22 - 26 November 2021: Weekly Roundup

29 Nov 2021 8:00 AM EST

I. Catching Up On What Happened On Thanksgiving Week

First Half Of The Week - Rotation For Higher Rates

This week was a very choppy week for the US stock market, with volatility increased, contrary to the usual view that this shortened Thanksgiving week is relatively calm. Early on Monday, President Biden announced the nomination of current Fed Chair Jerome Powell for a second term, and Governor Lael Brainard as Vice Chair. Market initially saw this as a positive note, as having a familiar person continuing this role means familiar, predictable monetary policy. After quickly notching new highs on all indices, market actually pulled back precipitously. 10 Year Treasury Yields shot up, particularly hurting the Nasdaq (technology-heavy index). The bet here is that with Powell in the seat, it is more likely that rates will go up earlier (Brainard was seen as more dovish). As we have said multiple times, when rates go up, financials go up, and long-duration tech assets go down (generally). You can see this by reading the market tapes.

Our take is there is no need to be panic in this volatile period, but rather use that to your advantage. We like banks and we had been positioning for this performance (see post here). We also understand at some point growth stocks would get hurt, and have been leaving room to add on the downside. Our view on the battle of interest rates vs. growth stocks is that secular, earnings-driven growth stocks will still perform well even in a 2% interest rates environment. The tech/growth companies that we own (Apple, Microsoft, Amazon, Google, AMD, Cisco, ...) have real profits, real growth that investors can see and value; contrarian to the non-profitable, pre-revenue long-duration assets that are valued based on future earnings, which will be hurt by higher interest rates and potentially sticky inflation (the likes of Palantir, Zillow, Teladoc, ...). Any associated pullback with high-quality growth/tech stocks in our portfolio will be used as a buying opportunity. As have stated multiple times, we will stay away from non-profitable growth companies.

Black Friday - Not Only For Retail, But Also For Stock Market   

The rotation away from growth and into value persisted throughout Wednesday before market was closed on Thursday in observance of Thanksgiving Holiday. However, on Thanksgiving night, market received a very disturbing news about a newly discovered, heavily-mutated Covid variant in South Africa (see the news here). This sent the Dow Jones plunging 900 points (2.5%) on Black Friday. We predict that in the days ahead, market will discuss chatters related to this COVID scare. This actually started the week before Thanksgiving, as there were rising cases in Europe. In response, Austria reinstated lockdown restrictions that are expected to last 10 days but could run as long as 20. At the same time, Germany has seen a spike in new COVID-19 cases and so far, has responded by taking a strong stance on vaccinations, but we will see if this extends to the return of other restrictions. Netherlands have imposed restrictions once again. With rising case counts across Europe, we will continue to keep tabs on these developments and what they could mean for our portfolio.

Don't Panic - Hindsight Of March 2020 Is 20-20

The sell-off we are seeing is similar to Covid worries from March 2020 and those for the delta variant. These lead to a "shoot first, ask questions later" mentality.  When we see a pick up in volatility, it can be a great buying period, and with hindsight being 20-20, that's exactly what March 2020 turned out to be. While watching the market gyrate is never fun for stockholders in particular, it is such a great opportunity for strategic investors or active portfolio managers like we are. Being at an advantageous position of having a strong cash position (we came into Thanksgiving week at 25% cash), having a calm head and long-term horizon will allow us to put the volatility to good use. We are looking through this market decline for opportunities to add to our portfolio. Our rule of thumb on these big sell-offs is buy on the 3rd day of decline (that would make it Tuesday). 

II. Macroeconomic Data

Here is a quick look at some of the broader market measures we like to keep an eye on: The dollar index held around the 96 level. Gold pulled back to around the $1,800 level. WTI crude prices were hit again on Friday, falling to around the $70 per barrel level. And the 10-year Treasury is hovering around the 1.5% level as COVID fears struck the market. U.S. Department of Labor reported that in the week ending Nov. 20, initial jobless claims were 199,000, representing a weekly decline of 71,000, and was well below estimates for 260,000. Moreover, this was the lowest level of initial claims since November 15, 1969, when it was 197,000. The prior week’s reading was revised higher to 270,000, up from 268,000 previously reported. 

III. Company-Specific News: Ford (F) And Rivian Are No Longer Partnering

On the week before Thanksgiving, Ford Motor (F) and Rivian Automotive (RIVN) announced they were scrapping plans to collaborate on developing an electric vehicle, according to multiple reports, deciding they would rather pursue their own specific plans. We were not surprised by the move and view it as signaling good progress on Ford's own EV efforts. 

Moreover, we suspect at some point Ford will either unwind all of its ownership stake in Rivian or do so in a structured piece meal manner. The groundwork for this move by Ford was laid in October when Doug Power, Ford's newly hired vice president of corporate development, stepped down from Rivian's board. Per reports, Ford owns roughly a 12% stake in Rivian, and based on where RIVN shares are trading, values the ownership near $11 billion. Based on the Ford share count exiting the September quarter, that's roughly $2.75 per share. While we could add that to our price target, we'd prefer to see how Ford plans to use that money. 

And as much as headlines are focusing on Ford and Rivian, we would be remiss if we didn't quickly say a word about Amazon (AMZN) , and its about 20% ownership stake in Rivian. We see Amazon eventually taking receipt of Rivian vehicles as Amazon not only looks to grow its own delivery fleet, but also address its carbon footprint. And, yes, at the current RIVN share price, Amazon's stake is worth about $19 billion -- roughly $37 per AMZN share. We see that added cash only shoring up our current $4,000 price target on AMZN shares.

IV. What We Are Doing In This Week

Adding To Salesforce

On our shopping list comes this week is Salesforce (CRM). We initiated this position back in August and wrote about their very positive quarterly earnings reported on 26th August here and their incredible analyst day on 24th September here. Afterwards, shares made an incredible run to 310$/share, and we trimmed our position. Today, shares are back to the ~285$ level, just ~5% above our cost basis but having pulled back ~10% from the $310 all time high. Having sold shares at the high awards us the opportunity to add back those shares at this level. This also demonstrates our portfolio management practice of actively buy and sell holdings when reasonable, rather than buy and hold forever. 

On the fundamental side, we haven't heard anything from CRM since their analyst day in September 2021 when they announced higher operating margins. With shares getting to the level when company announced margin expansion, we're essentially getting that good news for free. CRM reports quarterly earnings this week, and we expect CRM to deliver another blow-out.

The reason why shares of CRM has been under-pressure, being over-sold, is not at all based on the company's fundamentals, but rather because this is a future-earnings kind of stock (60x forward P/E, 12x P/S, PEG of 10) whose profits get undercut in times of higher interest rates and inflation. However, we argue that CRM trades at an expensive multiple because it is best-of-breed in this business (Customer Relations Management). We also argue that the technologies/services that Salesforce provide actually serve a deflationary force for the economy, as they allow businesses to be more cost-efficient, and thus able to reduce costs.