Reality Check for High Flying Tech Stocks - Your Money January 7th 2022
Posted by Steve Bokor
The inflation cat is unofficially out of the bag as investors reacted negatively to the release of last month’s FOMC meeting minutes on Wednesday in which several Fed Presidents argued for an increase to interest rates as well as reducing its bond buying program as early as this March. WOW that was a long sentence. With inflationary pressures still on the front burner, the Fed needs to react to prevent the possibility of long-term stagflation setting in. We must acknowledge the realities of covid negatively affecting supply chains leading to higher prices, but with the dramatic increase in cash in the financial system, in a zero-interest rate environment, the excess liquidity has found its way across the entire spectrum of investments driving prices higher. The result has created a wealth effect in which the average consumer feels more likely to increase their consumption of goods and services to the point where price point is not important. And while this may be a temporary phenomenon, once inflation sets in, it is very difficult to change the mind set of consumers.
However, with a more hawkish central bank policy clearly on the horizon, Wall Street’s love of affair with companies that generate rapid top line revenue growth with little or no profits is giving way to companies with stable bottom line numbers. In other words, “value instead of growth.” Sadly, the hottest stocks in 2021 are suddenly getting a downgrade, but not because their financials have changed but due to the analysts repricing the sales multiple and future stock target. Instead of pricing a company at say 10 times 2023 sales, the analysts, with a stroke of a pen or click on the keyboard, have reduced it to perhaps 8 times sales. If interest rates indeed increase, expect further reductions in stock targets. Take Chewy for example. It’s the online pet food and pet supply company that took off in April of 2020 when Covid first struck and by February 2021 hit $120 per share. Sales of the company have been growing nicely, but they still lost $32 million in the latest financial quarter and Wall Street cut their targets sending the stock down 17% this week.
Yup, a lot of Wall Street Tech darlings have succumbed to downgrades and or sell offs and we have a similar picture here in Canada. I already mentioned Shopify in the broadcast, but Docebo fell even more, down 21% this week. By all accounts it’s a great up and coming company with cloud based artificial intelligence-based software, but the feeding frenzy that sent the stock soaring from $47 dollars a year ago to $117 in September have moved on, and the stock is back town to $67 with $17 of that coming this week alone.
Now aside from the Wednesday release by the Fed indicating a rate increase as soon as March, today investors got a look at the all-important jobs numbers. Canada continues to shine as we added just under 55,000 jobs last month, but the US underwhelmed with a meager 199,000 additions. Maybe that is a good thing because the employment cost index (the preferred inflation stat used by the Fed) jumped 0.6% which indicates a steady rise in labor costs. It caused the bond market to lose another 50 cents and sent the 10-year bond yield to 1.78%. Again, not good for “high sales but no profit” companies, because their cost of capital could cause them to lose even more money as rates rise. And don’t get me started on Crypto Currencies which also got taken to the woodshed and beaten with a stick. Bitcoin, for example fell from $47000 US last week to $41,444 today. Ouch. Now in fairness, crypto miners over in Kazakhstan, went offline for a few days as the government tries to quell a mini political scuffle. Long term, I am not a fan.
However, On the plus side, as the global economy picks up speed, the need for basic materials also accelerates. Oil for example hit $80 per barrel and that is after OPEC announced plans to increase production by another 400,000 barrels per day next month. We note copper prices also rebounded from the drop on Monday. When you factor in the avalanche of cash coming from the Infrastructure Spending Bill and you can see why Wall Street is jumping on everything from Ford, Chevron, Exxon, Caterpillar and Honeywell.
Next week, we will get further confirmation on inflation data plus it’s the beginning of earnings season with names like Citigroup, JP Morgan and Wells Fargo on Friday, and in Canada, keep an eye out on Shaw Communications, Cogeco, and Aritzia.
Happy trading and Stay Safe.
Cheers Steve and Michele.
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