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Monday Roundup: 10/04/2021

I'm trying to see how I can provide more value for freemium users so I'm going to start providing short roundup thoughts in a random fashion. My goal here isn't to necessarily write a blog on direct company subject matter, but rather to get some thoughts and strategies out there as certain events merit. Today, with the markets selling off hard, it's a great place to begin, as there are definitely drivers, and things to think about.


At today's close, the Ten-Year Note is up 61.5% in 2021. This has been a reoccurring theme where inflation has been attributed with the "rotation" from growth to value being justified. In fact, many have become supportive of value outperforming growth stocks in 2021 and over the short-term.


First, what is the definition of value? Value investing is typically defined as picking stocks that appear to be trading for less than their intrinsic or book value. This can be any company in the world, but usually, value-based companies are not afforded their worth appropriately for various reasons. A great example is the energy sector, companies like Chevron Corp. (CVX) are discounted as the expectation is that oil will transition to newer energy technologies. Chevron's ability to become a part of this transition, while loosing its core Revenue stream leads to a discount on future uncertainty.


Another example of value are stocks like consumer staples where lower inflation has depressed their ability to grow Revenue and expand margins. The main thing to consider here is that there is some rationale for why a company is discounted and a perceived opportunity to unlock that discount.


For growth, especially aggressive growth, the opposite is true. It is very rare to get a highly discounted price for a stock that is witnessing substantial Revenue growth. The problem today is that many have forgotten that Cash Flow is the true valuation metric that needs to be considered for the growth multiple. This is why companies like Confluent, Inc. (CFLT) and Monday (MNDY) trading 50-62 times EV/Revenue without any Cash Flow are primed for a steep correction.


But what is interesting, is that a lot of mainstream media is focused on a perception that they feel is warranted - that there should be a rotation from growth to value justified by rising inflation. This can be debunked easily with the chart below.

Before the Ten-Year developed into an inverse relationship of performance against the NASDAQ, S&P 500 and Dow Jones Industrials, from late 2016 through the inverse point, all three major indices performed quite well with inflation leading the charge. The NASDAQ as a direct example of higher growth stocks, returned 55% over a roughly 22-month span and before a brief pause into 2019.


Since the inflection point, near mid-July 2019, the NASDAQ has returned nearly 60%, outperforming the prior similar period - but not by much difference here over the past five years as one would think. If there was such an extreme divergence where the NASDAQ had performed say, 80-110%, then it would make perfect sense to see a steep drop back to a more normalized relationship.


Of course as of today, the NASDAQ is up another 10% from the defined prior period example, and there has been a stark re-emerged inverse relationship with the Ten-Year. Since late-August, the Ten-Year has increased by 15%, while the NASDAQ has declined by 7%.


While pressure from mainstream media is likely to continue with respect to rising inflation, I highly doubt that over the next five-year period there will be much deviation from the 55-60% NASDAQ performance that has been displayed during higher inflation and lower inflation periods, perhaps it may drop towards 50%. What this signals to me is to continue with a disciplined management strategy to keep buying selectively for holdings displaying the largest mispricing. If anything, a pause and/or correction over a brief period of time will afford stronger mid- and long-term returns.


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