Now and then

As the NASDAQ index remains close to record highs and not wishing to compare the current rise to 1998, 1999, well not entirely, however, there does seem to be some themes that may be worth highlighting. In 1998, valuations of technology stocks reached disproportionate highs. At the time based on very overly optimistic assumptions, more importantly, the stocks that were considered old economy, Bats, Imperial Tobacco, Diageo, Unilever, Rio were ignored by investors. You were either in tech or a dinosaur. That meant valuations on these stocks, particularly in comparison to technology, trade well below historic norms. One good example of this was Dixons, who had a large stake in a Freeserve, an early internet service provider. Freeserve, at one point, had a valuation of 9 billion pounds. Dixon's entire market capitalization was below that. That meant the market was placing a negative value on the core Dixon's retail business, selling white goods and PC’s etc.  Completely illogical. 

Once again it could be argued the investment community is focusing on the tech stocks and deciding that the more established business models are likely to disappear. There is no doubt, an enormous difference between now and 1999, the balance sheets of the big techs are strong, revenues for many are growing at a fast rate. The other major difference is obviously the low rate of interest around the globe, this has offered some support to the more defensive sectors. 

After the rise in Amazon shares, it trades on an earnings multiple of 150x according to Stockopedia, on a price to book of over 20x and price to sales of over 3x. Traditional retailers trade on a fraction of that as it is assumed Amazon will continue to disrupt the traditional model. Tesla has no price-earnings multiple as it does not yet make any earnings. It has a market cap of $40bn on revenues of $20bn. BMW has a market cap of 50bn euros and sales of 100bn euros, the complete reverse and trades on a price-earnings multiple of 7. One assumes BMW will make electric cars as well. Traditional media companies that offer decent dividends trade at almost single-digit price to earnings, as the likes of Facebook and Instagram will leave these companies for dead. 

This may all be correct, and the future is all about technology and paying for growth, whatever the multiple will pay out in the long term. One does have to wonder somewhere in the back of one’s mind, if one set up a short basket of the disrupters (Amazon, Facebook) to name but two and bought against it a basket of the stocks that are deemed to be their breakfast, lunch and dinner, which will outperform which over the next few years. 

Posted on November 10, 2017 .