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Economics

Hard Landing for Pandemic Darling Stocks

Pandemic stocks saw valuations rise and decline rapidly.

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Pandemic stocks saw valuations rise and decline rapidly.

The meteoric rise of the pandemic stocks led to investors who found themselves flush with cash as work from home companies benefited.

Demand for the stocks rose exponentially, mirroring consumer enthusiasm for products such as Peloton ( (PTON) - Get Peloton Interactive, Inc. Class A Report), Netflix ( (NFLX) - Get Netflix, Inc. Report), Roku ( (ROKU) - Get Roku, Inc. Class A Report) and Zoom ( (ZOOM) ) as people stayed at home and watched movies, talked to their friends and family members on video calls and exercised at home instead of gyms.

Investor optimism and enthusiasm was off the charts in the second half of 2021 and even in 2022 despite declining revenue as work from home stocks fell out of favor when the economy reopened and some people returned to the office.

Several of these stocks have fallen even more recently as volatility in the market rose and consumers shifted their interests and are spending money traveling, eating at restaurants and attending concerts and movies.

The year-to-date losses for these stocks through May 13 are eye-opening. Shopify ( (SHOP) - Get Shopify, Inc. Class A Report) dipped by a whopping 70.47.07% while Zoom suffered a loss by 48.53% and DocuSign ( (DOCU) - Get DocuSign, Inc. Report) fell by 49.58%.

“Unfortunately for the most of the pandemic darlings, they were able to pull forward years worth of demand for the products being at the right place at the right time and reached massively lofty valuations,” Art Hogan, chief market strategist B Riley Financial, told TheStreet. “Now we are seeing them rapidly come back down to earth.”

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Good Products vs Good Investments

Even by January 21, the first three weeks of trading in 2022, many of these stocks reported massive losses. Shopify fell by 35.3% while Netflix dipped by 33.5%. Coinbase( (COIN) ) saw its stock value dip by 23.5%, but its year-to-date loss is 72.97%.

These stocks were driven “by all the liquidity infused into the financial markets in response to the pandemic,” Robert Johnson, a finance professor at Creighton University, told TheStreet.

“This is what drove the meme stock phenomena, the pandemic stocks and the bull market in cryptocurrencies,” he said.

Investors often fail to understand is that good products such as Peloton’s bikes do not mean they are good investments.

“I am a big user of Peloton,” Johnson said. “I have encouraged others to consider buying the bike and the treadmill. But, I have never encouraged anyone to buy the stock. The economics of the business simply did not justify the lofty valuation.”

The risk of owning some stocks is higher, especially if there is already a lot of competition in the industry already. Peloton has not shown that it will “ever be able to have positive earnings,” he said. “People fell in love with revenue growth and failed to realize that strong revenue growth does not necessarily translate into profit. What good is it for a company to sell a product for $20 when it costs $22 to produce and deliver?”

Future Earnings To Be Lackluster

The earnings of these pandemic stocks are likely to be more anemic in the future, even as inflation rates subside.

“I would characterize our expectations for the growth of most of these names to be normalized as we move beyond the pandemic environment,” Hogan said. “A lot of these companies offered us services that were essential during pandemic lockdowns that now will likely become just one of many choices we have. The reopening process has certainly been an eye-opener for a lot of the companies that really flourished during lockdowns.”

CFRA, a Charlottesville, Virginia-based financial research company, has a hold rating on Roku, Peloton, Zoom, Netflix and Etsy ( (ETSY) - Get Etsy, Inc. Report).

Stocks such as Peloton, Zoom and Netflix will continue to be impacted when consumers lose confidence in the economy or have less disposable income as they shift their spending elsewhere, Adam Parker, CEO of New York-based Trivariate Research, told TheStreet.

“These former darlings were the beneficiaries of the pandemic and have fallen,” he said. “The path of recovery is whether they can reinvent themselves or generate free cash flow. Not all of these stocks will be winners and many could be losers. “When the consumer’s income slows you will see that behavior. That bodes more poorly for stocks like Roku and Netflix.”

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Zoom’s management team has been received well by Wall Street and other investors and has a lot of value to the brand name, Parker said. Back in August 2020, Zoom’s market cap was worth more than Morgan Stanley and Goldman Sachs combined.

“Zoom has more potential than Peloton and Netflix,” he said.

Investors should focus on adding sectors that are generating more revenue because consumers feel comfortable venturing out more and on stocks where there is gross margin expansion and can produce positive free cash flow for the next six to 18 months.

Lofty Expectations

Lodging, entertainment and some banks are sectors that are producing more interest from both consumers and investors.

“Investors should want exposure to industries that benefit as things open up,” Parker said.

Many of the pandemic work from home stocks had high quality problems, Steve Sosnick, chief strategist of Interactive Brokers, a brokerage based in Greenwich, Conn., told TheStreet.

“Their huge Covid-era success became unsustainable,” he said. “It brought years of future growth into the present, making forward comparisons tough. If I have a Peloton or Roku, do I need another in the immediate future? If I'm stuck at home I might buy cute stuff on Etsy, but how much do I need, and would I rather spend that money on experiences once I can enjoy them again.”

The expectations of how much revenue the companies could generate by some investors were unrealistic, Sosnick said.

“Investors extrapolated the unsustainable levels of growth into the future,” he said. “‘Growth at any price" replaced the classic "growth at a reasonable price.'"

The market is currently repricing growth across all sectors and stocks.

“The stocks with the loftiest expectations and/or marginal profitability are bearing the largest brunt,” Sosnick said.

Investors should seek out companies with long-term sustainable business models and not be “wowed by exponential revenue growth,” Johnson said.

Many of those stocks did not deserve those valuations and lack sustainable long term business models.

Warren Buffett's mentor Benjamin Graham wrote that “in the short run, the market is a voting machine but in the long run, it is a weighing machine.”

The fundamentals of a business will win in the long run, he said. “A company like Peloton may deliver a great product, but does it deserve its current valuation in a very crowded exercise space? “

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Economics

Hotels: Occupancy Rate Down 3.5% Compared to Same Week in 2019

From CoStar: STR: Weekly US Hotel Revenue per Available Room Reaches Highest Level Since July 2019U.S. hotel performance increased from the previous week, according to STR‘s latest data through May 21.May 15-21, 2022 (percentage change from comparable …

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U.S. hotel performance increased from the previous week, according to STR‘s latest data through May 21.

May 15-21, 2022 (percentage change from comparable week in 2019*):

Occupancy: 68.6% (-3.5%)
• Average daily rate (ADR): $151.75 (+13.4%)
• Revenue per available room (RevPAR): $104.06 (+9.5%)

*Due to the pandemic impact, STR is measuring recovery against comparable time periods from 2019.
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four-week average.

Click on graph for larger image.

The red line is for 2022, black is 2020, blue is the median, and dashed light blue is for 2021.  Dashed purple is 2019 (STR is comparing to a strong year for hotels).

The 4-week average of the occupancy rate above the median rate for the previous 20 years (Blue).

Note: Y-axis doesn't start at zero to better show the seasonal change.

The 4-week average of the occupancy rate will mostly move sideways seasonally until the summer travel season.

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Economics

“This Is A Crucible Moment” – Sequoia’s Ominous Warning To Companies On How To “Avoid The Death Spiral”

"This Is A Crucible Moment" – Sequoia’s Ominous Warning To Companies On How To "Avoid The Death Spiral"

"This is not a time to panic. It is…

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"This Is A Crucible Moment" - Sequoia's Ominous Warning To Companies On How To "Avoid The Death Spiral"

"This is not a time to panic. It is a time to pause and reassess," begins the thought-provoking presentation from veteran venture capital firm Sequoia Capital.

But that's about as 'positive' as they get as the founders of the firm warn of a prolonged market downturn and urges the startups in its portfolio to preserve cash and brace for worse to come.

"We believe this is a Crucible Moment, one that will present challenges and opportunities for many of you. First and foremost, we must recognize the changing environment and shift our mindset to respond with intention rather than regret."

And in its somewhat ubiquitous historically grim outlooks (its "R.I.P Good Times" in 2008 and "Black Swan" memo in March 2020 have become legendary) don't expect a quick rescue and recovery this time.

"Sustained inflation, and geopolitical conflicts further limit the ability for a quick-fix policy solution. As such, we do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery, like we saw at the outset of the pandemic," the note said.

They argue that it will be "Survival of the Quickest"...

In particular, Sequoia urged companies to look at cutting projects, R&D, marketing, and other expenses, noting that companies should be ready to cut in the next 30 days.

"We expect the market downturn to impact consumer behaviour, labour markets, supply chains and more. It will be a longer recovery and while we can't predict how long, we can advise you on ways to prepare and get through to the other side," it said.

The founders/CEOs who face reality, adapt fast, have discipline rather than regret will not just survive, but win, noting that "It is easier to preserve cash when you have more than six months left. Recruiting is about to get easier. All the FANG have hiring freezes."

They conclude their presenttation by noting that:

"At Sequoia, we believe that the one who wins is the one most prepared."

In other words America, brace for capex cuts, hiring freezes to accelerate, and growth to evaporate.

*  *  *

Read the full presentation below:

Tyler Durden Thu, 05/26/2022 - 15:45

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Economics

Best Day For Discretionary Stocks Since COVID-Crash As Consumer Recession Bets Get Steamrolled

Best Day For Discretionary Stocks Since COVID-Crash As Consumer Recession Bets Get Steamrolled

A week ago, following dismal guidance by Walmart,…

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Best Day For Discretionary Stocks Since COVID-Crash As Consumer Recession Bets Get Steamrolled

A week ago, following dismal guidance by Walmart, Target indicated that it is seeing a shift in the consumer wallet away from the pandemic purchases and into reopening purchases - including apparel - and the pace of this shift caught some retailers off guard on inventory. WMT, COST, and TGT all saw their stocks fall sharply last week as investor concerns around a US consumer slowdown mounted and investors reconsidered just where, if anywhere, you can play "defense" in the current market.

But as Goldman's Chris Hussey writes today, this week, results from companies like DKS, Macy's, JWN, WSM, DLTR, and DG painted a decidedly different picture.

Deep discount retailers Dollar Tree - or rather Dollar 25 Tree - and Dollar General both posted strong results and DLTR raised top-line guidance.

Which isn't surprising: as we discussed in "Middle Class Is Shutting Down As Spending By The Rich Remains Robust" when consumers are trading down - as they are doing now due to Biden's runaway inflation - dollar stores see more business.

As a result, Dollar Tree surged as much as 20% on Thursday, the biggest intraday move since October 2020. Evercore ISI said Dollar Tree's move to a "$1.25 price point" last November from $1 “came in the nick of time" adding that "given the broad-based inflationary cost pressures, the 25% price increase drove material sales and margin upside for both the namesake division and the total company," wrote analyst Michael Montani who also said that while freight, transport, and labor headwinds are real, some of the pressure cited by Target last week was likely company specific.

The analyst concluded that the read-across from DG and DLTR is “favorable,” and it seems that the low-end consumer is “hanging in better than initially thought.” Or rather, the middle-class is getting crushed and it has no choice but to trade down to the cheapest retail outlets.

And with countless shorts having piled up and getting massively squeezed, the S&P 500 Consumer Discretionary Index today has risen as much as 5.6%, its best day since April 2020, as optimism on the health of the consumer returns following a string of better-than-expected earnings reports from retailers.

Top performers in the S5COND index include Dollar Tree, Dollar General, Norwegian Cruise, Caesars Entertainment and Carnival; the Discretionary Index is on pace for its best week since March 18, when the group climbed 9.3%; the index sank 7.4% as Walmart and Target reports spooked investors. The index is still down almost 30% YTD.

"Retail earnings are bullish.... with four blow-outs,” said Vital Knowledge’s Adam Crisafulli, referring to quarterly reports from Williams-Sonoma, Macy’s, Dollar General, and Dollar Tree.  “The overall retail industry is experiencing stark changes and the market is incorrectly conflating these shifts with underlying demand weakness when the actual health of the consumer is much better than it seems,” Crisafulli says, although there are many - this website included - who wholeheartedly disagree with his optimistic view of the US consumer.

Remarkably, thanks to today’s rally, even Burlington Stores, which sank as much as 12% in premarket on disappointing results, is trading up as much as 11% and some say, the rally helped reverse the earlier tumble in NVDA shares.

The discretionary group is also getting a boost from airline operators Southwest and JetBlue, helping travel-related names, while on the economic front, better-than-expected personal consumption (for the revised Q1 GDP print). and jobless claims may be adding to the bullishness according to Bloomberg.

Tyler Durden Thu, 05/26/2022 - 15:00

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