Category: Markets

 

Ignore the Anecdotes, Robinhood Traders are Solid Investors (Mostly)

 

Taking positions in bankrupt corporations, indefinitely berthed cruise lines, airline stocks, cannabis, unknown electric vehicle startups, equities that legendary investors are short, and Chinese retailers are all activities Robinhood traders have been ridiculed for. But is the reputation deserved? As a group, the performance of these self-directed investors can be measured. True analysis (not anecdotes) has tested the hypothesis that “they’re all nuts.” This analysis has been done covering the last two years’ worth of data on customers of the company. The results run counter to the reputation these presumably younger, inexperienced investors have been tagged with. The collective Robinhood buys and sells, as a portfolio did not underperform when compared to standard academic benchmark models.

What Was Learned

The National Bureau of Economic Research released a working paper late last month titled: “RETAIL RAW: WISDOM OF THE ROBINHOOD CROWD AND THE COVID CRISIS.”  At the heart of the paper, the author, Ivo Welch, a finance professor at UCLA’s Anderson School of Management, looked at the holdings and results of all Robinhood transactions (since inception), using information available through *Robintrack. He then compared risk/reward to professional money managers’ performance, cash, and the overall market.  His results uncovered that Robinhood user’s portfolios, on average, contain 5% of small, less liquid stocks that may be subject to much wider price swings. These smaller positions are often in companies the younger demographic is very familiar with. They also included industries that had either been beaten down, could potentially benefit from the COVID-19 economy, or those nearing a breakthrough of one kind or another.  A much higher percentage of the positions were similar to those held in managed major index mutual funds.  Although RH investors have created volume spikes and even price spikes in lesser-known companies, these were not their largest trading plays. By Professor Welch’s calculations, up to 60% of Robinhood investors’ holdings were stocks with large daily volumes. Companies with the heaviest weights in the average Robinhood portfolio according to the study include Ford Motor Co., General Electric Co., American Airlines Group Inc., and Walt Disney Co.

“The actual RH investors portfolio (ARH) was not as crazy as these ‘anecdotal holdings would suggest,” writes Ivo Welch. “Instead, most of the interest of RH investors revolved around larger and highly liquid firms.” The 5% held in smaller companies with lower volumes could easily be argued as appropriate or even prudent for the younger investor. It was additive to the aggregate portfolio outperformance.

 

    New York Times, July 8, 2020

 

Smoothed Pandemic Crisis Selling

The RH self-directed investors are impacting price movements in ways unexpected by more experienced professionals. This is getting more attention from veteran traders as individuals now account for 20% of equity trading. This makes it important to understand them, and foolish to ignore. Welch’s paper provides that the composite model Robinhood equity portfolio has outperformed so far in 2020, and the presence of individual investors has possibly acted as a dampening force during a volatile environment. Whenever the stock market fell in 2020, spikes in retail buying occurred as early as the next day. Then, the second surge in RH volume usually occurred roughly three days after a spike down. Three days is about the time it takes to complete an ACH transfer and make sure there’s good funds in an account.

 

Stock Market performance vs. Robinhood Interest 2018-2020

 

The combined actions of RH trader’s willingness to buy into selling served them and the overall market well. The top plot shows the total Robinhood investment account size (blue/red) charted against the incidence of the word “Covid” on Google Trends (green). It clearly shows RH investing accelerated at the beginning of the crisis in the U.S. The bottom plot shows the change in Robinhood holdings (black) against the changes in the value of the S&P 500. The drop in the overall market was met with growth in total RH portfolio value. RH investors did not panic or experience margin calls. Instead, there is evidence that as the stock market declined, they actively added cash to fund purchases of more stocks.

 

  CNBC June 12, 2020

Method of Comparison

After downloading stock data from Robintrack, which aggregated RH trades across all account owners, Professor Welch found that while it’s true that Robinhood investors have been attracted to “some rather odd stocks,” these shares are not Robinhood users’ largest holdings. Instead, the average Robinhood portfolio “was a lot more ordinary.”  He then applied the Fama and French model to create a benchmark to measure performance against. Walsh broke down the significantly different styles within the holdings to capture size and value. He used their calculated weights and applied the weighting to a merged Value and S&P 500 portfolio. This is not a perfect measure but creates a reasonable benchmark of the full RH portfolio.

This is where naysayers may have to watch who they sneer at. The Robinhood portfolio, based on the collective wisdom of their cohorts, did not underperform. The alphas were positive, and despite the very short sample period, it is viewed as statistically significant at a respectable +1.3% per month.

What Is the Fama and French Three Factor Model? The Fama and French Three-Factor Model (or the Fama French Model for short) is an asset pricing model developed in 1992 that expands on the capital asset pricing model (CAPM) by adding size risk and value risk factors to the market risk factor in CAPM. This model considers the fact that value and small-cap stocks outperform markets on a regular basis. By including these two additional factors, the model adjusts for this outperforming tendency, which is thought to make it a better tool for evaluating manager performance. Investopedia

 

CNBC, June 15, 2020

What Robinhood Traders are Doing

It is not uncommon for veterans in any discipline to poke fun at newcomers that do things differently. This usually changes if the new way is more successful than the more accepted old way. When it comes to people’s money, this is doubly true. There are 13 million primarily young or new Robinhood self-directed investors. They have been stereotyped as unsophisticated followers who have yet to move out of their parent’s house and are throwing away their COVID-19 stimulus check in the markets. There may be some among the 13 million who fit this description. However, data supports the idea that as a whole, the performance of this group is quite admirable and should not be scorned.

On average, those pulling the trigger on trades through the Robinhood app performed well; they earned positive alpha versus cash, the overall market, and even the weighted Fama-French factor model.  This simple two-variable model served as the proxy for the investment performance of small retail investors throughout the app trading universe. It will be interesting to see if the model vs. actual experience holds this level of performance over time. One variable during the measurement period with hard to assess influence is the timing of government stimulus checks, this may have impacted investible assets while the market was at a low for the year. Another variable is individuals out of work or working remotely during this period, they may have had more opportunity than normal to research and study some of the high potential names found in the 5% of their portfolio. Anecdotally, as a resource, Channelchek experienced a threefold increase in activity during 2020. A full 25% of that activity is from visitors 25-34 years-of-age accessing company research, articles, and other helpful content. More time to explore and solid resources once reserved for large institutions may also be a contributor to performance results.

Paul Hoffman

Managing Editor, Channelchek

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Each event in our popular Virtual Road Shows Series has a maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meetings intrigue you here.

 

Sources:

“Retail Raw: Wisdom of the Robinhood Crowd and the Covid Crisis”

Robinhood Traders Nailed the Market Bottom

Kramer Thinks Wall St Pros May Be Playing a Game With Amateur Robinhood Traders

Robinhood Risky Trading

Bloomberg Intelligence

 

*Robintrack, a website that provided updates on retail stock demand using Robinhood’s public application programming interface, was forced to shut in early August after the data feed was cut.

 

A Peek at Stock Market Performance as We Enter 2020’s Final Round

 

If you looked at the stock market major index levels on 12/31 and then not again until 9/30, you’d think not much has happened — boring
year. Despite the overall market’s rise since the beginning of the second quarter, two major indexes are essentially where they were at the beginning of 2020. The S&P 500 is up 5.57%, while the Dow Industrials is down .91%. The extreme outlier is the Nasdaq Composite with its high weighting of tech stocks; it’s up 24% going into the last quarter of the year.

Who’s Ahead?

Among the non-tech big winners last quarter are home builders. Builders have benefited from low rate mortgages, moves away from metropolitan areas, and a growing need for more home workspace. This, of course, is related to the pandemic and, to a lesser extent, riots. Currently, there is a historic shortage of new and existing homes for sale. An August 19 article in Forbes magazine recommends that with large home builder stocks up from 22% to 172%, they may be overvalued. Forbes contributor Richard Suttmeier writes: “You can be long, homebuilders, when their P/E ratios are 8 and lower. Today the P/E ratios are between 11.16 and 13.68.” An increased cost of lumber and other forest products are also beginning to pull from builders’ expected net profits.

 

 

Tech favorites and growth stocks made exceptional moves upward, particularly the behemoths like Apple, which crossed the $2 trillion mark. This leaves the computer and smartphone maker bigger than the entire global markets (shares were up 27% during the 3^rd quarter).

 

 

More on Markets

Other stocks that are way ahead are Zoom, an online communications company that was off most everyone’s radar at the beginning of the year, and Tesla, which people have argued for years, is overvalued. In August, Tesla reached a new high, which provided a market value of more than $400 billion. The shares almost doubled in the third quarter as both institutions and self-directed investors poured money in. Both stocks have been favorites among institutions, as well as self-directed investors, many of whom are new to trading stocks or have ramped up activity significantly this year.

New Contenders

Investors this year have also waved in shares of companies that are new to the public markets. A fresh example of this is shares of software companies Palantir Technologies and Asana, which started trading Wednesday on the New York Stock Exchange, both turning in excellent initial results. Their successful entrance, along with others to the public markets, demonstrates how healthy the appetite for new issues remains this year, particularly as investors have favored technology and biotech companies.

The Economy

The economy has steadily improved since the initial pandemic shutdown. Although the pace of GDP growth is not what it was at the start of the year, there is movement back toward low unemployment, high production, and increased consumer spending.  These figures over the past six months have shown steady improvement, many times surprising on the positive side. They still remain far from where they were at the start of 2020.

Meanwhile, the Federal Reserve approved a shift in how it sets interest rates in the third quarter by signaling it would target low rates for years. This provides low operating costs to corporations with high debt. A more subtle tailwind for stocks is that the fixed income markets compete with the equity markets for investor dollars. Low rates make bonds less attractive, and the risk/return on select equities more appealing.

Fourth Quarter

COVID numbers in the U.S. continue to go down, and the number of states declaring they will not shut down their economy continues to rise. This points toward increased economic activity. The question, of course, is, has this already been factored into today’s equity valuations? In some sectors, like homebuilding, it may be. There is likely to be significant repositioning and rotation between industry sectors and cap weighting before the close of the year.

What may be most significant in the final round of 2020 is the Presidential election and overall election results. Over the next month and possibly longer, there will be projections, forecasts, and pundits declaring which party will have power and what that power means to the markets, sectors, and individual stocks. It may prove the most challenging quarter of 2020.

 

Suggested Reading:

Financial Markets Lifted Household Wealth to Record Levels

The Fed is Experimenting with Digital Money

COVID, Sex, and the Business Cycle

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

Americans Want Homes, but There Have Rarely Been Fewer for Sale

Take profit on Home Building Stocks Now

These Stocks Have Rallied More Than 400% This Year

Why Tesla Was Left Out of the S&P 500

S&P Indices 9_30_2020

 

Photo Credit: www.attacktheback.com

 

Equity Leadership Could Be Handed-Off to Small-Caps Post Election

 

The average return for small-cap stocks, the year following a presidential election, for the past 40 years, is 17.48%. Looking back, the least the Russell 2000 returned during these years was 2.03% (1981), the most 38.82% (2017). The major large-cap indexes don’t have this level of consistency, they also fall short in performance by a few full percentage points.  This begs the questions: Why would smaller companies outperform after a presidential election and more relevant, are they likely to outperform again next year?

Why the Outperformance?

After the people decide on who will be their President, there is a renewed focus on domestic issues that had a reduced priority during the Presidential race. The noise and distraction of political gamesmanship becomes severely reduced after the contest(s). Elected officials get back to their To-Do list. These lists usually include providing a positive environment for business and workers. For example: In 2021 we’re likely to see work on tax and trade policies, health care reform, hearings on big tech oversight, and overall creating an environment where jobs are created. 

Large multinational companies don’t benefit as directly as smaller companies in the U.S. are more likely to feel an immediate positive impact that focusing on domestic issues has since they have a much higher percentage of their business conducted in North America.

But now there’s a growing chorus on Wall Street calling for a leadership change. Earnings drive stock prices long term, and small-cap earnings estimates are improving faster than those for large-caps. Add cheaper valuations and the relative reward for small-caps looks even better. – Barron, August 14, 2020

 

Will the Streak Continue in 2021?

Market cap weighted indexes like the S&P 500 and tech heavy indexes like the NASDAQ 100 are heavily influenced by FAANG stocks. These stocks have had an amazing ride in 2020 because of  lockdowns. Their strength and their increased weighting created a strong updraft for these two indexes which are positive on the year. By contrast, the popular index of America’s small-cap companies, the Russell 2000, is down near 12% YTD. So, in addition to four decades of market history placing odds on the side of small domestic companies with less overseas exposure, small-cap stocks have five weeks before the election and are more attractively priced after falling out of favor. 

The run-up we’ve had in big tech and other large-caps is part of a cycle and won’t last forever. Any possible rotation into small-caps was derailed with COVID’s impact and the distractions of an election year which included impeaching a U.S. President. The potential for outperformance on those facts is strong, add to it a weakening dollar and companies with  a high percentage of their business dealings done domestically also face a tailwind.

Some strategists think 2021 might finally be the time for the Davids of the market to start outperforming the massive Goliaths of tech. – CNN Business, September 18, 2020

 

In addition to the post-election year probabilities of this group outperforming, the odds are also in their favor as the recession ends. In an interview Michael Binger, President of Gradient Investments, had on CNBC’s Trading Nation said: “When you look historically, as the economy comes out of a recession — and we’re certainly going to be in a recession after the second quarter — small-caps have outperformed large caps in nine out of the last 10 economic downturns aafterthe economy came out of the downturns. So, I think you have history on your side.”

Take-Away

Is outperformance by small-cap stocks a slam-dunk next year? The investment markets never provide a future slam-dunk possibility without caveats. There are a lot of other moving parts to consider. Analysis of the markets do, however, provide higher and lower probability of outcomes. Armed with the history of this sector in post-election years, post-recession years, with a weakening dollar, and after large-caps ran so far, I’d place this scenario in the perfect storm category for small-caps to recover relative lost performance ground in the coming year. And, possibly much more than just lost ground.

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

U.S. Debt as a Percentage of GDP

Small-cap Stocks are Looking Better for Investors

Investment Barriers Once Seen as Insurmountable are Falling Fast

 

Enjoy Premium Channelchek Content at No Cost

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

Investing in Small-Caps after an Election Year, CNN

Pick up Some Values in Small-Cap Stocks, Kiplinger

Small-Cap Stocks Could Keep Rising

Small-caps Historically Outperform After Recessions

Small-cap and Emerging Market Favored in Post COVID Era

The Most Popular Small-cap Index Isn’t the Best, Morningstar

Stock Market Returns

Russell 2000 History

The FAANG Stocks Are Converging and Cracks Are Showing

 

The so-called FAANG stocks have dominated the technology sector in recent years. FAANG stocks refer to the stocks of Facebook, Apple, Amazon, Netflix, and Google.  Each company has its origin in and is known for, a different component of the technology industry.  Facebook is known for social media. Apple is known for hardware. Amazon is known for retail. Netflix is known for content streaming. Google is known for its search engine.

A funny thing has been happening in recent years; the FAANG companies have begun to converge and act like competitors, often copying each other.  Amazon began making smart speakers (Alexa), so Apple (Homepod) and Google (Home) followed suit.  Netflix began producing original movies and shows, and so did Apple (Apple TV+), Amazon (Prime Video), and Google (Google Play).  Facebook expanded into other social media sites (Instagram) and messaging sites (Messenger), so Google purchased YouTube and Apple expanded iTunes. Apple began making smartphone accessories, so Google purchased Fitbit. All five companies have moved into cloud services.

The Overbite of the Companies

Today all FAANG companies have at least a foot in all aspects of technology, whether it be hardware, software, social media, media distribution, original content, search engines, or retail. In many ways, these founding fathers of modern technology are becoming more and more similar.  And at the heart of all operations are advertisement dollars.  In essence, they all want to control how a person accesses information and to sell visiting “eyeballs” to advertisers.  That includes controlling the hardware devices (phones, computers, smart speakers, televisions), the social apps (Facebook, Instagram, YouTube, TikTok, iTunes), help apps (Google Maps, Uber, Weather apps), and original content (Netflix, Apple TV+, Amazon Prime).

 

 

The company that controls the eyeballs controls the advertising dollar.  That’s why smart home speakers were sold so cheaply when they came out.  That’s why companies are investing large dollars in speech recognition software. That’s why FAANG companies sell devices to connect televisions to the internet. That’s why companies are paying up to acquire the latest, hottest technology companies. The battle to acquire TikTok’s U.S. operations between Oracle and Microsoft/Walmart may have well been those company’s attempts to join the inner circle of technology giants.  And, before you say “what was Walmart doing trying to buy a tech company,” remember that Amazon has been eating into Walmart’s retail operations.

Out for Blood

So, if these tech giants are headed for an all-out war for the advertisement dollar, how can we handicap their odds?  Facebook and Netflix seem to be the odd men out, checking off the fewest categories to attract eyeballs. Facebook is strong in social media, but behind the game in other areas of technology.  Netflix seems especially vulnerable given steps taken by the other tech giants and other media companies (Disney, Viacom, Universal, Fox).  In fact, if AAG wasn’t such a bad acronym, Facebook and Netflix would probably not be included in the grouping.  Not that Facebook and Netflix won’t do fine on its own in its sectors, but it’s hard to envision them as major technology companies involved in all aspects of technology unless they were to merge with a company like Oracle, Microsoft, or IBM.

New-FAANGled Opportunity?

On the other hand, there is one other component that we have not talked about yet – automobiles.  If computers, phones, televisions, and smart speakers are important access points to the advertising dollar, what about cars? Perhaps the car manufacturers of the future will be paid for product placement when drivers make requests for the nearest restaurant, gas station, etc.  Automobile computers could become especially important in the age of driverless vehicles. And who is the most innovative car manufacturer?  Perhaps the FAANG group will become the TAAG group someday. 

The technology industry moves fast.  IBM dominated the space in the 1950s and 1960s and is now an also-ran.  Microsoft dominated the 1970s and 1980s and is on the outside looking in.  The next great tech company may not have even been formed yet.  All it takes is a great idea.  That’s where small microcap companies come into play.  The investment environment has never been riper for new companies to develop and hit it big.  At worse, a successful small company may be bought out by a giant looking to maintain their position, rewarding early investors for their foresight.

 

Suggested Reading:

Fear of Missing Out on Owning the Next Apple

Investors Should Pay More Attention to ATM Offerings

Ecommerce Adapts While in-Person Retail Struggles

 

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Each event in our popular Virtual Road Shows Series has a maximum capacity of 100 online investors. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

Sources:

https://www.cnbc.com/2020/09/22/apple-amazon-and-google-will-emerge-as-winners-gene-munster.html, Stephanie Landsman, CNBC, September 22, 2020

https://towardsdatascience.com/who-is-winning-google-amazon-facebook-or-apple-45728660473, Rodrigo Salvaterra, Towards Data Science, February 10, 2020

https://www.marketwatch.com/story/the-faang-companies-are-starting-to-turn-against-one-another-2017-09-18, Jeff Reeves, MarketWatch, September 18, 2019

 

Small-Cap Stocks Have Shifted into Outperformance Mode

 

The behavior of drivers I witnessed while driving south from New York to Florida after Labor Day reminded me of reactions prevalent among market participants. Behaviors that literally drive travelers; from the professional (truck driver) to the guy in the sports car, or the family cruising in the SUV, also impact investor behaviors. There are people in the markets and on the road,  especially professionals, that always seem to know things first and how to respond. There are also impatient drivers and investors, those that want fast results, and safer people just trying to be prudent. They’re all on the same road, but their level of expertise and reason for being there is different, so is their ability to change when needed.

My personal driving style is risk-averse; I just want to arrive alive. My normal pace is about 7 miles per hour above the posted speed limit. This is often a little slower than those around me, but not so slow as to annoy others on the road. During this most recent road trip, while just south of  Annapolis, there was a significant number of cars on the road, yet the pace was brisk. We were all making good headway (just as investors in large-cap, especially tech, have over most of the summer had been). Like these investors, I let my guard down with everyone else who had grown comfortable with the velocity that we were moving. I was startled from my comfort when a car came past exceeding the average speed by 15-20 mph. I then noticed that a few of the cars around me increased their own pace.  People are inclined to increase their risky behavior when they see others less cautious and benefitting from it. As far as I can tell, the truck drivers didn’t change their behavior.  As professionals, they learned from experience and training what was best for them. A few miles past where the cars sped up, I saw a number of vehicles, mainly trucks exiting the interstate. This got my attention, and I considered doing the same as these drivers are often more in the know than the occasional vacationer like myself. Without a known alternative route to take me where I wanted to go, I decided not to.

It did not take long before I realized why the professional drivers exited. The car that startled me as it raced past earlier had just gotten into an accident. It was left overturned with steam coming from what I assume was the front.  The cars around me quickly slowed their pace to the speed limit. I reduced my speed as well; I also lowered the volume on my music and placed my hands firmly at 10 & 2 o’clock on the steering wheel. Seeing what could happen caused us all to be safer drivers. For some of us, that lasted about ten miles. After that I saw people begin to resume their speed. For others, they shook off the reality of the possibility of crashing sooner and resumed their pace quickly. This wreck wasn’t the only one I witnessed on my 1200-mile drive. Each time I saw caution temporarily increase among those around me. The stock market has behaved the same way throughout 2020. On two occasions we’ve experienced severe and sudden downturns; after each, people have quickly resumed their pace.

Stock Market Highway

Leading up to the late February 2020 record-level highs in the major indexes, we saw many investors speeding into the market. Tech stocks were especially popular, but many sectors had continued strength as we ignored warnings of an overextended market, sorted out pandemic risks, and the idea that the pace may be dangerous. The markets did come screeching to a halt after President’s Day  as some participants exited out of equities and others took alternative routes to stocks most likely to benefit from a response to the pandemic.

The 30% crash ending in March caused many to head to the sidelines as the reality of what could happen became reality. Some of these investors stayed cautious and missed opportunities as the market rose again. Others pivoted to companies that eventually proved to be the darlings of the situation. This included big tech, pharmaceuticals, and online retail.

 

Source TradingView.com – NASDAQ 100 E-Mini as Proxy for NASDAQ 100 Stocks (1 year)

In the past few weeks, these darlings, the companies that had been speeding the most after the earlier crash, have hit another rough patch. During the last 14 days (Since September 4) the NASDAQ 100 is down 5.9% as investors move money out and find different avenues.

Taking an Exit

On September 2, thanks to tech stocks and other COVID related plays, the large-cap indexes had reached a new all-time high. In the short time since then, they have given up more than 10% (NASDAQ 100). Although this rapid selloff is not currently as large as the 30% route in March, it was rapid and exceeds the psychological 10% level that investors react to.

The question now is, is this a pause before large tech investors begin “bargain” hunting, or have they shifted their focus. Chart comparisons for popular indexes may be able to answer this. If the pattern holds, it looks like investors may have exited the large-cap tech highway and found an alternative route in small-cap investments. This is starting to become visible when comparing major index results over the past 14 days, and money flows among ETFs.

While the three most quoted large-cap indices are down over the past two weeks, the small-cap stocks, which weren’t getting much attention during the race to the new peak, have significantly outperformed as money was taken off the table in the high flying large caps and placed instead in companies with lower market caps. This may prove to be a smart detour as the economy gets on a stronger footing.

 

 

From Friday, September 4 through Friday, September 18, the Russell 2000 index showed positive results while the DOW 30, S&P 500, and NASDAQ 100 were down meaningfully.

 

 

Fund flows into ETFs with performance that tracks small-cap indices have outpaced flows into large-cap funds. This change suggests that market participants selling out of large-cap have not left the market. They have just adjusted the road they believe is now safer and could offer a better return.

 

Shifting Gears

The small-cap companies represented in the Russell 2000 rely less on profits from doing business overseas than the large-cap indexes. As the U.S. pace of recovery is strong, it makes sense to look domestically for value. Larger corporations with stable and stronger financials were the “flight-to-quality” trade early in the pandemic. Unwinding these trades also has the effect of cash moving back into a more diversified position.  Domestic small-caps also have less international exposure, they are more shielded from sovereign and other geopolitical risks. The U.S. relationship with China, Brexit concerns, and a Presidential election may complicate global investing. This bodes well for companies that primarily have their operations in North America.

Though far from the “best-ever” economic levels we saw pre-pandemic, data has been improving. The unemployment rate is at 8.4%, this is much better than what many economists had forecasted for the remainder of the year, manufacturing has also expanded, and confidence is high

Take-Away

The relative increase in small-cap stock interes shows that investors think the run-up in companies that benefit from social distancing are low on gas.

Small-cap stocks are providing somewhat of a refuge from the rout that tore through equity markets this month. This signals that investors see brighter days ahead for the economy as pandemic lockdowns are lifted.

Not unlike highway driving, market movement is the cumulative effects of all the behaviors of those involved. It makes sense that there are some investors who have already begun leaving the large-cap companies that had treated them well and are now taking other routes. The conditions are changing, it may be time for investors to take it off autopilot and adjust once again for what may be called for.

Paul Hoffman

Managing Editor, Channelchek

Suggested Reading:

Do Analyst Price Targets Matter?

Fear of Missing the Next Apple

A Virtually Perfect Time to be in This Business

 

Enjoy Premium Channelchek Content at No Cost

 

Each event in our popular Virtual Road Shows Series has a maximum capacity of 100 online investors. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

Nasdaq, tech stocks coming out of correction

Small Caps Emerge Relatively Unscathed in Megatech Bludgeoning

ETF.com

 

 

Half the Analysts Following Apple Have a Buy Rating Even Though the Stock is Above Their Target

 

The shares of AAPL have surged above $500 per share after having risen 70% year to date.  Most of the surge has come since the company announced a four-for-one stock split on July 30^th.  Since the stock split announcement, the shares of AAPL have risen approximately 30%.  Sixty-one percent of the analysts following the stock have a positive rating on the shares of AAPL despite the shares trading above price targets.  The highest price target is $520 per share, and the average price target is $430 per share.  Whether or not analysts following AAPL raise their price targets or lower their ratings remains to be seen.  The current disparity, however, raises a bigger picture question: do analyst price targets matter at all?   In theory, an analyst’s price target is an indication of where an analyst thinks the stock will trade at a future date (usually twelve months).  As such, the difference between an analyst’s price target and the current stock price is a measure of how much an analyst believes the stock is under or overvalued.  In reality, price targets do not fully reflect an analyst’s sentiments regarding a stock for reasons discussed below. 

Bull Case (price targets are useful)

Price targets are regulated and can not be arbitrary. Following the collapse of Enron in 2002, regulators added additional restrictions regarding the use of price targets.  FINRA rules 2241 and 2241 require that price targets have a “reasonable basis” and include a disclosure of risks that may impede achievement of the price target.  Most analysts will justify their price targets mathematically, perhaps by applying a price-to-earnings ratio, a sum-of-the-parts calculation, or a discounted cash flow estimate.

Price targets imply direction more than magnitude.  As mentioned earlier, price targets represent an analyst’s estimated value of a stock.  That value, however, is not static.  It may be based on many factors that are constantly changing, including company fundamentals, its competitive environment, overall stock market conditions, interest rates, and many other factors.  In theory, an analyst should be changing his or her price target every day if not continuously.  This, of course, is impractical.  As such, investors should pay more attention to the direction of price targets, especially when they are updated.  A study by researchers at the University of Waterloo and Boston College found that analyst target price revisions are more accurate predictors of future stock price performance than the actual price target.

Price targets lag behind changes in fundamental company developments but will adjust. Analysts will typically review their price targets whenever they write a report.  They will take into account all changes that have occurred since their last report.  However, they will probably not make a change to their price target unless the change is significant.  If a drop in interest rates warrants raising a price target by $0.50, they may decide to wait until conditions warrant a larger change.  Consequently, price target levels typically lag minor changes in company fundamentals or other data points.

Bear Case

The analyst just raises their targets when they are hit.  Although analysts tend to think of price targets as a way to communicate their feelings on a stock, some investors and traders view them as a price limit for buying the stock.  Investors and traders get frustrated when analysts simply raise their price targets when stock prices reach their target. The chart below shows the stock price of Apple shares (yellow line graph) and the median twelve-month price target for Apple (white line graph).  As you can see, the two lines mirror each other, with the gaps growing during periods when the stock price has stagnated.  As indicated earlier, this may be a function of the fact that analysts are not constantly changing their targets, instead of waiting until the fundamental change is large enough to make a major move.  Often, such a move occurs when a company releases earnings or other news.  Of course, such an announcement often is associated with an increase in the company’s stock price.  Analysts try to stay ahead of the stock price, but that is not always possible when there are sudden moves.

 

 

Price targets are sticky on the downside.  Price targets typically increase over time.  If an analyst used a P/E ratio to set a price target, the price target would increase each year, assuming the company is growing earnings.  Occasionally, company fundamentals or other factors deteriorate, causing an analyst to lower high price targets.  This is certainly true in situations where a company makes a major negative announcement.  It is less true when a company’s fundamentals deteriorate slowly.  It is not unusual for an analyst’s price target to become outdated under such a scenario.

Conclusion

Price targets are a second tool (in addition to a stock’s rating) for analysts to communicate feelings about a stock’s value.  Price targets can become outdated when a stock’s price moves quickly.  However, that does not mean it is not important.  Investors and traders need to be cognizant of the limitations of using price targets for making investment decisions when making decisions regarding buying and selling stocks.  Price target changes may provide more information that the price target level.  Often, the magnitude of the change or the reasons behind the change tell a more complete picture.

Suggested Reading:

Investors Should Pay More Attention to ATM Offerings

Investment Journalists Would Make Horrific Fund Managers

Fear of Missing Out on the Next Apple

Enjoy Premium Channelchek Content at No Cost

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

Sources:

https://www.barrons.com/articles/wall-street-analyst-stock-price-targets-51561597085, Al Root, Barron’s, June 27, 2019

https://realmoney.thestreet.com/articles/08/03/2013/why-price-targets-matter, James Deporre, Real Money, August 3, 2013

https://www.theglobeandmail.com/globe-investor/investor-education/what-every-investor-should-know-about-analysts-price-targets/article627565/, John Heinzl, The Globe and Mail, March 29, 2012

https://financialpost.com/investing/analysts-target-prices-rarely-accurate-global-study-finds#:~:text=%E2%80%9CWe%20find%20that%20analyst%20target,subject%20to%20conflicts%20of%20interest.%E2%80%9D, David Pett, Financial Post, March 07, 2013

https://www.finra.org/rules-guidance/rulebooks/finra-rules/2241, FINRA

https://osboncapital.com/price-targets-are-obsolete-why-are-they-still-a-thing/, John Osbon, Osbon Capital Management, September 12, 2018

 

SPAC Candidates, Blank Checks, and Leaving More to Investors

Former House Speaker Paul Ryan knows a lot about being a candidate. The former Speaker of The House was Mitt Romney’s vice-presidential running mate. He won elections for The House of Representatives eight times by defeating challenger Jeffrey C. Thomas in 2000, 2002, 2004, and 2006 elections. In the 2008 election, Ryan defeated Democrat Marge Krupp. He just announced he’s creating a special purpose acquisition company (SPAC). The IPO shell will be among the latest in the torrent of SPACS popping up this year. Paul Ryan will soon be aggressively looking for an acquisition candidate as part of his newly formed business.

 

Organization of the SPAC

Ryan is expected to serve as chairman of the soon to be formed Executive Network Partnering Corp. (ENPC).  ENPC will look to attract roughly $300 million in an initial public offering (based on demand).

 

The new vehicle’s ticker symbol will be ENPC. Relative to traditional shell IPO vehicles, ENPC will provide longer-term incentives for its stakeholders and scaled-down fees for underwriters. Founders of ENPC won’t be permitted to sell any of their shares for three years after any merger. Similar vehicles allow for sale when shares trade above a certain level or after a year from closing.

 

SEC Filing

ENPC is expected to file documents with the Securities and Exchange Commission in the coming days. This filing will outline the structure specifics. They’ve chosen the acronym CAPS to refer to the vehicle whose terms are supposed to be more investor-focused. The underlying reason for choosing “CAPS” is it is a palindrome for SPAC and can mean “capital which aligns and partners with a sponsor.”

 

 

More Competitive

Management competence and what their experience brings to getting a worthwhile deal completed is the main component investors look for when investing in this form of IPO. Terms are also high on the list of what should be analyzed before any monetary commitment.

 

Typically, SPAC founders are awarded shares equivalent to roughly 25% of what is raised when the initial IPO closes. As you might imagine, that becomes an above-average payday for their efforts. Under the expected ENPC terms, Ryan and the other creators will have the right to buy roughly 5% of the shares and then reap another 20% of the stock appreciation if share price increases by more than 10%.

 

They also plan to slash fees to Wall Street banking organizations. Evercore Inc. is the sole underwriter of the blank-check fund. They agreed to be paid 1% of the size of the vehicle; this is half of the usual 2% upfront of other SPACs. When a merger deal is struck, the same underwriters typically receive another 3.5%. With Paul Ryan’s SPAC, Evercore will get a separate, smaller advisory payment. ENPC is free to work with other advisers on any subsequent merger deal.

 

 

The Year of the SPAC

So far, in 2020, 75 new SPACs have been listed, with a total raised adding to $29.9 billion.  This is more than twice what was raised during all of last year. There is no telling when or why this pace may begin to slow, but over the past eight months, SPACs have already attained the highest volume ever in one year.  They have accounted for approximately 43% of IPO volume in 2020.

 

Earlier this Summer hedge fund billionaire William Ackman raised $4 billion for the largest SPAC ever created.  Last month, health-care-services provider MultiPlan, Inc. announced it was merging with a blank-check company run by Michael Klein in the largest transaction ever at $11 billion.  

 

Take-Away

The appetite for investors eligible to participate in a SPAC is still very high. The sheer number of “blank check” companies being formed is starting to push their founders to provide more to investors and negotiate better deals with banks and other service providers and consultants. “Big names,” including Paul Ryan, who sits on the board of FOX Corp., which owns The Wall Street Journal and other large media outlets, help bring attention to their intended deals.

 

Suggested Reading:

Special Purpose Acquisition Corporations (SPAC) Attracting Investors

Can AI Skyborg Technology Create Unpredictable Yet Consistent Military Aircraft?

Are Dual Class Stocks a Mistake for Investors?

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

Will 2020 Go Down as the Year of the SPAC?

https://en.wikipedia.org/wiki/Paul_Ryan

Paul Ryan Becomes Board Member of FOX News Corp.

Former
House Speaker Ryan to Chair Blank Check Company

Wall Street Banks Are Cashing in on the Boom in Blank-Check Companies

 

 

Investing, Gambling, and Trading (Which are you Doing?)

 

“Oh, that’s gambling,” my mom said. We were talking about an investment I recommended to her two months earlier. She had followed my recommendation to purchase the security, which closely follows gold prices. It went up. In fact, I checked it while on the call and saw it was up 13.7%. The last time I had a conversation with my mom, it was even higher at 19.2%. Gold then retraced a bit after its strong run. For those that pay attention to these markets, the recent dip was not unexpected. I was happy with the position, mom was confused. “Why didn’t you have me sell it,” she asked?”

 

I had recommended the security purchase as an investment, not as a trade. The added diversity it brought to my parent’s portfolio, and perceived downside risk was why I suggested it. Those elements hadn’t changed. It still represents a good position relative to all the factors that went into this decision for them. Additionally, in my mind, there is no asset with a more compelling story that I’d replace it with right now, including cash. Especially considering the joint account owners are both in their eighties. As an investment, there is always a risk of loss, but it is not a gamble in the way rolling dice is. I should mention that the position wasn’t put on as a trading play. There have been and will be future transactions (trades) involved, but we weren’t trading this stock, they are invested in it. After all, these are retirement assets.

 

Today, many people use the terms investing and trading interchangeably. They’re both different activities and gambling is completely separate from each of them. There is a bit of overlap. All three seek to increase wealth. Two try to increase wealth by price movement, these two are investing and trading, they are not the same and require different skills and knowledge.

 

Investing

Accumulated capital that has been allocated to assets with the intent of growth and producing profit is financial investing. The return on investment is generally expected to come from income or price appreciation. The expectation of a return over time in excess of the initial outlay is key to investments. At times this return will be positive; if the investment goes as expected, the return can, of course, also be negative. Seldom will it be unchanged.

 

There is risk with investing. This risk is commonly linked with potential rewards and is measured against a time horizon.  Using real estate as an example, before purchasing an investment property, the investor may try to determine what the risk is that the property sits unrented, what is the risk of the value declining, what are the risks that cost of ownership increases beyond expected rental income, etc.. Investments in stocks, bonds, and funds have their own sets of risks. The primary investment risk is, “what if the investment is worth less than the cost at the time when I anticipate using the money for non-investment purposes.” Within that risk are all the nuances driving the market up and down, the impact of all the elements affecting the sector, and the time you will hold the investment. There is also the consideration of the universe of other options and which would create the best risk-adjusted return over the expected holding period.

 

Maximizing return at the end of the holding period should be the primary goal of investors. If they find themselves in the position, as many gold investors just did, where the asset jumps 10-20%, it then deserves to be reevaluated with the question, “Is there now a better place for this capital?” This is the same for investments that are not performing or underperforming. Part of investing is looking at nonperforming and holdings that are underwater and asking if it is still the best place for the capital. Seeking return by evaluating holdings, understanding alternatives to each holding, and working to maximize risk-adjusted return is investing.

 

Trading

More frequent transactions, such as the buying and selling of stocks, commodities, or even flipping houses, fall under the category of trading. The trader could be using the same vehicles as the investor to attempt to increase wealth. But the decision to buy has a limit in that they are looking for quick short-term moves in the asset. Traders of stock, commodities, and real estate are looking for these faster price moves with a goal of returns that outperform buy-and-hold investing. The skill includes awareness that the money committed is not an investment; it is instead the most important tool to generate income. The “tool” needs to be protected through risk management. A trader without money is no longer a trader; they are out of business. This is one reason a good trader has a time horizon – a bad trade should never become a long-term investment.

 

High-frequency traders look to earn incrementally over many trades during the course of the day.  They have a plan to manage the winners to exceed the losers in dollars they generate. Low-frequency traders may monitor the market for long periods of time before uncovering a setup they believe fits their description of a high probability trade.

Trading can potentially return much more than investing. Deciding when investments are most likely to move, rather than ride ups and downs, is often from a series of calculated speculations which fit a tested methodology of that trader. The trader, like the investor, has to be aware of changes that increase risk without adequate reward adjustment when comparing one trade over another.

 

Gambling

Wagering, betting or gambling, means risking money on an event that has an uncertain outcome and relies more on chance than does investing or trading. One big difference from investing is that gambling very often has a known outcome probability, both direction, and magnitude. These are called odds (50/50, 1,000,000/1, etc.). There are no firm odds for investors or traders. There could be a history of performance, but no mathematical outcomes that all participants are subject to.

Investors and traders, like the gambler, may also benefit from luck, but when done right, trading and investment decisions are based on expectations that don’t in any way include chance.

 

Take-Away

Whether you’re investing, gambling, or trading, it is important to have a plan. The plan should involve money management skills. For the investor, they should seek to move into another position when their holdings no-longer offer the best risk-adjusted return expectation. Traders should execute when the trade needs to be entered or exited. Win or lose, money management is key to a trader’s survival. Without capital, there is no trading, that would put them out of business. This can be said of gambling as well. Professional gamblers are able to continue only as long as they have money in which to play their game of choice. The average person that gambles by purchasing a lottery ticket is spending a few bucks, writing off the entry fee almost immediately as they spend it. They’ve purchased a fantasy that can last until they check their success. A raffle ticket, lottery, or spin of the wheel at a Church picnic is viewed as a donation. There are few who view their own gambling as investing and trading. Alternatively, there are many who transact with brokerage accounts acting on hunches and guesses who are leaving too much to chance. Successful investors and traders are more deliberate, more methodical. Hunches are not part of their evaluation.

 

As an aside, the account my mom spoke to me about is an investment account. She is going to hold onto her gold position until something else makes more sense to replace it.  She is not a trader. However, her gambling luck is top-notch. Last year she won a $50,000 Mercedes in a Church raffle.  Perhaps her exclaiming “that’s gambling” was intended as a positive.

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Contango, ETFs, and Alligators

Trading vs Investing vs
Tomorrow

Millennials Could Use Help With
Investing

 

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Stocktwits

Actively Managed Funds are No Guarantee for Beating the Market

 

According to Dimensional Fund Advisors, while the types of businesses most prominent in the market vary through time, the fact that a small subset of companies’ stocks account for an outsized portion of the stock market is not new. Given the difficulty of predicting which companies will outperform or underperform supports the importance of having a broadly diversified portfolio.  Are individual stocks or index funds the best path for gaining exposure to the market?

 

The Case for Index Funds:

Index funds offer a low cost means for diversified exposure to the market or segments of the market. Index funds help minimize company-specific risk that can dent returns. During the March 2020 market sell-off, many individual stocks performed substantially worse than the S&P 500 index, including those vulnerable to travel restrictions and social distancing, including cruise lines, airlines, and hotel chains and experienced a slower recovery as the market rebounded. The main argument against owning an index fund is the inability to outperform the market. However, the broader market has provided respectable returns over time. For example, during the period January 1970 through June 2020, the S&P 500 annualized return with dividends reinvested was 10.4%. Excluding dividend reinvestment, the annualized return was 7.3%.

 

The Case for Individual Stocks:

Owning individual stocks can be a good choice for investors with ample funds and the ability to own enough equities across industries to be appropriately diversified. Due to low trading costs, a portfolio of individual stocks can be bought at relatively low cost, and the investor can easily track what he/she owns, dividends received, and can vote their shares on company matters. However, there is still the issue of monitoring holdings, rebalancing when appropriate, and staying up to date on market trends and/or company developments. Importantly, for investors that have time to make informed choices, there is the potential to outperform the market or spot that next Apple, Amazon, or Facebook that will accelerate the path to wealth.

 

The Take-Away

Investors should choose investments that are appropriate based on return objectives and risk tolerance. This likely encompasses a mix of active and/or passive funds, individual company equities and/or other asset classes. While actively managed funds can be a great option for certain strategies, S&P Global Indices found that many actively funds underperform their respective benchmarks. Because actively managed funds are by nature constrained from owning broader benchmarks, they risk missing out on the stocks that drive broader market returns. As a result, many investors may elect to own individual stocks at relatively low cost for the actively managed portion of their portfolios. Selecting a subset of individual micro or small-cap stocks for a portfolio that may include large cap index funds for broad market exposure and diversification, may offer more opportunity to capture alpha due to smaller cap companies being underfollowed by the analyst community and the potential for higher growth. For micro and small cap investors, www.ChannelChek.com may be an excellent resource for generating investment ideas.  

 

Investors Should Pay More Attention to ATM Offerings

Trading vs Investing vs Tomorrow

Channelchek Experiences Meteoric Activity Increase

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

Large and In Charge? Giant Firms atop Market Is Nothing New, Dimensional Perspectives, Dimensional Fund Advisors, 2020.

Index Funds vs. Individual Stocks: What Does the Coronavirus Market Collapse Teach Us
About Both Investing Strategies?, USA Today, Adam Shell, March 23, 2020.

S&P 500 Return Calculator, with Dividend Reinvestment, DQYDJ, 2020

SPIVA U.S. Year-End 2019 Scorecard: Active Funds Continued to Lag, S&P Global, S&P Dow Jones Indices, Berlinda Liu, April 8, 2020.

Capital Raises by ATM Equity Offerings, Combined with Good Stewardship, Can Serve Companies and Investors

An at-the-market (ATM) offering is a type of follow-on offering of stock used by publicly traded companies to raise capital over time. Under a typical ATM offering program, a listed company incrementally sells newly issued shares on the exchange through a designated broker-dealer at prevailing market prices rather than employing a traditional underwritten offering at a fixed price.

According to Bloomberg Law, 79 ATMs were completed in the first quarter of 2020 representing proceeds of $10.1 billion.  In 2019, 266 ATM offerings raised over $31 billion.  The chart below summarizes ATM offerings on U.S. Exchanges from 2014 through the first quarter of 2020.

 

Advantages:

Greater control – A company has more control over the timing of sales, the amount and the price received. Additionally, a company can more precisely match the sources and uses of funds.

Less disruptive to the stock price – Unlike a managed public offering, ATMs are less disruptive to the stock price because sales are limited to a specific percentage of trading volume and mask the seller.  Additionally, selling shares into the existing trading market can result in a lower cost of capital relative to other financing alternatives where the shares are sold at a discount.

Can be set up quickly – Generally, ATM offering programs can be implemented in relatively quickly for issuers that are eligible to use a short form S-3 registration statement and have an effective shelf registration statement.

Disadvantages:

ATMs may be used indiscriminately – Given their ease, managements may use ATM offerings to raise capital indiscriminately and cause dilution to existing shareholders.

Investors may be unaware – Unlike a public offering that may be more visible to investors, shareholders need to pay attention to filings, such as the Form 10-Q, to be aware of the company’s intention to use an ATM offering program and to track shares issued under the program.  

Not suited for lump sum capital raises – Because sales are limited to s certain percentage of daily trading volume, ATMs are best suited for raising capital over time and not suited for raising large amounts of capital in a short time frame.

The Take-Away

ATM programs can be an effective tool for management to use for managing working capital needs and raising capital in advance to fund specific capital projects. However, management teams should use ATM programs effectively and efficiently to avoid unnecessary shareholder dilution.  Investors should also pay attention to company filings to monitor such programs and assess whether management teams are good stewards of capital.  

Suggested Reading:

Will 2020 Go Down at The Year of the SPAC

Will there be an
Explosion of New Acquisitions?

Can the Market
Continue to Defy Gravity?

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Channelchek Content at No Cost

Sources:

At the Market Offerings Raising Equity Capital in Volatile Markets, Goodwin Law, December 29, 2008.

Analysis:
At-the-Market Offerings Trend Upward in Q1 2020, Bloomberg Law, Preston Brewer, April 10, 2020.

At-the-Market
Offerings, Journal of Financial and Quantitative Analysis, Vol. 54, No. 3, Matthew T. Billett, Ioannis V. Floros, and Jon A. Garfinkel, June 2019.

 

 

About Virtual Investor Day 2020

 

Welcome to the inaugural Virtual Investor Day Conference (VID) – a conference that is focused on you, the investor!

Jointly hosted by Follow the Money Investor Group and IR.INC Capital Markets Advisory, and sponsored by Noble Capital Markets, VID is a two-day, invitation-only event featuring nine resource-focused public companies that have recently attracted market attention.

VID differentiates itself by offering our featured companies an opportunity to meaningfully share their story with you. Featured companies will present a full 30 minutes in order to better outline their investment opportunity, and we will provide you, the investor, 15 – 20 minutes to ask live follow up questions after each presentation.

During VID, you will have the chance to interact with other investors and we encourage you to engage and take part in the numerous polls and other features that will be live during the conference.

In these turbulent times, characterized by uncertain global economies and significant central bank stimulus, many people are perhaps feeling unsure about how to manage both the opportunities and risks that are being presented . To that end, we have three guests joining us to speak on this exact topic:

Frank Holmes, CEO of US Global Investors

Nico Pronk, CEO of Noble Capital Markets

Rick Rule, CEO of Sprott US Holdings.

See you at Virtual Investor Day on August 11th and 12th!

 

Meet The Presenters

Rick Rule Rick Rule has devoted over 35 years to natural resource investing. His involvement in the sector is as broad as it is long; his background includes mineral exploration, oil & gas exploration and production, water, agriculture, and hydro-electric and geothermal energy. Mr. Rule is a sought-after speaker at industry conferences, and a frequent contributor to numerous media outlets including CNBC, Fox Business News, and BNN. He founded Global Resource Investments in 1993 and is now a Senior Managing Director of Sprott, Inc., a Toronto-based investment manager; and CEO and President of Sprott US Holdings, Inc., where he leads a team of skilled earth science and finance professionals who enjoy a worldwide reputation for resource investing. Sprott U.S. Holdings Inc. is a holding company made up of three separate and distinct companies: Sprott Global Resource Investments Ltd., a FINRA Registered Broker/Dealer; Sprott Asset Management USA, Inc., an SEC Registered Investment Adviser offering managed accounts; and Resource Capital Investment Corp., an SEC Registered Investment Adviser that manages Limited Partnerships. These three companies make up the U.S. Subsidiaries of Sprott Inc., and are active in securities brokerage, segregated account money management and investment partnership management involving both equity and debt instruments, across the entire spectrum of the natural resource industry. Trey Wasser Mr. Trey Wasser, brings over 33 years of experience in capital markets, brokerage and venture capital structures, and has specialized in equity/debt re-structuring and cash management. He was a corporate finance specialist with Merrill Lynch, Kidder Peabody and Paine Webber. He is the President, founder and Director of Research for Pilot Point Partners LLC and is the founder of Due Diligence Tours organizing analyst tours to hundreds of mining properties in North America.

Virtual Investor Day Sessions

Keynote Speaker Frank Holmes – CEO/CIO US Global Investors Tuesday August 11th @ 10:00 AM Eastern

Feature Company Day 1 – Presentation Ely Gold Royalties Tuesday August 11th @ 10:30 AM Eastern

Feature Company Day 1 – Presentation Chakana Copper Tuesday August 11th @ 11:30 AM Eastern

Feature Company Day 1 – Presentation Golden Predator Tuesday August 11th @ 12:30 PM Eastern

Feature Company Day 1 – Presentation Warrior Gold Tuesday August 11th @ 1:30 PM Eastern

Feature Company Day 1 – Presentation Palladium One Mining Tuesday August 11th @ 2:30 PM Eastern

Keynote Speaker Guest Speaker: Nico Pronk – Noble Capital Markets Wed August 12th @ 10:00 AM Eastern

Feature Company Day 2 – Presentation Blackrock Gold Presentation Wed August 12th @ 10:30 AM Eastern

Feature Company Day 2 – Presentation Jaguar Mining Presentation Wed August 12th @ 11:30 AM Eastern

Feature Company Day 2 – Presentation Regulus Resources Presentation Wed August 12th @ 12:30 PM Eastern

Feature Company Day 2 – Presentation Comstock Mining Presentation Wed August 12th @ 1:30 PM Eastern

Keynote Speaker Closing Speaker Day 2 Wed August 12th @ 2:30 PM Eastern

 

Disclaimer

Follow the Money Investor (“FTMIG”) is an online investor community that connects investors and public companies. Both FTMIG and IR.INC are not registered as a broker, dealer, exempt market dealer, or any other registrant in any securities regulatory jurisdiction and will not be performing any registerable activity as defined by the applicable regulatory bodies.

Both FTMIG and IR.INC and their affiliates do not endorse or recommend any securities issued by any companies identified on, or linked through, this conference. Please seek professional advice to evaluate specific securities or other content discussed during this event. Links, if any, to third party sites are for informational purposes only, and not for trading purposes. FTMIG and IR.INC. and their affiliates have not prepared, reviewed or updated any content on third party sites and assume no responsibility for the information posted on them.

What’s Moving the Market: Explained in Three Charts –  Part 2

The market continues to rise despite the negative impact of a pandemic and remediation efforts that have slowed down the economy.  In an article written on June 5, 2020, What’s Moving the Market: Explained in Three Graphs – Part 1, we explained the rise in three graphs.  The first graph showed a significant jump in personal income in April related to the government stimulus.  The second graph showed a large spike in personal savings in April as home-bound consumers decided to invest the money instead of spending it.  The third showed the increased weighting that a handful of tech stocks are having on the major indices implying that the market movement is due the success of a few companies that are less affected by the pandemic and not a broad-based representation of the economy.  These three trends witnessed in April have continued into the summer months.  But there is more to the story, as explained in the next three graphs.

Reason #1 – Retail investors have become active participants in the stock market. 

Households have been taking their stimulus money and putting it directly into the stock market.  Joe Mecane, the head of execution services at Citadel Securities, said that retail investors make up 20% of the market currently, up from 10% in 2019.  Retail online brokerages such as E-Trade, TDAmeritrade, and Charles Schwab have reported robust business activity in recent months in response to the stimulus and the erasing of commission fees.  The activity has created a FOMO (fear of missing out) among retail investors, which serves to push the share of retail-favored stocks even higher.  Goldman Sachs shows this outperformance graphically in the chart below.

Reason #2 – Investors have nowhere else to go

Valuation multiples have climbed as management and analysts lower expectations for 2020.  True, investors may be looking beyond 2020, expecting a strong rebound in 2021.  Still, multiples of 2021 results are high relative to historical levels.  So why do stock prices keep rising? Frankly, there is nowhere else for investors to put their money.  Bank deposits offer little return.  Government bonds, as shown in the graph below, provide returns below 0.5% unless you go out past ten years.

 

Reason #3 – Earnings reports for the second quarter are coming in above depressed expectations

It’s early in the reporting season, but results are generally surpassing expectations at a higher rate than we have seen in past quarters.  This may reflect increased caution by management and analysts given uncertainty.  Nevertheless, better-than-expected results will lead to higher expectations for future quarters.  John Butters of Factset provides the below scorecard for S&P 500 companies who have reported second-quarter results:

 

The three graphs presented above help explain why the market continues to rise.  However, they do not offer much insight into whether the market will continue to rise in the future.  There are just too many unknowns.  Will the stimulus that put money in investor pockets be extended? How will retail investors react when the market faces a downturn? Have management and analysts overestimated the downside of the pandemic, or were they just being overly cautious?  Only time will tell.

 

Suggested Reading:

What’s Moving the Market: Explained in Three Graphs – Part 1

Equity Markets Give a Lesson in Behavioral Psychology

Copying the Brightest Investment Ideas

Enjoy Premium Channelchek Content at No Cost

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

Sources:

https://financialpost.com/investing/how-the-new-retail-investor-mania-is-changing-the-stock-market-game, Victor Ferreira, Financial Post, July 06, 2020

https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_072420.pdf, John Butters, Factset, July 24, 2020

https://markets.businessinsider.com/news/stocks/retail-investors-quarter-of-stock-market-coronavirus-volatility-trading-citadel-2020-7-1029382035#, Ben Winck, Markets Insider, July 9, 2020

Special Purpose Acquisition Corporations (SPAC) Attracting Investors

“So, we’re looking to marry a unicorn. So we’re prettying ourselves up for the most attractive possible partner…” – Bill Ackman, July 22, 2020

 

On July 21, Pershing Square Tontine Holdings raised $4 billion by offering 200 million units at $20 per share in the largest IPO of a special purpose acquisition corporation (SPAC). Several high-profile companies, including Nikola, Fisker, and DraftKings, agreed to merge with a SPAC as a means of going public instead of pursuing their own initial public offerings. According to SPACInsider, 59 SPAC IPOs raised $13.6 billion in 2019 with an average IPO size of $230.5 million. In 2020, 50 SPACs have gone public that raised $19.0 billion with an average IPO size of $380.1 million. During the period 2009 through 2020, there have been 274 IPOs that raised $65.7 billion.

What is a SPAC?

A special purpose acquisition corporation (SPAC), also known as a blank check company, is generally sponsored by an investor (i.e., Pershing Square Capital Management) and/or a management team and raises capital in an initial public offering (IPO) with the intention of completing an unidentified acquisition that meets the SPAC’s investment objective. The IPO proceeds are held in trust that can only be accessed to consummate an acquisition. If the SPAC does not complete an acquisition within a specified time frame, it must liquidate and return the trust proceeds to its stockholders. Once the SPAC finds a company to acquire, investors have the choice of staying invested in the SPAC or redeeming their shares, if they do not like the transaction, for the amount for which they were acquired.

The Rationale

SPACs offer an alternative to a traditional initial public offering as a way for companies to go public. For some companies, it may be difficult to go public due to size, lack of investor interest, or a challenging IPO environment. Some companies in a “hot” sector may chafe at the prospect of their stock price taking off after a traditional initial public offering meaning that they might have left too much money on the table. For some, merging with a SPAC may offer a less costly and/or burdensome means of going public. Importantly, SPACs offer an alternative for private equity and/or venture capital firms to exit their investments. Because sponsors include providers of private equity, some may view it as a sign of asset managers’ growing influence in the capital markets.

The Take-Away

Judging from the data below provided by SPACInsider, the number of special purpose acquisition corporation IPOs accelerated in 2017.

Source: SPACInsider and Noble Capital Markets

With no shortage of private companies capitalized by private equity and venture capital firms, coupled with well-recognized sponsors like Apollo Global Management and Pershing Square Capital Management launching successful SPAC IPOs, it is likely the trend may continue.

 

Suggested Reading:

Will Broadcast Mergers and Acquisitions Surge?

Will there be an Explosion of New Acquisitions?

Can the Market Continue to Defy Gravity?

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Sources:

Bill Ackman and Tontine Holdings Rewrite the Terms for SPACs, CNBC, Kenneth Squire, July 22, 2020.

Nikola and DraftKings Stock Started As ‘SPACs.’ What Investors Need to Know, Barron’s, June 22, 2020.

SPAC IPO Transactions – Summary by Year, SPACInsider, July 2020.

Go SPAC Yourself, Techcrunch, Alex Wilhelm, July 22, 2020.

Bill Ackman’s blank-check acquisition company to begin trading on Wednesday after Raising up to $4 billion, Markets Insider, Ben Winck, July 21, 2020.

SPAC-and-Span: A Clean Exit?, Harvard Law School Forum on Corporate Governance, Carol Anne Huff, Daniel Wolf, Kirkland Ellis, July 9, 2015.

Electric Car Maker Fisker to Go Public Through SPAC Deal at $2.9 Billion Valuation, Reuters, Ben Klayman, July 13, 2020.

Big Blank Checks, The New York Times, Dealbook Newsletter, July 14, 2020.

Ackman-backed Blank Check Company’s Units Rise in NYSE Debut, Reuters, C. Nivedita and Joshua Franklin, July 22, 2020.