It’s time for some perspective.
Overnight, US stocks rallied on better-than-expected employment numbers. The US economy created 4.8 million new jobs in June.
Buy, buy, buy!
COVID-19 destroyed 22 million jobs in March and April. There are still 14 million more unemployed people in the US than there was in February.
The fact is, the stock market went up because there is a torrent of central bank-created liquidity having a punt and looking for a home.
Finance journos are just scratching around for a story, looking for some sane way to connect the economy and the stock market.
Don’t be fooled.
This is a good old liquidity-driven melt-up
Let’s have a look at a few stocks to make my point…
Tesla Inc [NASDAQ:TSLA] has surged 200% since its March low (see chart). That may seem modest by the standards of an insane market…but Tesla is not a minnow.
It now has a market cap around US$225 billion, or US$1,209 per share. Forecast sales revenue and earnings for FY20 are around US$27 billion and 27 cents per share respectively.
On these numbers Tesla trades on a revenue multiple of 8.3 times and an earnings multiple of…wait for it…4,482 times.
But I’m being unfair. Earnings are forecast to surge in FY21 to $8.59 per share. That puts in on a far more respectable earnings multiple of 141 times.
Let me put this absurdity another way.
In FY21, if Tesla hits its earnings forecasts, it will generate a return on equity of 19.5%. Sounds pretty good right?
Except you have to pay nearly 17 times the forecast equity value in FY21 to get that return. (Tesla trades on a price-to-book multiple of 16.7 times.)
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What does that mean?
Well, if you’re a business owner taking a longer-term view, you’re locking yourself into a shockingly low return. 19.5% divided by 16.7 = 1.16%. Throw in a bit extra for compounding and you might get close to 1.5%.
Translation: People buying Tesla here are idiots.
But it gets better.
Have you heard of Nikola Corp [NASDAQ:NKLA]? It’s also in the electric battery, hydrogen fuel game, with a focus on pick-up trucks. There are no stats to offer you here, because there are no earnings.
But after a 450% surge from the March lows (which was more than 650% at one point, the stock has come off a bit) Nikola now has a market value of nearly US$24 billion.
And as yet, no earnings.
But these extreme valuations aren’t just confined to the US market.
The ASX has a few world-class representatives.
Let’s have a look at the beast: Afterpay Ltd [ASX:APT].
This Aussie champion has a market value of around $18.3 billion.
It doesn’t have any earnings yet either. But it is expected to generate earnings in FY22, with a forecast of 18 cents per share. That puts it on a PE multiple of 389 times.
That sounds crazy. And it probably is.
But, a caveat…
Central banks are that beast
Companies with new business models will always look expensive. That’s because they need to build a business before they can start generating meaningful earnings.
So what you want to focus on is revenue growth. That will tell you if the business is growing at a decent clip.
And for APT, it is.
In 2017, revenue was around $23 million. In FY21, it’s forecast to hit $758 million, up 60% on FY20.
If it achieves that forecast, that’s very strong growth.
But is it enough to justify the price tag?
Whichever way you cut it, $18 billion is a lot to pay for a company not forecast to crack a billion in sales until FY22.
The problem for companies that are priced like this is that they cannot afford ANY slip ups. Any disappointment in growth will be severely punished.
The market has no such issues now though.
The chart below shows that APT has rallied an incredible 665.84% since the March low. Let’s make it 666%…
The mark of the beast.
Whether that turns out to be a bad omen or not, I don’t know.
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But it is a reminder of the old saying, ‘the road to hell is paved with good intentions’.
By bailing everyone out, by making sure no one falters, central banks have created the worst moral hazard markets have ever seen.
Fundamentals don’t matter in this market. It is completely divorced from reality. Yet if you decide you don’t want to play, what do you do? Sit in cash and watch the fruits of your labour deliberately and ruthlessly devalued for the good of ‘everyone’?
The mark of the beast indeed. Central banks are that beast. And they will end up destroying us.