The Stock That's Outperformed Nvidia

In this issue of the Peel:

• ?? Is there a Magnificent 7 bubble? Place your bets now.
• ?? Carvana went from bankruptcy talks to how much in profit this quarter?
• ?? Wanna guess which stock actually did better than Nvidia?

Market Snapshot ??

Banana Bits ??

• Enough to make a grown man cry—Warren Buffett eulogized Charlie Munger in Berkshire’s 2024 Annual Letter
• Citadel takes a rare L in a bid to takeover Credit Suisse’s China biz
• Disney shakes hands with one of India’s largest companies in a “media merger pact”
• Former President Big Dawg Donnie T dubs again in South Carolina, his main competitor’s home state

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Macro Monkey Says ??

Nothing To Pop Here

Tech companies, tulips, and the territory of Mississippi —3 things that, at some point in history, have driven financial market participants to the brink of insanity.

While some of these bubbles make sense for a short period, they all unequivocally end with all of us losing a whole lot of sense… and cents… and dignity... and probably your house and everything else.

Now, since 7 brave, heroic stocks put the entire market and everyone’s portfolio on their back since the end of 2022, labeling these saviors as a “bubble” has become the new hot thing.

And as usual, the new hot thing is wrong —for the most part. Allow me to explain:

From Soap to Bubble

Definitions vary, but generally, a financial market bubble “occurs when the prices of assets exceed their fundamental value by a large margin.”?

Charts like this can easily scare us into thinking that the recent run-up and enrichment of Americans by a certain 7 stocks is a bubble:

Source

Even leaving out Meta and Tesla, we can see the big dawgs of the S&P 500 make up close to a record-high percentage of the total size of the index.

I might regret saying this one, but concentration data is almost the only valid argument that implies bubbly behavior in U.S. markets right now. While this data might suggest the S&P 500 is acting like a Bud Light after a good shaking, it’s actually more like one that was left open and out all night.

In fact, although the share prices of these companies have ripped more than SpongeBob’s pants, earnings have done a solid job of keeping up—and it looks like that’s set to continue for some time.

Source

Bubbly Behavior?

According to recent reports, however, there are more stocks in the United States than just these 7.

Expanding our view, we can get a sense of how bubbly markets have become by assessing retail trading behavior. For example, when speculation dominates, margin debt tends to rise as bulls become cocky enough to buy stocks with debt:

Source

?

Margin debt includes money that traders borrow from their broker in order to buy stocks. It gets used as fuel to pump up bubbles with further buying pressure, but we’re not even close to seeing brokerage borrowing reach historically bubbly levels.

On the other hand, institutions generally do the opposite of stupid, ugly, and poor retail traders. The “smart money” held by these institutions likes to take short positions when they see bubbles coming, and right now…

Source

We’re throwing a lot of charts at you apes today, but we’ve got one final one that should put the nail in the non-bubble of the Mag 7. For once, this alleged “tech bubble” actually has a potential use case. And companies are getting in on it hard.

Source

Capital expenditures and Investments from companies going forward are overwhelmingly weighted toward tech/AI developments.

The Takeaway?

The big, scary AI bubble that mainstream financial media loves to milk fear around doesn’t actually have a whole lot of data to support it. We dive deeper into Nvidia’s—the biggest “bubble” of the whole Mag 7 below for more context.

Besides heavy concentration, there’s almost no other evidence to suggest these stocks fit the definition of something that “occurs when the prices of assets exceed their fundamental value by a large margin.”?

Fundamentals are largely keeping up with share prices. Plus, market-wide behavior certainly doesn’t fit with past bubbles, especially those of recent history.

It goes without saying that this could certainly change. It’s all relative, so all we’re saying here is that these “magnificent” 7 stocks aren’t any more bubbly than the rest of the U.S. market.

But things that have never happened before happen every day… like me waking up more than 4 minutes before my first Zoom call today.

What's Ripe ??

Carvana (CVNA) ??32.1%

• At the end of 2022, Carvana was down 28-3 with 2:17 left in the 3rd quarter. But like TB12, they shocked the nation and delivered a big win in 2023.
• From bankruptcy talks to a $450mn surprise profit, Carvana’s cost-cutting and debt reduction strategy seems to have paid off. In 2022, the firm lost $1.59bn.
• Customer demand remained relatively low, but the firm learned how to fleece them even more, nearly doubling profit-per-unit to ~$5.2k from ~$2.2k in 2022.

Intuitive Machines (LUNR) ??15.8%

• Elon Musk cried his way into the office today as a company not named SpaceX claimed the title of “first privately developed spacecraft to land on the moon.”
• Congrats, Intuitive Machines. The ~$960mn firm confirmed its “Odysseus” spacecraft is upright and sending data from the moon back to Earth.
• This is a huge proof of concept for the young firm. Yet, shares are down after hours as it turns out there aren’t many motivated customers on the lunar surface.

What's Rotten ??

Booking Holdings (BKNG) ??10.2%

• You can never make ‘em all happy, but usually, you can make some at least content. That is unless you’re Booking Holdings.
• Booking Holdings beat estimates across the board and declared a new dividend of $8.75/sh beginning in Q1. But poor EBITDA and gross bookings guidance dominated.
• Blaming wars in the Middle East and Ukraine, analysts weren’t buying it as the U.S. and Netherlands alone have made up >90% of the firm’s revenue each of the past 3 years.

Warner Bros Discovery (WBD) ??9.9%

• The tragedy of this new season of Curb Your Enthusiasm is already taking its toll. Warner Bros Discovery, owner of HBO and others, tanked on earnings.
• Losing $400mn in Q4 was actually a sizable improvement from last year’s $2.1bn loss, but it still didn’t impress analysts as it was wider than expected.
• Sales missed estimates, too, at $10.2bn vs the $10.3bn estimate. But, there were positive signs, including an 86% jump in year-end free cash flow.

Thought Banana ??

The Stock That’s Outperformed Nvidia

For at least the past year, Nvidia has been the indisputably coolest kid in school of the S&P 500.

But, if we expand our view beyond the 500 biggest companies to the 1,500 biggest—a.k.a. the S&P 1500—we find that there is one stock that’s been even cooler.

Plus, the kids in school who actually were cool probably wore this stuff, too (not that I would know)...

Abercrombie & Rich

If you put $100 into Nvidia on February 23, 2023, that investment would be worth $379.77 as of Friday’s close. Not bad, but you’d have $419.04 if you put it into Abercrombie & Fitch.

It’s not often that a consumer-facing clothing brand that’s generally forgotten about by everyone in America outside of Black Friday to Christmas Eve outperforms the hottest B2B megacap tech name around.

And it gets even crazier when we recall that Nvidia’s products are powering a technological revolution, potentially on par with the creation of the internet, while Abercrombie & Fitch powers fashion-based social hierarchies in high schools across the U.S.

Don’t get me wrong—Nvidia’s sales, earnings, and fully diluted EPS have still outperformed Abercrombie & Fitch in the past year, but the outperformance of the clothing retailer speaks to the power of a turnaround story.

A Tale of Two Tales

The narratives behind these two firms are arguably the two most idealistic narratives shareholders could hope for.

For Nvidia—it’s creating a “new asset class” in AI. The firm has seen absurd growth across all 3 financial statements to back this story, but it can be difficult for traders to be comfortable assigning an ever-growing valuation multiple on something this new.

For Abercrombie & Fitch—they have seen stellar earnings growth over the same period, but this stock is riding the narrative of a turnaround story as opposed to creating something brand new.

Stock prices can be boiled down to 2 things—earnings and the valuation multiple assigned to those earnings.

Nvidia’s earnings have clearly outperformed Abercrombie & Fitch, but Wall Street has been much happier to bid up (or bid down less) the earnings multiple of a douche-baggy clothing brand.?

And that might have to do with the fact that every Wall Street analyst’s parent probably dressed them in A&F since day one, but likely even more to do with the fact that markets have an easier time digesting a turnaround instead of something brand new.

The Takeaway?

You don’t always have to find the company that’s performing the best to translate into the highest share price return you can find.

Finding stocks starting with a more negative consensus outlook that also strongly outperforms expectations can be just as important. The beginning is just as important as the destination.

But hey—it’s all about the journey anyway, right?

?? The Big Question ??: What underrated stocks will dominate markets this year? What’s the next ANF?

Banana Brain Teaser ??

Previous ??

A survey of employers found that during 1993 employment costs rose 3.5 percent, where employment costs consist of salary costs and fringe-benefit costs. If salary costs rose 3 percent and fringe-benefit costs rose 5.5 percent during 1993, then fringe-benefit costs represented what percent of employment costs at the beginning of 1993?

Answer: 20%

Today ??

There are 5 cars to be displayed in 5 parking spaces, with all the cars facing the same direction. Of the 5 cars, 3 are red, 1 is blue, and 1 is yellow. If the cars are identical except for color, how many different display arrangements of the 5 cars are possible?

Send your guesses to vyomesh@wallstreetoasis.com

Wise Investor Says ??

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” — Warren Buffett

How Would You Rate Today's Peel??

??All the bananas? ? ? ? ? ? ? ? ? ? ? ? ???Meh? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ??Rotten AF

Happy Investing,

David, Vyom, Jasper & Patrick