3 Reasons Why Stocks Still Aren't Cheap
plus TikTok shopping bombs; petroleum engineer shortage; Einhorn's prediction
07/11/2022
With everyone and their mother screaming about recession, is it time to start getting interested in stocks again?
In October of last year, we reported on the possibility of recession from two contrarian economists. Today, that call is consensus. What’s funny is that in 2008, most economists were caught with their d*cks in the wind after predicting continued growth right up until everything collapsed. Today, in a massive overcompensation, most economists are calling for recession.
Again, I have no clue what’s coming for the economy… none whatsoever. But valuation =/= economy. And based on valuation, most stocks aren’t objectively cheap by historic standards.
That doesn’t mean I’ve stopped investing, but I’m not yet apeing into stocks with everything that I have. Hopefully, though, that day will come soon.
Peace out.
Mike
Featured Article
3 Reasons Why Stocks Still Aren’t Cheap
by Mike, Tycoonist Creator
Stocks
Despite the recent (and rather mild) selloff in the S&P 500, stocks still aren’t very cheap by historical standards. Here are three indicators to watch.
The Buffett Indicator: The stock market value-to-GDP ratio was popularized by Buff Daddy as a valuation measurement in a 2001 Fortune article. Fair value today might be 127% of GDP, but the Buffett Indicator shows that we’re at 172%.
Earnings Revisions: Despite unprecedented earnings growth since 2020, market analysts still project even greater profits in 2022. Noted value investor Michael Burry of The Big Short fame recently suggested that earnings will contract in the back half of this year, meaning that we’re halfway through the turmoil.
Earnings Yield: The ratio of earnings-to-stock price (a.k.a. inverse P/E) remains historically on the low side (5% vs. 6.7% median) which doesn’t imply that stocks are cheap.
Reversion to the mean for these three indicators implies another 26% drop in the S&P 500 to below 3,000—although, to be clear, this should NOT be taken as a prediction.
Business Bites
News, Memes, and More From Around the Internet
TikTok Shopping Bombs in Britain
E-Commerce
The flagship app of the Zoomer generation held high hopes for its TikTok shopping experience, which it planned to test in the U.K. before a wider rollout in the United States. But the American invasion has reportedly been shelved after a crappy performance in Britain.
Background: Livestream shopping (think QVC on social media) took in a staggering $480B in China last year, posing a serious competitive threat to traditional Chinese e-commerce sites such as Alibaba.
At the same time, livestreaming shopping remains puny in the U.S. at just $11B, according to eMarketer.
The Financial Times reported that the chaotic rollout was partly attributable to culture clash between execs at TikTok’s parent company ByteDance and local British workers. One top Chinese exec supposedly stated that he “didn’t believe” in maternity leave (talk about more red flags than a Communist Party parade).
Looks like social e-commerce will wait in the West… for now.
Where Did All the Petroleum Engineers Go?
Energy
“US College Students Are Shunning Oil-Industry Degrees for ESG Future,” read the title of a recent Bloomberg article.
ESG future? You mean the one where production of oil and gas is expected to increase?
As we’ve discussed for over a year, numerous energy agencies project that global consumption of petroleum will remain largely flat until the 2040s, partly as a result of failure to invest in mining commodities for renewable energy projects.
Undergraduate enrollment in petroleum engineering programs, which peaked at 12,400 in 2015, fell to 3,600 for the 2021 academic year—levels not seen since 2007.
Result: Due to a labor shortage in the oil patch, major producers couldn’t invest in more supply even if they wanted to. Lack of engineers for new projects could contribute to future supply shortfalls—and thus, higher prices—for years to come.
“Personally, I think we are heading to a bit of a crisis. As petroleum engineers age, the industry will need to replace a retiring cohort of Baby Boomers. But we are not seeing enough petroleum engineers to fill the demand.”
-Jennifer Miskimins, professor of petroleum engineering, Colorado School of Mines
David Einhorn’s Prediction Checkup
Investing
Will the 2020s be known as the decade of shortages and higher inflation? David Einhorn thinks so.
The hedge fund manager notes that investor capital has been flowing out of the unsexy “old economy.” Instead, investors have plowed funding into bullshit Silicon Valley apps, depriving the economy of things that we actually need like energy, mining, housing, and more.
Effect: With little investor appetite to fund new oil exploration or cement plants, old economy companies haven’t been responding to higher prices with more supply. This leads to even higher prices and persistent inflation, while the companies themselves enjoy excess profits.
Instead of reinvesting those earnings, companies are buying back their own stock—10%, 15%, 20% a year.
For a look at what can happen when a stodgy company shrinks its share count before a positive catalyst, check out Dillard’s ($DDS). Einhorn loaded up on shares of the department store chain pre-pandemic at $60; in 2021, shares hit $400 in an epic short squeeze.
#BigOilEnergy
Cool Shit
This mug is an entire vibe #BigOilEnergy.
Check out the Tycoonist Amazon page for this and (actually useful) stuff like the recommended book list.
Memes and Sarcasm
RIP Tony Sirico, a.k.a. Paulie Walnuts. We’ll never forget your brilliant explanation of EBITDA.
Nobody could’ve seen this one coming…
…or this
Can we get away with one last Musk meme here?
Last Week’s Issue
Contact
Email mike@tycoonist.co or reach out on social media.