Right now, what’s working is overpriced, what might move is ridiculously priced, and what should move is barely priced at all.
Cloud Czars like Apple and Microsoft are trading for more than they should. Their price to earnings ratios hover around the mid-30s, their dividend yields are below 1%.
What might work, speculative EV stocks like Workhorse Group or pot stocks like Tilray, carry prices you can’t evaluate at all, based on the size of the businesses.
What should be moving are companies focused on increased demand from the economy. The COVID relief package is going to pass. It’s going to give Democrats the support needed to do more. Both private and public demand are going up.
This means “value” stocks, grocers like Kroger, landlords like Simon Property, and even oil companies like Exxon Mobil, should be exploding. They’re not. Exxon is up, but that just brings its dividend yield to 6.9%. Simon is yielding 5%, and Kroger’s price to earnings ratio is below 10.
There’s more money running around than there are good places to put it. Investors aren’t chasing returns, but “alpha,” which means returns higher than the market. All the children are not above average.
There are two types of demand that are going to pick up. Lower income people are going to get cash and they’re going to find work as the pandemic eases. Upper income people are going to be spending, making up for lost time, and looking to avoid the tax man.
In the short term that means more demand for food, gas, and construction supplies, more inflation, and profits in the real economy. More inflation also means higher interest rates, money finally costing money. These forces should put the brakes on speculation and put a premium on more certain returns.
I can’t predict when the turn will be made. It can only be seen now in commodity prices and the falling dollar. It’s not yet being seen in the stock market because speculators remain dominant. You have time to adjust.
Look to see more value out of what works, less money for what might work, and more profit in serving demand. Doubtless we’ll overshoot, with more demand than supply (thus higher inflation), but that will just make technology (which causes deflation) more valuable. Microsoft will make more money even if the stock’s price falls.
Unfortunately, by the time most investors realize all this, it will be too late. Expect them to lose money, start dumping shares, causing more losses. Expect a bear market in speculative names as people adjust to reality. Meanwhile, put your money on what will be in demand later this year – food, commodities, builders, and the real economy. Then pick up those green stocks and tech stocks after they’ve fallen.
