One thing we can say about the still-young year of 2021: It’s proving to be a great vocabulary-builder.
People who just yesterday didn’t know a bull from a bear are learning about short squeezes, cryptocurrencies and everyone’s favorite, SPACs.
There have been more than a few references to the current runup in stocks resembling the 1999 silliness that ended in a market crash (except for gaming stocks, which were protected by that era’s continued expansion of casinos into the American heartland).
Until recently, the 1999 comparisons didn’t seem entirely valid. Tesla, Peloton and Zoom might have run up beyond all expectations, but these businesses have products and services that are much in demand, and revenues that are rising along with—if not exactly commensurate with—the rise in their stock prices.
Then came GameStop and AMC, driven to idiotically astronomical prices by retail investors who egg each other on, drive the price higher, then squeeze out short positions. GameStop is especially ridiculous: a money-losing company with a problematic future that’s reached a $25 billion market cap.
This kind of zaniness is reminiscent of 1999, when similar new investors gloried in day-trading stocks of internet companies that had no revenues, but lots of promises. That ended badly for the day traders, and this will end badly for the adventurous champions on Reddit. Meanwhile, few tears will be shed for short-sellers taking a beating.
There’s an old expression, “It’s an ill wind that doesn’t blow somebody some good.” It’s truer of investing than any endeavor.
One of the ironies of the current phenomenon may be that it’s benefitting long-term investors. As short-sellers scramble to cover their positions, many are raising money by selling long positions in companies that actually have good prospects. And that is depressing stock prices, thus creating an opportunity for long-term investors to buy such stocks at lower prices.
Of course, prices generally aren’t low. In particular, sports betting and iGaming stocks have been driven up to dizzying valuations, at 20 times and 30 times revenues, projected three, four and five years out. Like 1999, companies are losing money in the name of grabbing market share, and investors are cheering on the red ink. Who needs profits, after all, when you can have market share?
Some companies will make it through to a period where market share translates into profits. But an investor has to identify those future winners, which is hard to do. Remember when the original Netscape had more than 90 percent of internet search? That company no longer exists.
Even an investor who does pick a winner might have to wait three, four or five years for that profitability to justify today’s stock price.
There are digital companies in iGaming and sports betting that are profitable, such as GAN. And I wouldn’t bet against DraftKings, for example.
That doesn’t mean that conventional brick-and-mortar businesses are automatically comfortable alternatives. In gaming, Covid has slashed business for casinos and their suppliers. There’s a legitimate question of whether the so-called asset-light model might also be considered a hollowing-out model by removing real estate as an appreciating asset.
But there’s still some sense of security in investing in a business with a positive bottom line. Those opportunities can be identified through their fundamentals—a word new investors can add to their vocabulary.
