Stocks hit another all-time high against a backdrop of generally favorable earnings. Bonds were basically flat.
It’s still early in earnings season but some winners are surfacing. Notably, most of the Magnificent 7 continue to perform magnificently. No final conclusions until these companies report earnings, but we got a sneak peek last night when Netflix reported robust numbers. Disruptors continue to disrupt. In Netflix’s case, the crackdown on non-subscribers using accounts of family and friends seems to be working, as are efforts to expand ad-supported options. Netflix remains alone in the streaming world as the only company making money and producing positive cash flow. But with that said, it only seems to be expanding its lead. Streaming is an arena that will undergo massive consolidation in the years ahead. But Netflix seems to dominate and there is little reason why that won’t continue.
Most of the actual Magnificent 7 members have yet to report although Tesla has released sales numbers that were disappointing. It alone among the top 7 is down materially year-to-date. Soon, the conversation will revert to the Magnificent 6. Over time, there will be further changes as older companies mature, others get disrupted, and new disruptors appear on the scene.
There is still a lot of discussion as to whether a soft landing or a recession lies ahead. For a disruptor, 1% growth or a 1% decline is almost immaterial. What matters is the opportunity to create and expand any company’s total addressable market. Nowhere is that more apparent than for Nvidia. Not only do its chips dominate a world craving AI capability, but it is adding software and other technology layers (e.g. security) to protect its moat. This is no different than what has made Apple# so successful for the past 15 years. Today, the smartphone hardware market is mature. Apple is actually selling fewer handsets today than it did a year ago. But all the added services build revenues, expand its moat, and improve margins. Whether it be Apple Music, storage, podcasts, Apple Pay, or a host of other options, it is these services, plus great service, ease of use, and wonderful industrial design that lets the company sell phones and computers twice as expensive as the competition.
This isn’t just true within technology. You don’t pay 2x or 3x for a Porsche because it goes a little faster. It’s a thousand little things. GM and Ford haven’t figured that out yet. But isn’t it great to make $50,000 per car instead of $5,000? A Chevy can get you from A to B as easily as a Porsche. But which gives you a better experience?
Cars are still part hardware and part technology. But what about Bounty towels, or a can of Coca Cola Zero? Consumers view these as superior as well. Procter & Gamble, which makes Bounty towels, reported great earnings yesterday. Procter & Gamble in its own way is as much a disruptor as Apple. Think Tide pods, or Gillette razors. Unless we are in a stiff recession where penny pinching is paramount, consumers will pay up for better quality.
Big companies have big advantages. McDonald’s# spends hundreds of millions of dollars to shorten the drive thru process by a few seconds per guest. That means speeding the preparation of hamburgers, to promoting the app for ordering, to incorporating artificial intelligence to speed ordering. Your mom and pop restaurant cannot replicate this. Even Burger King can’t. Deere combines can distribute seed and fertilizer precisely according to topography. That’s a capability few can compete against. Ditto Caterpillar with mining and construction equipment.
None of this says a newbie can’t arise to compete either against an established giant or to create a whole new world of its own. Facebook basically created social networking, building on the experience of early pretenders like MySpace. Google did the same in search, crushing pioneers like Yahoo with a faster engine.
If you look at the totality of the stock market, the vast amount of growth over the past decade has come from companies who were able to create great new markets or who were able to obsolete early pioneers. The GPU of Nvidia is crushing the microprocessor world dominated by Intel. To Intel’s credit, it is trying to fight back. Netflix still dominates streaming despite dozens of well capitalized entrants. No one yet has supplanted Google in Search or Meta Platforms# in social networking although TikTok is making a good try.
That doesn’t mean now is the time to rush out and buy the obvious leaders. But every stock, and I mean every stock, has its ups and downs during any given year. Nvidia, the winner of 2023, was down 20% from March to October. It has risen 50% since. Now isn’t the prime entry point. Assuming you won’t isolate the exact bottom, nibble. I like to find a stock I really want to own and buy a 1/3 position, probably at a price that is still pretty rich. If it goes up, hey, I make a few bucks. But if it goes lower, I buy more using the same dollar amount as my first purchase. That way, I buy more shares the second time. My hope is that there is a final flush that will let me buy the last third in a healthy market correction, perhaps 10-15%. I’m not talking about a bear market, just the sort of correction that can happen at any time. Of course, I have to make sure that my fundamental reason to buy is still intact. I set an ideal buy price and start to nibble when the stock gets within 10-15% of my target. It doesn’t work all the time. But if you end up investing in one of tomorrow’s great companies, the process should produce major long-term dividends.
Today, Neil Diamond is 83.
James M. Meyer, CFA 610-260-2220