Go all in? Not yet

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It's All About the "Skew"

In a note to clients yesterday, we advised investors to be patient in deploying capital following the stock market's recent run-up.

While many Wall Street strategists have come out recently with very bullish outlooks for the year, we see a more neutral upside/downside "skew" to U.S. stocks today. We believe that investors can afford to be selective in deploying capital over the coming weeks/months (i.e. light offense).

"Skew" refers to the balance between the potential positive and negative event paths at a given point in time. More simply, it's the ratio of upside vs. downside.

This is a useful framework in investing because it can help you bet big only when the odds are in your favor (vs. when the market is just giving you a coin toss).

See a stock with 60% upside and 20% downside? That's a 3:1 skew (quite good; stock could be a buy). Another with 10% upside and 20% downside? That's a 1:2 skew (quite poor; maybe the stock is a short?).

Now, you cannot just go online to find the upside vs. downside for the S&P 500 or a given stock. Investors have to do their own homework to estimate them. This is what our Research team does for you. And today, we estimate the short-term skew for the S&P to be quite balanced (1:1). See our memo for our math here.

So in the short term, the odds are roughly even. Short-term even odds coupled with long-term excellent odds warrant light offense. Light offense means spreading out your buys and keeping some dry powder if/when the market reprices the downside risks more appropriately.

Onto our top stories from this past week:

Five Things to Know

1. Retail investors have been trading at all-time high levels, suggesting appetite for risk remained alive and well amidst recent market volatility.

If Charles Schwab’s investor base is any indication, recent market volatility has gotten many individual investors extremely eager to participate in the markets.  According to the company, in the first quarter of 2020, investors booked 27 of the 30 highest trading volume days the firm has ever seen - including every single trading day in March.  And over the course of March, the level of daily active trades reportedly increased by more than 200% vs. the prior year.  We see this as a strong indication that despite heightened volatility, risk appetite amongst retail investors has remained strong through the recent pandemic-related drawdown.

2. Apple and Google have teamed up to offer bluetooth-enabled virus contact tracing - a potential breakthrough in global COVID-19 containment efforts, and a landmark partnership between the two historic rivals.

The newly announced partnership aims to leverage the power of near-field, device-to-device communications technology to help countries better track viral contact chains.  We’re pleased to learn of this development and view it as a landmark technological partnership as it will require key updates to enable iOS and Android devices to communicate with each other in ways they previously couldn’t.

3. Airlines majors are now looking to take up the government on its bailout loan offer, after previously receiving it in lukewarm fashion.

In late March, the Congress approved a $50 billion bailout to the airline industry - half in the form of payroll grants, and half in the form of loans.  While airlines were generally expected to tap into the payroll grants, new reports suggest they’re now also eyeing the loan package.  Given that the loans would require restrictions on dividends, buybacks, and executive comp, we believe this suggests the terms of the bailout loan were meaningfully better than what the airlines were seeing from capital markets.  

4. Amazon is rolling out waitlists and hiring another 75,000 workers in order to keep pace with COVID-19 demand, highlighting the dramatic uptick for grocery delivery in the wake of pandemic control measures.

Despite having increased order capacity by more than 60%, Amazon has still struggled to keep up with overwhelming consumer demand for fresh grocery delivery in the wake of COVID-19 distancing measures.  To keep up with demand, the company plans on hiring another 75,000 employees (having already completed its recently-announced 100,000 worker hiring spree), while rolling out a new waitlist feature to enable consumers to digitally reserve delivery time slots.  We believe it’ll be key to watch the extent to which this heightened demand for grocery delivery sustains itself after distancing measures are loosened. 

5. NBC’s Peacock enters the digital streaming space as consumer demand for video streaming services surges.

The new video streaming platform will debut by rolling out for certain Comcast (NBC’s parent company) customers at no additional cost to their existing Comcast subscriptions.  A broader nationwide rollout of the platform will take place in July (as previously announced) and will feature both a free tier and two premium tiers (one ad-supported, and one not).  We believe the “freemium” pricing approach makes a lot of sense for a relative late-comer to the digital streaming space looking to rapidly scale up its subscriber base.

Question of the Week

What are some stocks you own or are considering buying where the skew (upside vs. downside) seems attractive today? Share your thoughts in the comments below.

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