Tuesday, May 11, 2021

What the sophisticated investor can learn from the GameStop stock bonkers rally

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Hello, Bull Sheeters. Tech stocks are leading the way this morning, pushing up US futures for the most part, and lifting global stocks as well.

It’s a big earning week for Big Tech with half the FAANGM sextet in the next few days.

In today’s essay, I watch the bubbly penny trade and loss-making stocks, including the mad surge of GameStop.

But first, let’s see where investors are putting their money.

Market update

Asia

  • The mainAsia Indexare mainly higher in afternoon trade with Hong Kong Hang Seng high2.4%, continuing an impressive month-long rally.
  • The big winner is Tencent, which at one point was up over ten% Monday as the bulls poured over call options to an amazing clip.
  • China is the new world leader in business investment. The highly regarded figures on foreign direct investment came out this weekend, showing the The United States lost the first place over the past year, thanks to COVID-19.

Europe

  • the European scholarships were mostly higher outside the doors with the Stoxx Europe 600 high 0.5% in the open air, before sliding.
  • President Biden phoned scores of world leaders over the weekend, including Britain Boris Johnson. Downing Street was quick to point out that the topic of a trade deal was raised during the call. The White House had a different memory of the conversation.
  • The one-two punch of Brexi and COVID shakes the nerves of UK finance and business capital. Roughly 40% of Londoners say they would consider a move across the Channel to Europe.

WE

  • American Futures point to a positive opening. That’s after all three exchanges ended last week in the green.
  • Goldman Sachs equity strategists see signs of “foam“and”unbearable excessOn the US stock market. It’s not just with SPAC, they warn, but also the “bubble” enthusiasm for stocks with negative profits. There is more on that below in today’s essay.
  • Great technology dominates the earnings schedule this week. Big names include: Microsoft (Tuesday), Apple and Facebook (Wednesday).

Somewhere else

  • Goldis flat, is exchanged $ 1850 / ounce.
  • thedollar is off.
  • Grossis in place, with Brent trading above $ 55 / barrel.
  • From 9 a.m. Rome time Bitcoinwas up about 1%, to $ 33,300.

***

Game on

The B word comes up a lot on Wall Street these days.

As Goldman Sachs equity analysts wrote in a note this weekend, “among the most frequent questions we receive from clients is whether US stocks are trading at unsustainable levels (read: ‘Bubble’).”

The answer to this question is: yes, bubbles abound. But you have to know where to look for them.

For example, equity professionals struggle to find an adjective to describe the craze for blank check PSPCs. There have been 56 SPAC IPOs so far in 2021, raising $ 16 billion. (If PSPCs still confuse you, check out FortuneJeff John Roberts’ analysis of what PSPC is a “poor” investment for anyone looking to make a quick and decent return.)

There are other red flags that Goldman is seeing in the markets – namely, robust trading in penny stocks, companies hemorrhaging from losses and overvalued stocks (represented by multiples EV / sales reaching or exceeding 20X) . It almost goes without saying that these risky bets usually don’t end well. And yet the volumes in these YOLO trades (you only live once) are reaching historic highs.

EV / sales is a closely watched metric. This allows investors to know whether the market value of a business (taking into account its level of equity and debt) is in line with income. A stock with a relatively low EV / sales – let’s say less than 1X – can be an undervalued business despite decent revenue growth. A high EV-to-sales ratio, meanwhile, indicates investor exuberance is on the way for a company whose stock price is growing faster than sales – at least it often seems.

“Since 1985,” writes Goldman, “median trading of stocks at an EV / sell multiple greater than 20x has generated a 12-month return of -1%, compared to + 6% for the median US stock.”

In the past month, nearly a quarter (23%) of the stocks that changed hands are companies whose sales / EVs have swelled in a haphazard fashion, as the table above shows. During this time, there has been a similar increase in the volume of transactions in companies with negative profits.

One of those beloved losers is GameStop; it flies off again this morning in pre-market trading. The loss-making video game retailer has grown nearly six-fold since Jan. 12, as retail investors do everything they can to punish the many short films that bet on its crash. We call her the mother of everything small pressures, and this triggers a whole a lot of vicious teardowns sure Twitter. The big scalp for the WallStreetBets crowd is veteran activist Andrew Left of Citron Research, who appears to be losing huge amounts of money on his bearish position at the moment.

GameStop was the most actively traded US listed company on Friday, Bloomberg reported. Never mind that there was a difficult Christmas sales period, and recently delivered a sobering perspective it involves further tightening of the belt to withstand its COVID-battered market. Retail investors are going all out on the stock as if it were an e-commerce juggernaut.

If you were a bubble hunter, actions like this might be worth considering.

***

Have a very good day everyone. I’ll see you here tomorrow… Until then, there’s more news below.

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write tobullsheet@fortune.comor reply to this email with suggestions and comments.



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