1 Corinthians Chapter 15 verses 55-57 state, "Where, O death, is your victory? Where, O death, is your sting? The sting of death is sin, and the power of sin is the law. But thanks be to God! He gives us the victory through our Lord Jesus Christ."
The verses above are important for Christians in that they deconstruct that sin leads to death, but also that the law, or the commandments of God, can be used to justify sin by anyone choosing to wield them. I am unable to keep God's law perfectly, therefore if I claim to live by the law, I am mistaken, I am no where near perfect. Jesus Christ is my intermediary towards salvation, He alone is the perfect victory over sin.
Right now, I sure feel like I need an intermediary when it comes to being an aggressive growth investor and my portfolio's performance. But as this year continues to play out, I am seeing very strong discrepancies across multiple sectors and industries. On the one hand, broader markets are performing well, on the other hand, companies displaying robust growth are not only lagging, but being shorted and punished as much as possible.
If there's anything to learn from last year's biggest equity winners and today's worst performers, there is a clear indication that something is afoot. The rotation speak that kept on popping up has fizzled, but there is a distinct divergence that has taken place with respect to growth. As we look to broad indices below, it is clear that all is well during 2021, despite volatility. The Dow Jones Industrial Average, S&P 500, and Russell 2000 are all up around 10%, with the NASDAQ being up 7%.
What I'm going to illustrate below is specifically how different industries and peers are not all being treated equally. In fact, many companies with the same prospects, and in the same case, even same growth trajectories are being treated very differently by markets. This effect is being driven predominantly by Wallstreet. In other cases, companies facing an uncertain long-term future have been given a free pass for the short-term.
For me, the answer to the divergence is straight forward although the psychology and emotional aspect will remain tough for all investors. There is a generation-based transitional pain that is becoming much more clear and will likely surface from time to time over the next couple of decades. As the Baby Boom generation is going to see an increase in the pace of decline regarding positions of influence in politics and corporations, as well as consumer power to Millennials and Generation Z, impacts to today's legacy leviathans is going to correspondingly see an increasing pace of loss of market share.
Today, the powers that be, government, corporations, and yes, Wallstreet are fighting against the inevitable. While the generational transition that is occurring is definitely a core catalyst, there is another simple fact to keep in mind - Wallstreet is tasked with investing in and serving clients across the spectrum of the 12,000 or so publicly traded equities. Wallstreet is incapable of picking true winners, not necessarily by choice, but as a result of greed. As the generation-based transition intensifies, this greed will result in a major shift in performance (last year was an accelerated example of what the inevitable will look like). Indications of a change in investing interest and strategy by retail investors has been building up the past seven or so years. The retail investor v. Wallstreet tug-of-war is just beginning, and Wallstreet is not going to win long-term, but they will continue to exert psychological and emotional pressure for as long as they can to inflict as much damage as possible.
Let's take a look below.
Legacy companies including banks, credit card companies and even older newcomers like Square and PayPal have all benefited consistently with broader indices. But next generation newcomers like Affirm Holdings, Bakkt, and SoFi, among others have been pummeled. These companies have more to prove at their current scale, but they also have the largest markets to grow into as well. Coinbase Global's recent IPO has also had a profound impact for the Financial sector - I consider it a landmark moment for the sector's future. Many of these companies are challenging conventional approaches and structures towards financial services and products. Fintech is a clear area where next generational consumers and investors will not initially look to legacy players.
A similar pattern is evident for Insuretech newcomers like Lemonade and Root, Hippo being the newest to go public, although through a SPAC. Legacy players in the insurance industry have performed mostly in line with broader indices. The insurance industry is tough to break into, similar as banking and lending and credit cards, but one could argue that the regulatory environment is even tougher. However, the issue remains similar as well from a consumer standpoint. Many if not all legacy financial service companies have long forgotten their consumers and have failed to innovate on the product front. This has created a very disconnected relationship with younger generations that will be much more interested in product offerings from newer entrants.
I recently wrote an update on the EV transition that has picked up steam. As can be seen, new comers like Lucid Motors, Fisker, and Lordstown Motors, among others are all being punished. Lordstown Motors has witnessed a short seller attack, but even companies which have not are similarly facing higher short interest and selling pressure. Contrastingly, Telsa remains a leading performer, while legacy automotive OEMs have begun to cool off a bit. The EV space is one of the most egregious industries where older generational influence is clinging on by mirroring market maker and taker perceptions. The trick is to assume that because a company like Ford or GM or VW has a massive supply chain, that they will be long-term winners. In reality, their risk to transition to EVs is just as great as it is for newcomers, and in some cases, it is greater, especially if they cannot win on technology, innovation and most importantly, autonomous transportation-as-a-service, TaaS. The used vehicle market transition to e-commerce is a clear illustration of how companies like Ford and others will not succeed. The fact that despite volatility, Tesla has still claimed recent short-term performance leadership is indicative of the mid- and long-term future.
Online Real Estate
Opendoor Technologies is a highly egregious example of how Wallstreet is attempting to slow the inevitable trend of where real estate markets are headed for the future. There are two things that are clear. First, Zillow is scrambling as fast as they can to continue to remain the number two online real estate power behind Opendoor Technologies (33% of their home sales are still non-digital). Second, the discount that Redfin is currently seeing is testament to the future growth generator (online home sales) that Zillow is much further ahead with. The irony, Opendoor Technologies is the clear online home sales leader, and yet is trading at nearly 70% valuation discount to Zillow. Both Opendoor Technologies and Zillow will be requiring substantial capital to fund the growth race to capture the online home sales market, neither is in a more financially superior stance. And, as evidenced by a stronger seller market last year, Zillow's non home sales business only grew in the single digits, further justifying the future dependence on online home sales. Online home sales is the future, not only literally, but also through cross-selling product opportunities that will likely shift away from existing real estate Internet models.
E-commerce is an area that has been on fire since last year. Analysts have tried to pivot and claim that growth will revert - didn't work. Now the claim is that growth will "slow", hmmm, likely not going to happen. However, while Amazon continues to lead the charge, higher growth plays are muted, and in the case of companies like Chewy and Coupang, undeservedly punished. Coupang is especially egregious as it is going to see highly robust growth with strong further Revenue diversification over the coming decade, all while being in one of the fastest growing e-commerce markets globally. And yet, it remains suppressed. Chewy continues to see growth strength transition to higher market penetration, while valuation remains discounted, again reflecting market schizophrenia, and clinging to false narratives to randomly target select equities.
I don't pretend to know exactly how the future of energy will unfold. But what is clear is that EVs will be the future for transportation. Commercial trucking will follow suite. Who knows, maybe one day planes and trains and all heavy-duty equipment will as well. EV technology likely isn't going to be the only one with hydrogen and fuel cell technology opportunities abounding. What I do know is that Plug Power has $5 billion in cash to invest in a clean energy future, with strong partnerships and investments to boot. It's never a good thing to go through a restatement of financials, but the company has been completely destroyed by this crux - as questions later. Meanwhile, companies perpetually dependent on debt and with long-term futures in question, are the hot topic at the moment.
While the rebuttal against these charts is to claim that these high-growth fliers are overvalued and face uncertainty - there's no guarantees for their futures. My response is that these high-growth fliers are not just growing faster, but substantially outperforming legacy/incumbent market givers. And as far as certainty goes, I am of the opinion that we are in the midst of a paradigm shift in many sectors affecting a substantial amount of legacy companies - like not seen before. The industrial revolution led to the creation of many new product innovations, the next decades will have a similar effect with respect to innovation. The biggest advocates against progress and market makers and takers are Baby Boomers. I'm not against Baby Boomers, but I am against those that are full of greed and oppose fostering a legacy for future generations.
It reminds me of human nature in general. I think of the prior athletes who have attained the pinnacle of sporting achievement professionally, and yet find it difficult to retire and let the next generation take the baton. For sports, it's very easy for anyone to clearly recognize someone who no longer has the physical ability to compete, despite being more knowledgeable than younger peers. It becomes evident when it is time to "hang it up".
In the corporate world, and in politics, decision makers, executives, etc., find themselves trying to stay in their careers and professions as long as possible. Similar to professional athletes, there is a sweet-spot to transition to the next generation. For those that resist and refuse, it is less about knowledge, but more about a lack of connection with future generations as consumers, versus greed and power. This is clearly evident in today's world as Baby Boomers look to keep the status quo, while they are actually setting up their businesses for a potential epic failure.
As an aggressive growth investor, I am not interested in the 12,000 or so public equities to invest in. I am interested in the next 20-30 years of where the future is headed. What is clear is that the current paradigm shift is getting to a point where many of these "disruptive" technologies and business models are at more mature stages. This is akin to the Internet and e-commerce. During the Tech Bubble, the Internet was premature and investors were tempted by the allure of a somewhat distant future. Today, e-commerce is very real and growing across nearly every retail vertical whether durable good or not. When I think about Fintech and Insuretech and the Financial sector, EVs and traditional automotive OEMs, e-commerce and retail, new energy opportunities versus old energy, among many others, I see a very exciting and promising future for investors willing to take the risk.
Wallstreet is going to continue to fight against the momentum that is building, but they cannot control the future. Make no mistake, Wallstreet will take a company bankrupt if possible, but their lack of focus is what makes them weak. The game they play is not going to work forever, and has been weakened substantially the past decade. The next generation of investors are not interested in the "dialogue" of how to value a company, especially with the increasing amount of market makers and takers emerging. But aggressive growth investors are going to need to be capable of dealing with psychological warfare, as it is the last resort and only means to dissuade any investor from successful execution. I think Wallstreet is not prepared for the future retail investors' combination of traits. Sophistication is something that has increased greatly for retail investors the past decade, but the future is witnessing the transition to a much more fearless and aggressive investor at their early initial investment stage. As younger investors learn how to transition fearlessness further into sophistication, the result will likely be a sustained focus on the anti-Wallstreet objectives. The future is going to be very exciting. Today's attack on growth is only a small blip compared to how the tables will turn for legacy/incumbents over the decades to come.