What Happened in the Market (and the World) This Week?
S&P 500 return this week: -0.76%
S&P 500 return YTD: 4.19%
Nasdaq return this week: -0.79%
Nasdaq return YTD: 2.54%
Another volatile week. The market has been incredibly choppy due to fear of inflation and higher interest rates due to the 10-year and 30-year treasury yields spiking.
On Wednesday, Jerome Powell made a statement after the Federal Open Market Committee (FOMC) March 2021 meetings that there was no plan to increase interest rates for the next few years. This statement calmed the market (for the day) where the Nasdaq went sharply green from red since there were forecasts that the Fed would increase interest rates earlier than that.
Unfortunately, despite Jerome Powell’s Wednesday statement, treasury yields spiked like crazy on Thursday, hitting 1.7% and the Nasdaq and the rest of the market tanked pretty hard with the Nasdaq dropping 3%+. There was a slight recovery on Friday, but overall, pretty “meh” week.
What’s surprising to me is generally Jerome Powell’s statements freak the markets out, so it’s interesting how this time he definitely calmed the markets, but the markets decided to ignore his statements. What’s even more interesting is that Jerome Powell wrote an op-ed in the WSJ on Friday to assure the investors that the Fed would do whatever was needed to keep the economy going:
But the recovery is far from complete, so at the Fed we will continue to provide the economy with the support that it needs for as long as it takes. I truly believe that we will emerge from this crisis stronger and better, as we have done so often before.
Portfolio Update and Random Notes
I actually didn’t follow the markets too closely this week since I took the week off to get some much needed R&R since it’s been really busy since my company was acquired. I also was a little distracted since I was able to pay MSRP for an RTX 3090 graphics card at Microcenter and was busy building a new computer.
For the week, Thursday’s sell-off definitely hurt my predominantly growth stock portfolio with many of my positions down 5-7% that day. I’m now down just about 3% YTD vs. the S&P’s +4%.
I had some time to reflect on my portfolio this week and while I was reviewing my closed positions, I identified a big performance drag to my portfolio: short-term options trading. Given the volatility of the market, I definitely have been placing more short-term option trades expecting a bounce and what not, but apparently my record has not been very good 🤔. I’m not incredibly surprised since short-term options require you to time the market correctly and it’s pretty hard when there’s just so much volatility.
Over the years, the majority of my market gains from option trades have always been through buying long-dated options (LEAPS) that allow the underlying stock years to ride out any volatility and grow into its valuation and more.
Given this new found insight, I’m going to definitely try to reduce the number of short-term option trades I’ve been making and we’ll see what happens to my portfolio going forward.
Moving on, I continue to buy the dip given all the market volatility and will continue to do so. I strongly believe Peloton ($PTON) and Zoom Video Communications ($ZM) are incredibly undervalued and have taken an unfair beating given investors fear that their glory days are now over with the re-opening. I call bullshit on that since the way we work out is definitely changing (granted, I will never own a Peloton since I’m too cheap to pay the monthly membership fee given my pursuits of FIRE, though I do own a rowing machine). Also, Zoom is not going anywhere and I fully intend to renew my annual subscription when it comes due next month.
CrowdStrike ($CRWD) announced earnings on Tuesday afternoon and while the earnings report was really strong, the market’s negative sentiment towards growth stocks and this painful “sector rotation” resulted in CrowdStrike basically staying flat for the week. It’s crazy how just a few months back, a report like the one CrowdStrike just had would have sent the stock soaring 15%+, but the market is pretty demanding these days when it comes to growth stocks.
I started a new position this week: Bandwidth ($BAND), they are a competitor to Twilio ($TWLO) and my primary thesis in investing in them is that they are forecasting 35% YoY revenue growth in 2021 (likely 40%+) and have a EV/S multiple of < 10. Generally companies growing at 35%+ will have an EV/S multiple closer to 20-30 in this market. For reference, Twilio has a 33 EV/S though they are growing at a slightly faster clip (45-50%). It’s hard to say if Bandwidth will ever see the multiple expansion it deserves, but historically, if you are patient, companies growing revenue quickly and continue to execute well will eventually get the multiple expansion they deserve.
A Few Examples or Case Studies of Multiple Expansion:
Pinterest ($PINS) – I first bought Pinterest back in October 2019 given their huge revenue growth rates and low multiple. They got beat up in their Q3 earnings report, so my initial investment turned sour very quickly. I bought the dip and then Pinterest had a pretty solid Q4 earnings report which caused shares to spike but that was short-lived since COVID struck and wreaked havoc on the advertising industry for a few months. In Q2, Pinterest rebounded and continued to execute and well, they are now sitting at a pretty solid 26 multiple (still lower than it should be imo). They were a 10 multiple when I got in around $20 and with revenue growth and multiple expansion, Pinterest is now trading around $73/share. In the graph below you can definitely see when Pinterest saw some big gains in their multiple after some solid earnings reports.
Roku ($ROKU) – Roku was definitely a painful one to wait for but it was totally worth it. In the graph below, you can see that Roku hovered around a 10-16 multiple for the first half of 2020. Mind you, this is when all the other growth stocks after April started skyrocketing and little Roku was just hanging back. So it was really hard to not get impatient with Roku. In Q2’s report though, Roku astonished Wall Street and their stock finally shot up and you can see the insane multiple expansion they received in the coming months. It was like 2 years worth in just 3 months hence why their stock skyrocketed from $100 to $300+.
Snap ($SNAP) – The last case study I will present to you is Snap. This stock took several years to pay off but it finally did. So Snap has been one of the most hated stocks due to their CEO’s initial lack of experience and Wall Street simply not understanding how the platform worked.
If you look at Snap’s historical stock price, it’s pretty crazy:
I first bought into Snap around their IPO and then trimmed the majority of my stake. I re-bought in Fall 2019 and had to wait for over a year before Snap finally got some attention. Granted, like many impatient investors, I got impatient and did trim a big chunk of my stake only to see them skyrocket finally in late 2020. Snap was a company growing revenues at a really healthy 40%+ clip but the market was only focused on DAUs. When the stars finally aligned for DAUs and the market saw the revenue growth, the stock got a lot of love. The stock basically tripled in just a few months.
Look at that multiple expansion 🤦♂️:
Next Week’s Plan
Earningspalooza is basically over now. So no major plans. I’ll continue my basic investing strategy during bouts of market volatility:
Buy the dip in strong companies that are getting unfairly beaten up and write long-dated puts (not to be confused with buy) to generate income to feed the machine.
I will also try to keep in the back of my mind: NO SHORT-TERM OPTION TRADES.