I heard about the most wonderful business the other day.
It’s a Hundred Dollar Bill store.
They sell $100 for $90 each. It’s wonderful!
Sales are rocketing like you wouldn’t believe. Customer numbers are the highest they’ve ever been. However, profitability is not there yet.
But hey, this is one of the fastest growing businesses around.
The only threat is if some young upstart decides selling $100 for 85 bucks. Then they’ll be in trouble…
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Gowth that Comes at a Cost
Excuse the tongue and cheek.
But the fictious company I’ve described above is maybe a little more real than investors are willing to admit.
Take Uber, for example.
The company is bleeding cash month after month. And that’s the only way they can continue to grow.
The business pours its own money into subsiding rides, making the price for consumers worth it.
So while bookings (the people ordering Uber and Uber Eats) look like an exponential line, all this growth comes at a cost. A very big cost at that, draining Uber of hundreds of millions, sometimes billions of dollars each year.
The problem is, Uber can never lift prices to even achieve profitability. Not with how the industry is set up right now, anyway.
Competitors like LYFT are all too happy to follow Uber in their unprofitable strategy.
When Uber lets up and raises their prices, LYFT can just keep prices low, lose money, but gain market share.
My colleague and self-described grumpy old man, Vern Gowdie, summed up the situation pretty well in Markets & Money the other day.
Here’s a snippet:
‘There appears to be an inverse relationship between how much a company loses and its valuation.
‘Uber, WeWork, Lyft, Pinterest, Airbnb, Tesla and the list goes on. The more red ink they bleed, the higher the share price.
‘This is the upside down, valueless society we currently — and again I stress, currently — live in.’
Personally, I agree with a whole lot of what Vern says. And I’d be more than delighted to go back to the ‘good old days’ where information was scarce, opportunities were abound, and all you had to do was buy stocks below book (book value, or net assets).
But we don’t live in that world right now.
A World Where Growth Outpaces Value
For almost a decade, we’ve lived in a world where growth (expensive stocks) outpaces value (cheap stocks). Take a look at this US example:
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How can this be?
How can buying something that’s expensive be better than buying something that’s cheap?
Well, it doesn’t work out forever.
The music will stop, the tide will go out, use whatever metaphor you want, logic prevails in the long run.
It’s why Vern talked about mean reversion, an idea observed time and time again that says data points (in the long run) will revert to their mean.
So if you imagine a volatile stock that runs up and down, it might be described as growth or value at different points in time, but over the long haul will revert to the mean…
Source: Money Morning
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I guess we just haven’t seen any reverting to the mean for quite some time.
Then again, we’re the ones defining ‘growth’ and ‘value’.
Maybe we just haven’t updated our definitions for a world where intangible assets, and human capital, is far more important than it used to be.
Is a stock really ‘expensive’ at 10 times book or 30 times earnings? Today, you can’t say for sure until you do the work and actually have a look yourself.
Maybe the company is dominating a profitable niche. Maybe that niche is expanding, but at a rate which isn’t conducive to new entrants yet.
And maybe that company has a good 30 years of growth left.
At the end of the day, all you can really depend on is change, especially in financial markets.
What worked decades ago, might not have the same effectiveness today. Business models change. Opportunities are exploited.
It’s why as an investors, you’ve got to constantly be reading, learning and looking for new ideas.
So you focus on the first two, we’ll do our best to take care of the latter.
Changes Coming to Money Morning
Late last month, I told you that we were getting back to basics.
We want to refocus and make Money Morning the e-letter it was always meant to be.
We want to bring you more of the big ideas the mainstreams aren’t. More of the insight that actually leads to huge opportunities. The left of field ideas that hardly anyone has caught onto yet.
Throughout June, I’ve been dropping hints of the changes going forward.
We’ve going to give our big idea editors Sam Volkering and Ryan Dinse the spotlight.
Five days a week, you’ll get condensed, valuable big idea insights from Sam and Ryan.
Then, on the weekends, you’ll receive a longer more in-depth piece from the ever-knowledgeable Ryan Clarkson-Ledward or myself.
What that means for you is more big, left-field opportunities. More of the stuff you’re not getting from the mainstream rags.
And it all kicks off Monday…
Your excited friend,
Editor, Money Morning
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