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This week, a Brooklyn guy sold a crypto-verified token indicating ownership of an audio flatulence recording for $85, providing vital new data for bubble watchers. I’m currently looking through my valuation books for a framework to use to assess the deal. Aspects of stock trading appear disturbingly sensible elsewhere. Companies that have outperformed the most after the effectiveness of vaccines was reported in November, for example, are beaten-down oil drillers, cruise lines, and banks, to name a few. These might greatly benefit from a period of economic recovery.
It’s hard to say which of these two trends has more room for growth. If it’s the crypto-gastrointestinal one, I don’t know much about it save that I attended to summer camp with a child who could be the industry’s Jeff Bezos. In terms of stocks, two Wall Street banks have made recommendations that appear to be fit for a financial world torn between logic and nonsense. Some value stocks are no longer clear bargains. It was six months ago that
Discovery
The reality-television business DISCA (ticker: DISCA), whose shows include Property Brothers and My 600-Pound Life, has a price/earnings ratio in the single digits. It has led the way since the vaccine was announced in November.
S&P 500 Index
With a gain of 262 percent, the index is now the highest in the world. Discovery has launched a new streaming service, and bulls expect it to see rapid subscriber growth in the coming years. Maybe they’re right, but investors who buy now are getting a growth stock rather than a fixer-upper. In terms of statistics, value stocks may have more space to run. The highest-P/E slice of the S&P 500 was 231 percent more expensive than the lowest-P/E slice at the start of this year, according to Goldman Sachs, the biggest spread since 2000. Although the premium has just dropped to 161%, the 40-year average is still 103 percent.
But be cautious about buying into value indices and sectors. Liz Ann Sonders, chief investment strategist at Charles Schwab, advises, “Don’t put blinders on where you look.” “Even though these are considered growth areas, you can discover attractively valued equities in sectors like technology, consumer discretionary, and communication services.” Stocks with below-average valuations, expanding profits per share, and a tendency to climb with bond yields are among Goldman’s picks. This year’s growth could be sped up thanks to vaccines and massive fiscal stimulus. After inflation, economists see a 5.7 percent increase in gross domestic product. 7 percent, according to Goldman. Inflation and interest rates could also rise further. If you believe this will happen in a predictable manner, value stocks with exposure to an economic boom may be a good choice. Among the stocks that came up in a recent Goldman test for such characteristics are the following:
Nexstar Media Group is a media company based in the United States
(NXST), which owns local TV stations and is trading at nine times earnings, has exposure to a resurgence in advertising.
Lumentum Holdings is a company based in the United States.
(LITE), a 13-times-earnings company whose lasers are utilized in the Face ID feature of the iPhone.
Apple’s
iPhone;
Devon Energy is a company based in Devon,
(DVN), which is trading at 14 times profits and is benefiting from increased crude oil prices; and
Kilroy Realty is a real estate firm that specializes in
(KRC), a real estate investment trust with a 2.7 percent dividend yield derived from rents on office and mixed-use real estate in California, is selling at 15 times next year’s estimated funds from operations. Of again, if you anticipate a chaotic return of inflation, you could be inclined to indulge in financial nihilism. That could explain why nonfungible tokens, such as the one I discussed earlier—which reflect ownership of not simply vulgar sounds, but also digital art, internet films, and more—are skyrocketing at the same time as old-economy stocks. Goldman has a positive outlook on the future. Between now and 2023, inflation will rise to 2%, but not to 3%. The yield on the 10-year Treasury note will conclude the year at 1.9 percent, up from 1.7 percent recently. Earnings will above forecasts. The S&P 500 will finish the year above 4300, up almost 10% from recent levels. What if bond yields climb more quickly? Even if the 10-year Treasury yields 2.1 percent by the end of the year, the difference between stock and bond prices will remain at historically typical levels. Morgan Stanley strategists are more pessimistic. Earnings forecasts will be revised upward later this year, and interest rates will continue to rise. As a result, the S&P 500’s P/E ratio will fall at the end of the year, offsetting profits growth. Those seeking more gain this year should purchase the appropriate stocks rather than merely following the market, according to the business. As a result, Morgan Stanley recommends looking for stocks whose profits growth may more than cover P/E ratio reductions. It has been looking for such stocks since September, updating its list every two months or so. It claims that over the last six months, its list has outperformed the market by 50 percentage points. The strategists now have a new list to work with. Comparing it to firms that have been rated Analysts at the organization place a lot of emphasis on names like
Alphabet
(GOOGL);
Citigroup
(C);
Darden Restaurants is a chain of restaurants owned by Darden.
(DRI), Olive Garden’s owner;
Exxon Mobil is a multinational oil and gas corporation.
and (XOM);
Take-Two Interactive Software is a company that develops interactive software.
(TTWO) is a videogame developer.
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I questioned Schwab’s Sonders if excessive price movement in unusual assets is a red flag. She observes, “There’s a lot of pretty wacky stuff going on in the market right now.” However, as a contrarian indicator, investor sentiment performs better in times of despair, which tend to be brief, than in times of euphoria, which can persist for longer. “Excessive optimism, joy, complacency, speculative fever, whatever label you want to use,” Sonders says, “absolutely constitutes a risk.” “However, it doesn’t tell you when that spark will occur that will turn the market in the opposite direction.” I’ll take that as advice to continue involved, but not to be lured by any tokenized sneeze transactions that come up.
Jack Hough can be reached at jack.hough@barrons.com. Subscribe to his Barron’s Streetwise podcast and follow him on Twitter.
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