year as mobile gaming keeps growing

Scientific Games has been beaten down for the past year & I figured even if they bombed the numbers the narrative shift would carry the day.

Last week I put most of my liquid savings in a low-yield Vanguard bond fund so I would sort of ignore the stock market & focus on other stuff, so I only put a tiny position on just before close yesterday using a bit of money that was in my IRA to quick flip Scientific Games around the quarterly results.

The short squeeze is still going with the stock up over 19% now, so I certainly sold too soon, but it will likely trend down later in the day as shorts finish covering & new shorts re-engage.

Trading the Trade War

The trade war ending has already been priced into the market, which is part of why the market has tanked for the last couple days after another round of Trillion dollar Tweets.

When the market sold off Monday I sold off the VIRT position I had recently established.

By close of Monday the stock market made up most of its losses & then today was once again down.

There are lots of obvious first-order impacts of the trade war. A slowing Baidu (BIDU) now trades for about a 15x P/E on fears of slowing down of the Chinese economy & potential capital flight from foreign investors if the trade war accelerates & supply chains move.

Today US federal government bonds & muni bonds are up. However most of the market is down.

There are also defensive sectors which can turn very much non-defensive if market behavior shifts enough. For example, if a market sell off continues it could not only project a recession, but it could cause one. That, in turn, would likely lead to an electoral landslide for the Democrats. That, in turn, would lead to some defensive sectors like healthcare getting dramatically repriced as some portions of the value chain are grown while others are gutted.

My view on the trade war stuff has been to fade consensus. When everything being perfect is priced in, expect turbulence. Whenever it seems all hope is lost with negative headlines everywhere, become a buyer. If the market is down again tomorrow it might be a decent day to nibble.

CMGI Sighting: Taking a Break from Trading

I’ll still read about the capital markets daily, but I have found trading quite distractive when considering my daily workflow. I’ve sold most my positions other than WBA, CVS, a REIT & a somewhat negatively correlated stock that tends to outperform when the market craps the bed. In the current market where a flood of IPOS are coming online, I’d hate to be in anything other than low beta stuff unless I was obsessively watching it.

I guess that near constant distraction would be worth it if my investing returns drastically outperformed what I was doing elsewhere, but the capital markets are far more competitive than most other markets. As a newbie it is better to wade into such waters when the central banks are pumping liquidity into the market after a pull back than to either buy beaten down value plays that keep getting more beaten down or diving into some beyond meat IPO pump-n-dump styled elevator price action.

I am the only person in America to have not filed an S-1 to go public this year. I love seeing endless IPO’s, but I know that with IPO’s comes supply and with endless supply comes lower prices (at least generally).

I also have some 1999 Déjà Vu going on.

SoftBank Group Corp. is considering audacious fundraising plans, including a public offering of its $100 billion investment fund and the launch of a second fund of at least that size, as it looks to seize on an exploding startup scene, people familiar with the matter said. … Highlighting the need for new funds: Mr. Son recently returned from China, where he negotiated informal deals worth several billion dollars that the Vision Fund doesn’t yet have, one of the people said.

If he & money from Saudi Arabia are existing, who is the next marginal buyer left in the market? I can’t believe the Wall Street Journal published an article with this analogy:

A Vision Fund IPO is the most ambitious of the plans under consideration and would take place after the fund is fully invested, likely by this fall, according to people familiar with the matter. The hope is to create a smaller version of Warren Buffett’s Berkshire Hathaway Inc. —only loaded with young technology companies, many of which have yet to turn a profit, instead of a stable of well-established utilities, insurers and energy companies.

Like Buffett, except the opposite.

  • Not value-based investments
  • Not profitable
  • No large insurance premium float to fuel other investments, but rather a bunch of marked up money-losing companies where the exit is done in part to raise funds to create another pro-cyclical investment vehicle which will likely invest in companies that also compete against the last batch of startups before they get profitable

Blue Apron is now profitable after a couple years as a public company & a 90% slide in their stock price.

Anyone remember CMGI? The Vision Fund feels like a high-stakes liar’s poker version of that. A loose collection of money losing somethings fueled by unrelenting optimism … sold to you.

Sounds like a press release to me

This sumptuous show last fall at the Hammerstein Ballroom in Manhattan represented the avant-garde not of theater but of Internet hype. It introduced a new home page and ad campaign by AltaVista, the search engine, to about 100 journalists and Wall Street analysts, and laid the groundwork for an initial public offering. AltaVista — prompted by its new owner, CMGI, one of the most successful incubators of Internet companies — promised to take on Yahoo with ”a portal as powerful and immediate as life itself.”

To do so, it would spend $120 million on a new slogan, ”Smart is beautiful.” These days, that strategy does not look very smart, and the prospects for the CMGI empire are not very beautiful.

CMGI’s shares are off 91 percent this year, to a value of about $3.8 billion, closing on Friday at $11.94.

And I wasn’t the only one who saw the CMGI parallel

If you lose 50% of your capital base, you have to double your base just to get back to even. If you ride a CMGI down 90% you’ll need a 10-bagger to get to par, excluding the impacts of inflation.

Maybe the market heads higher from here on a China trade deal & the Federal Reserve lowering rates once more to throw fuel on the fire, but I suspect the Fed will first have to see a catalyst to justify throwing more fuel on the fire & at the very least I’d rather wait for such a catalyst before putting much capital at risk.

CVS Panning 2018 Q4 Was…

… a great buying opportunity.

Which is part of why insiders were buying. CVS is up around 5% in premarket trading today. They beat earnings & revenues, raised full year guidance, outperformed in their retail business & outperformed in their health-care benefits segment.

A month ago they were under $52 a share & a week ago they were still just $52.50 a share. So shares currently trading at $57 have seen a big move & the bottom is almost certainly in.

Provided Bernie Sanders is not elected president (socialized medicine that nixes private insurance also guts the value of CVS’s Aetna) the current share price is still cheap. In Q1 CVS insiders invested hundreds of thousands of dollars buying shares at above $58 a share, so if you buy at open you’d be paying a price insiders felt was a good deal.

Here is a list of some of the recent insider buying

Date Director Shares Share Price Investment
3/11/2019 C. David Brown 10,000 $53.18 $531,800
3/11/2019 Fernando G. Aguirre 1,900 $53.59 $101,821
3/8/2019 David Wyatt Dorman 9,600 $52.71 $506,016
3/8/2019 Edward J. Ludwig 2,000 $52.8 $105,600
3/1/2019 Edward J. Ludwig 4,000 $58.27 $233,080
3/1/2019 Fernando G. Aguirre 3,410 $58.29 $198,768

And they also issued a bunch of options at $54.19 a share.

Date Director Shares Award or Strike Price Value
4/1/2019 Larry J. Merlo 20,858 $54.19 $1,130,295
4/1/2019 Thomas M. Moriarty 4,837 $54.19 $262,117
4/1/2019 Troyen A. Brennan 3,606 $54.19 $195,409
4/1/2019 Lisa G. Bisaccia 2,411 $54.19 $130,652
4/1/2019 Eva C. Boratto 1,336 $54.19 $72,397
4/1/2019 Alan M. Lotvin 863 $54.19 $46,765
4/1/2019 Joshua M. Flum 742 $54.19 $40,208
4/1/2019 James D. Clark 253 $54.19 $13,710
4/1/2019 Kevin Hourican 1,109 $54.19 $60,096
4/1/2019 James D. Clark 5,536 $54.19 $299,995

Disclosure: the author owns CVS shares.

Google Guts Stock Market

When I saw they were down almost $100 a share in after hours trading yesterday I knew today was going to be a down day for the market. You’d just about need a signed deal ending the trade war with China (allegedly resolved one way or the other within weeks) to get markets back up to par after such a key component nose dives.

  • Google is weighted heavily in key indexes & many tech ETFs
  • Google is seen as a bellwether. If they can’t get the numbers to work out as well as it looked like they would, then many money losing tech startups that are soon coming to market will have people question how they’re going to get their numbers to work.

Google rarely misses, but they stunk up the joint in Q1 by showing a rapidly decelerating ad growth rate, with the YoY rate decelerating from 26% to 17% in the quarter & operating margins falling from 25% to 18%. Google claimed a big part of the shift was due to changes at YouTube:

“While YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience,” Porat said on the company’s earnings call Monday.

If YouTube was the main driver of the miss you would expect to see rapidly slowing click growth & increased cost per click. What we saw in the quarter for Google properties was:

  • paid clicks (also includes video ad views): up 39% YoY, down 9% QoQ
  • cost-per-click: down 19% YoY, up 5% QoQ

Ads on search clicks are worth far more than video ad views because there is a lot more expressed intent in searching for a specific keyword than there is in watching a random(ish) YouTube video.

Over the prior 4 quarters Google grew their owned & operated ad clicks about 60% YoY while driving down CPC about 24% YoY. The rapidly decelerating click growth & CPC falling less than it had been would indicate YouTube is perhaps getting closer to ad saturation.

Historically a rising click count at above a 50% rate means massive YouTube ad view expansion, which normally correlates with blended click price being off around 20%. That Google rose their cost per click in the first quarter from the seasonally strong 4th quarter does indicate they’ve slowed down ad growth on YouTube compared against prior quarters.

When the first month of a quarter has an announcement that Google is culling a large partner from their ad network that can be seen as more than a hunch they had a soft quarter & are doing clawbacks.

Prior to the app removals, DO Global had roughly 100 apps in the Play store with over 600 million installs. Their removal from the Play store marks one of the biggest bans, if not the biggest, Google has ever instituted against an app developer. 

Though it also remains to be seen how or why Google needs BuzzFeed News to ensure click quality!

DO Global is a Chinese app developer that claims more than 800 million monthly active users on its platforms, and was spun off from Baidu, one of China’s largest tech companies, last year. At least six of DO Global’s apps, which together have more than 90 million downloads from the Google Play store, have been fraudulently clicking on ads to generate revenue, and at least two of them contain code that could be used to engage in a different form of ad fraud, according to findings from security and ad fraud researchers Check Point and Method Media Intelligence.

Google sending out questionnaires to small businesses about monetizing the hell out of local search is another clue the quarter was going to stink.

The weakness Google showed in the most recent quarter likely has to do with ad load saturation. They could add another ad unit on desktop search results, but key categories like hotels & e-commerce already stack ads via showing multiple different formats. They have also ramped up YouTube ad load a lot over the past year.

Google’s push of programmatic advertising has led to a greater share of their non owned and operated inventory being low quality garbage clicks like the stuff DO Global was offering.

Leading publishers have reoriented their focus to place more emphasis on subscription revenues & less on advertising. And some of the leading destination sites are not only ad buyers but are also becoming ad sellers. now carries a heavy ad load. They are piggybacking on the install base of Google’s DFP to launch the Amazon Unified Ad Marketplace across the broader web. And then Jeff Bezos also has a sneaky secondary play to further peal off premium publishers from Google. Washington Post’s ARC Publishing has partnerships with the sort of premium publishers Google has perhaps taken for granted:

The software-as-a-service platform may grow into a $100 million business that would bolster the company’s bottom line.

Shailesh Prakash, head of product and information technology at the company, said Arc has expanded its clientele beyond WaPo to include almost every major advertising market in the United States. Its technology powers the Chicago TribuneLos Angeles TimesNew York Daily NewsThe Boston Globe, The Dallas Morning News and The Philadelphia Inquirer.

That gives Washington Post great benchmarking data on their competitors. But it (combined with Amazon’s first party data) also puts them in an enviable spot to launch a premium ad network. I could see them offering the technology free (or rebated to make it free) in exchange for using their ad server. At that point Google gets to have an ad netwrork consisiting of fat thumb misclicks on mobile games while premium advertisers & premium publishers are drawn in closer to Amazon’s orbit.

Look what Amazon recently did in the freight market. Offer a service at no margin to destroy the capacity utilization & economics of an incumbent, and then only after shifting the economics consider making a profit. The ad network equivalent of that is peal off many of the premium publishers while leaving the existing ad network with backfill dreck.

Walmart & Target are following Amazon in ramping up their ad load. eBay is also growing an ad business which will include a CPC aspect. Facebook’s Instagram now has a checkout feature.

With so much selling off it could be the beginning of a bear market, so no harm staying heavily in cash. That said, here are some stock ideas I am looking at…

  • PETS – earlier today Petmed Express was off over 3% in part on general market downdraft, fall of internet related stocks & an ultra bearish analyst call on PetIQ that pulled PETQ down about 15%. As of typing this PETS is down almost 3%. also filed for IPO, so that could have a big impact (hype around IPO could drive PETS higher until some analyst makes a call that will eat everything & downgrades PETS). Petmed Express reports earnings on the 6th.
  • VIRT – if volatility picks up this stock often has a negative correlation to many others, as they are an HFT shop that can scrape more meat off the bones when others are forced to liquidate positions. They were off about 2.5% earlier today & are still down about 1.5%.
  • MMYT – they made a strategic majority investment in corporate travel firm Quest2Travel & were downgraded by Bank of America in the wake of Google crapping the bed – a proper triple lindy. Last week did Ctrip increase their holdings in the company to 49%. They’re off over 10% today, putting their stock right where it was before the Ctrip announcement was made. This stock has low liquidity & sometimes spreads can be a bit wide on it, so it is worth considering a longer term position, particularly if you think the domestic India internet will parallel the development of the Chinese & US internet ecosystems.
  • I don’t follow commodities heavily, but African swine flu is causing big problems in China. Some of the related protein stocks have been strong & are up even on a day like today. Tyson (TSN), Seaboard Corp (SEB), Pilgrims Pride (PPC) & the JBS ADR (JBSAY) might be worth a look & a small exploratory position. Many of them are up about 50% off the bottom from late last year.
  • EIGI – probably has another day or two of decline, but Endurance International Group bombed earnings and lowered guidance. They’re now at fresh 52-week lows & are down over 10% today, so who knows when the bottom will be in. At some point they will be a P/E buyout target as they are trading at well under 1 times sales. Anyone who can come up with any sort of upsells on hosting that they are not doing could drastically expand their margins as they have about 4.8 million active subscribers. Hard to believe they were founded in 1997, have negative growth YoY & are still losing money.
  • Health insurers – if you don’t have any exposure to healthcare yet, these are quite beaten up & the current Congressional hearings are about as rough as it will get provided Bernie Sanders is not elected and/or the Senate does not flip in 2020

Amazon One-day Shipping

Amazon has had a history of making announcements that decimate adjacent markets. They’ve acquired Whole Foods & crashed Kroger, they’ve acquired PillPack & crashed CVS + Walgreens, and they’ve had other retail announcements in the past which have clobbered other retailers.

In most cases, each of the “oh shit, Amazon …” stories has been a decent entry point for at least a short term trade.

On the most recent conference call Amazon announced they were going to cut delivery times for Prime subscribers from 2 days to 1 day.

“We’re currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program,” Olsavsky said, adding that Amazon expects to spend $800 million this quarter to make the change.

Amazon offers one-day delivery on some products now, and even same-day delivery for some purchases. But Olsavsky suggested that the company now expects that the standard free two-day shipping that is the biggest selling point for the Prime subscription plan will be improved to a one-day schedule globally.

The faster shipping time increases the range of impulse purchases consumers may conduct on Amazon. Amazon still has gaps in their catalog in terms of competitive pricing & the more they move to speed up advertising the more they’ll need to either cross-subsidize from AWS or squeeze merchants on their platform with more junk fees to make up for the cost difference.

Some parts of the market are logical & some are utterly illogical. For instance, after there was news that Nancy Pelosi’s team was guaranteeing health insurers they wouldn’t eat any cramdowns anytime soon & Trump suggested it made sense to wait until after the 2020 election to reform healthcare one could presume that would be an “all clear” to dip into the health market.

Markets not only tend to be forward looking, but they also tend to be more headline & emotionally driven than most would give them credit for being. So when the Democratic presidential candidates started taking hard left planks to try to differentiate themselves from the field, the concept of socialized medicine / Bernie Sander’s Medicare-for-all absolutely clobbered health stocks.

The current Democratic leaders in Congress — Senator Chuck Schumer of New York, the minority leader, and Nancy Pelosi of California, the House speaker — have not supported it. President Trump and Republican leaders in Congress have been demanding a smaller government role in health care, not a larger one. And the giant health care companies, which have enormous wealth and influence, are, for the most part, committed to blocking the idea. …

Data from Bespoke Investment Group shows that the damage to health care stocks became much more acute on Tuesday and Wednesday. On those days, according to Bespoke, the health care sector, dominated by UnitedHealth, underperformed the S&P 500 by its widest margin since April 2009.

Joe Biden throwing his hat in the ring has the healthcare industry hopeful, but I can’t see him winning the election.

The health care industry — doctors, hospitals, insurers, pharmaceuticals — has united in the Partnership for America’s Health Care Future, a lobbying coalition, to stop Medicare-for-all. That organization aggressively denounces single-payer at every opportunity, and has condemned proposals like a public option or letting people 55 and older buy into Medicare.

The Democrats would need to take the Presidential election, the House of Representatives & the Senate in order to pass a Medicare-for-all bill. And they would need to have a strong enough majority to override moderate grifter types like Nancy Pelosi. In short, “The selloff is based on legislation that has almost no chance of passing,” said Raymond James analyst John Ransom.

If that tail risk doesn’t come true then many stocks in that sector are a steal. And if at any point during the election cycle it looks like Donald Trump is going to get re-elected or a more moderate Democrat is likely to get the nomination healthcare stocks will pop.

After the steep declines health industry stocks today are almost like buying a call option on Bernie Sanders losing the election or a put option on him winning.

The Amazon shipping announcement took about 6% off Target, 4% of Kroger & 2% of Walmart. Those are substantial moves for staid retailers.

The flip side to the announcement is this: Amazon’s move to one-day shipping shows the competition is catching up

“[I]t would be a mistake to sell large retailers on this announcement as they have anticipated this for some time and are already rolling-out corresponding services,” Zolidis said in a statement. “Further, we believe that a total offer that gives consumers the option to get product when and where they want it, either at home or in the store, is superior to a delivery-only option.”

I just bought a bit of KR & TGT. They could still fall further, but unless the entire market craters they are reasonably priced.

And any logic which concludes offline retail is going to get wiped out by Amazon becoming more efficient is also logic which might conclude that Amazon is likely to get broke up after the election. President Trump already hates Jeff Bezos (for owning the Washington Post) & some of the Democrat presidential candidates like Elisabeth Warren have spoke mad hate about Amazon.

To be clear, I don’t think Amazon gets broken up anytime in the next 5 or 6 years. But I also don’t think changing shipping from 2 days to 1 day is a huge deal changer for most people.

A smarter approach IMHO would be one where Amazon gave buyers a sliding scale for shipping rebates for either buying more merchandise at once and/or selecting slower shipping dates for credits to apply to future purchases. Amazon already does the second a bit, but I think they could have their shipping features more than pay for themselves by allowing customers to not only enjoy free shipping widely but also get paid to wait.

A couple years ago IHL Group highlighted how the “retail is dead” meme was sort of garbage & how a lot of the company closures were from debt-levered LBOs by private equity firms. That business model is a “no lose” as even when they go under they still get to loot the value of the underlying real estate & pension plans while layering on dividend recapitalization after dividend recapitalization until they create a debt mountain so large the firm implodes.

To this day IHL Group is still debunking new rounds of retail doom.

Many retail names today are still dirt cheap.

Either they are pricing in a recession or they are pricing in asset price inflation where tech companies will keep appreciating much faster than value companies.

“Growth shares have surged to the highest levels versus cheap equities since the dot-com bubble, underscoring fierce demand for companies less exposed to the gyrations of the economic cycle. Stocks posting a strong return on equity are near their most expensive since 1990, according to Sanford C. Bernstein & Co. To cap it all, tech multiples have jumped toward 2009 highs relative to the broader gauge. It all suggests an “extreme” valuation gap is setting the stock market up for a rotation away from winners in favor of the losers, according to Morgan Stanley, echoing a growing number of Wall Street strategists. … the most-loved equities look decidedly expensive in this melt-up. And all bets are off on how they will fare in any correction, with the projected earnings expansion for growth stocks this year not much stronger than peers”

In other news, Naspers exchanged their MakeMyTrip shares for new shares in Ctrip, giving the leading Chinese online travel agency a 49% stake in the leading Indian online travel agency. MMYT was up over 6% on the news. Ctrip is unlikely to increase their MMYT holdings any further given the local “national champion” policies India is following in an attempt to create home grown tech platforms the way that China has Alibaba, Baidu & Tencent. Skift explicitly stated the 49% stake was capped to limit regulator scrutiny:

Naspers offered Ctrip even more shares, which would have given it control of MakeMyTrip, noted analysts at Goldman Sachs, but Ctrip opted for a minority position to avoid regulatory scrutiny. Ctrip’s concerns centered around a foreign company taking over a brand in India. Naspers will own about 6 percent of the Chinese travel agency’s outstanding ordinary shares after the maneuver. In 2016, Shanghai-based Ctrip had invested about $180 million in MakeMyTrip, gaining it one board seat. With this deal, it will get Naspers four board seats. It now has five of the 10 board seats.

Fads, Trends & Timelines

ROKU was on fire yesterday as the market turned up. It is already up over 90% so far this year, in part due to a particularly weak performance as the stock market cratered in Q4 last year.

A few weeks ago analyst after analyst downgraded Roku, but on Monday Susquehanna analyst Shyam Patil upgraded it on the thesis that cord cutting is a trend which will continue for a long time to come.

“The connected TV advertising market is inflecting as engagement continues to shift from linear to digital. ROKU is one of the few scaled plays on this trend,” he wrote.

Young people view Netflix as the most important video brand by a wide margin. People under the age of 35 also put Hulu & Amazon Prime Video in their top 5.

AT&T just shed another half-million TV subscribers in the most recent quarter.

AT&T lost a net 544,000 premium TV subscribers, a category that includes DirecTV satellite and U-verse television customers. Analysts had expected a loss of 385,000 customers across DirecTV and U-verse, according to research firm FactSet.

Their stock is off almost 5% today ($1.57 or 4.9%). With a quarterly dividend of 51 cents that is over 3/4 a year that just went poof. Anyone who sells now instead of yesterday is undoing most of a year’s worth of income from the stock. And if that income was taxed at 23.8% the day’s slide is a whole year’s worth of income.

Add up a few nasty quarters like that & it really ads up.

Since July 29, 2016 the stock slid from $43.29 to $30.59 (as of typing this). That is a $12.60 slide per share. As July 29 was past the July 9 ex-div date that means shareholders who bought that top did not get the next quarterly dividend payment that August. So they’ve earned $5.46 in dividends over nearly 3 years, amounting to half of the stock’s decline & then that income was also taxed.

Ex/Eff Date Dividend Declared Recorded Paid
4/9/2019 0.51 3/29/2019 4/10/2019 5/1/2019
1/9/2019 0.51 1/10/2019 2/1/2019
10/9/2018 0.5 9/28/2018 10/10/2018 11/1/2018
7/9/2018 0.5 6/29/2018 7/10/2018 8/1/2018
4/9/2018 0.5 3/30/2018 4/10/2018 5/1/2018
1/9/2018 0.5 12/15/2017 1/10/2018 2/1/2018
10/6/2017 0.49 9/29/2017 10/10/2017 11/1/2017
7/6/2017 0.49 6/30/2017 7/10/2017 8/1/2017
4/6/2017 0.49 3/31/2017 4/10/2017 5/1/2017
1/6/2017 0.49 10/24/2016 1/10/2017 2/1/2017
10/5/2016 0.48 9/30/2016 10/10/2016 11/1/2016

That AT&T performance looks absolutely fantastic when compared against a bombed out Tupperware (TUP) which raised its dividend yield about 10% today by having the stock slide over 9% on negative sales growth. In the age of Instagram who goes to Tupperware parties?

Anyone who bought yesterday might offset that decline in a couple years provided the dividend is not cut.


It is very easy to see new verticals & market shifts as fads early on in the shift, but if you compound a decade or two of strong growth it adds up.

Two decades ago the Internet was a fad & a bubble.

A decade ago mobile was a fad. Today if you interact with the public regularly in an urban area it is hard to go a whole day without being pissed off by some unaware cell phone user cutting you off or running into you.

People have become embedded apps in their cell phones. Thus mobile constitutes the majority of online ad spend – over 70% of the total online ad spend.

We forecast digital ad spending will rise 17.1% to $327.28 billion in 2019 … Mobile represents a significant portion of total media ad spending as well, and we forecast it will get $232.34 billion in 2019.


Who really cares if something is a fad if it goes up 60,000%? A fad that doesn’t end & enjoys growth long enough can no longer be described accurately as a fad, even if it is terrible.

The California-based company’s unparalleled stock rally reflects its steady growth. It has boosted revenues by at least 9% every year since 2001

And would plants crave it if it wasn’t good?

JUUL was a fad. Ignoring it proved costly:

“Youth use of e-cigarettes jumped 78% between 2017 and 2018—to one out of every five high-school students—thanks largely to the popularity of Juul. … Altria first tried to buy the entire company in late 2017 or early 2018 with an informal offer of as much as $8 billion, according to people familiar with the matter. That approach, previously unreported, was rebuffed. Mr. Willard eventually sweetened the offer and settled for a minority stake. He also agreed to put Juul coupons on packs of Marlboros, giving his own consumers an incentive to try Juul.”

This, incidentally, is also why value investing can be so painful.

While “the future” can be priced at infinite through rose colored glasses driven by compound growth & the imagination of what is possible, existing players who are getting disrupted need to spend aggressively while their growth falls to nothing or even turns negative.

Also from the above linked WSJ article:

It’s the dilemma facing many established companies in mature markets. How should one respond to new entrants that are disrupting the status quo, when the classic strategy—buy the disrupter—could potentially speed the decline of the legacy business? PepsiCo Inc. and Coca-Cola Co. have shifted away from sugary sodas by scooping up coconut water, coffee and kombucha. Big media companies such as Walt Disney Co. and AT&T Inc. are launching their own streaming services as they chase consumers who are cutting the cord. Walmart Inc. has invested billions in e-commerce sites such as and India’s Flipkart as the retail giant works to fend off Inc

A 4%, 5%, 6% or 7% dividend can sound quite appealing at first glance. But that income is instantly realized & taxed. If the company has a crappy quarter the stock can lose a half-year or multiple years worth of coupon in a day. So you pay income tax on the dividend that does not even compensate for the capital decline.

If that dividend payment gets cut pain compounds on top of pain as many dividend investors consider a declining dividend to be a sell signal, locking in further losses for existing debt holders. What’s more, many value stocks carry a high debt load from acquisitions and/or buying back their own stock. So you end up hoping either the debt can be paid down or a new growth channel emerges before the profit pool goes away. Each quarter the dividend payments must be made while debts are serviced & rolled over.

As rates go up, bonds become relatively more attractive than equities (particularly equities that have a bunch of debt associated with them & a dividend that might get cut as debt service costs rise).

The future is anything but certain.

But the emotional pain is real.

And you must be willing to eat that pain long enough for either the company to fight through market changes, or for analysts to believe in a different narrative of the company. And while you do so, you are underperforming the index almost every day until the bull market ends.

“Growth shares have surged to the highest levels versus cheap equities since the dot-com bubble, underscoring fierce demand for companies less exposed to the gyrations of the economic cycle. Stocks posting a strong return on equity are near their most expensive since 1990, according to Sanford C. Bernstein & Co. To cap it all, tech multiples have jumped toward 2009 highs relative to the broader gauge. It all suggests an “extreme” valuation gap is setting the stock market up for a rotation away from winners in favor of the losers, according to Morgan Stanley, echoing a growing number of Wall Street strategists. … the most-loved equities look decidedly expensive in this melt-up. And all bets are off on how they will fare in any correction, with the projected earnings expansion for growth stocks this year not much stronger than peers”

And even outperformance in a crash could mean still losing, but losing slightly less than the index.

To some degree, this is why momentum investing can be more rewarding than value investing. The shifts come quickly & you often know if you are right or wrong in short order. Whereas with a value play you can eat pain for months or years before it finally turns around – or not.

This is part of why it can help to have multiple brokerage accounts. One for active management where you regularly take score, buy good set ups & regularly enter & exit positions. Then the other account where the value investments are segregated into something you rarely look at & the daily noise of the market doesn’t have any impact on.

Health Sector Not So Healthy

The health sector cratered yesterday on fear of ‘Medicare for All’ gutting the sector.

The stock is down 13.3% so far in April, on track for its biggest one-month decline since February 2009 when it fell 30.64%. UnitedHealth shares initially rose Tuesday after it reported first-quarter earnings and revenue that beat Wall Street’s expectations. But the stock quickly gave up those gains on jitters from investors over drug pricing reform and “Medicare for All” proposals from Democratic lawmakers.

Insurers were not the only companies that cratered. Pharmaceutical companies like AbbVie fell around 3%. More volatile drugmaker stocks like CRSP fell much more – closer to 8%. Hospitals fell. Drug suppliers fell. CVS took another dump.

Last night Guggenheim initiated coverage on CVS at buy with a $63 price target, while this morning they downgraded Walgreens Boots Alliance to neutral from buy.

There have been a couple wild health-related stories recently. Scientists restored brain some function after the death of a farm animal & in Israel they’re 3D printing organs using a patient’s cells.

FNKO fell as low as $18.68 a share from a daily high of $20.06, due in large part to announcing their CFO Russell Nickel intends to step down by the end of this year. They closed at $19.09 a share – off 5.21%. They’re announcing earnings after market close May on 2.