Momentum Red: Don’t Just Blame Snapchat

Snapchat

Today, Barron’s stepped in to offer some insight into the state of Tesla (TSLA) stock, which fell to $628.16, an 11-month low. Blame Snapchat. Snap Inc. (SNAP) – the parent company of the social media platform that still makes no sense to me – plunged by roughly 43% Tuesday – and blamed the “macroeconomic environment” for its downturn.

Sure, a second-tier social media platform like Snapchat is responsible for an overvalued Tesla’s downturn in the middle of a massive selloff. But, do go on, Barron’s. I’ll tell you why Tesla stock is falling. It’s not complicated.

Valuation Matters

Over the last two years, we’ve witnessed an incredible surge in stocks with no earthly business reaching nosebleed valuations. Datadog (DDOG), CrowdStrike (CRWD), Zoom Video Communications (ZM), and dozens of other technology and communications firms traded at 20 times revenue or higher. 

In a market where interest rates are zero and the Federal Reserve has dropped $5 trillion from the sky, valuations do not matter. But they DO matter when interest rates rise, and concerns about economic growth accelerate. Snapchat’s downturn on Tuesday was driven largely by a massive shift in advertising spending and weak growth. 

The company blamed the macroeconomic environment, and digital advertising stocks spiraled lower. Of the 644 companies that hit 52-week lows today, 11 were advertising firms. I eye this list every day of weak stocks because that trend will likely continue, especially as valuation compression continues.

For those new to Haven Investment Letter, valuation compression is a situation where a company’s multiples like price-to-sales, price-to-earnings, and EV-to-EBIT drop because investors aren’t willing to pay more money for the same expected returns. When growth slows and forecasts slump, valuations typically contract. 

If Not Snapchat, Where Does The Blame Fall?

Valuation compression is the real story in this market. Not Snapchat. Tesla might be the most innovative company on the planet. But should investors be willing to pay 10.9 times revenue or a price-to-sales of 91.2 for the right to own it? Not in this macroeconomic environment and NOT in an arena where investors are too caught up in the company’s battle over electric vehicles – which are VERY expensive. 

Several analysts price Tesla’s stock in the $140 range. They’ve been wrong for so long because the Federal Reserve largely propped up this market with cheap money, distorted valuations, distorted the economy, and created conditions where valuation did not matter. 

It matters. If Tesla traded at the P/E ratio of Ford Motor Company (F), shares would be in the $32 range. But, of course, investors ARE willing to pay more right now for earnings because they anticipate rampant future growth. In a negative momentum environment, Tesla has a BIG downside. 

The Federal Reserve hasn’t even started to drain liquidity from the market. The central bank will begin its Quantitative Tightening operations on June 1. Given that the Fed owns 25% of all Treasury Bonds, there could still be a lot of volatility and selling. Therefore, I am not ready to call a bottom on this market before June 1. 

And based on the fact that the Fed doesn’t end this program until September – while raising interest rates – this summer could be even more difficult for the Dow Jones, S&P 500, and the Russell 2000. And, of course, the Nasdaq 100 still has a lot of price discovery left.

What Is Working

Again, every day I go to Finviz. I set a screener then I look at 52-week highs and 52-week lows. I don’t get caught up on individual stocks. Instead, I focus on the sectors. This selloff screams that a recession is coming. Across various sectors, pain is accelerating as purse-tightening preludes it. 

Retail is getting crushed. Biotech is fading faster each week as investors pile out of speculative positions. As a result, the asset management industry is shedding clients and profits. 

Residential construction is plunging. Software applications are contracting at a massive pace. And travel services are facing new challenges. My goodness, Garrett… Is anything working?

The new highs continue to focus on things that we NEED in this world. Oil and gas exploration, oil refining, marine shipping, agricultural seeds, and regulated utilities. 

This isn’t hard to put together. Our economy is weakening, consumers are focused on what they need and not what they want. There is a significant rotation of capital happening RIGHT NOW. Washington might not see it. But we are investing in reality. Food, energy, inexpensive consumer defensives, and keeping the lights on.

It might be a long summer. But know that 36 U.S.-based companies hit their 52-week high today. About 290 are within 3% of their new highs. Opportunity exists. Just follow the money and the trends. I’ll talk tomorrow about another major trend that can benefit you. Mergers in a bear market.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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