(B)(N) Momentum Stocks & The Four Horsemen

Ano de la Misericordia

Drama. The market is full of fast and early risers for which there’s no reason to own them but everybody wants them less somebody else should get them at a low price and own all of their earnings before they do.

For example, the four FANG stocks (Facebook, Amazon, Netflix, and Google now called Alphabet for A to Z or the Alpha and Omega, we suppose) have never paid a dividend or returned any of their earnings to the shareholders but for a select few, and they are trading at a [P/E]-multiple of only 50x today so there must be some upside because we just looked at thirty-five miserable stocks with a current dividend yield of 3.3% and a  [P/E]-multiple of 100x going to 150x if the earnings don’t come in any better than they have for the last five years.

However, somebody once said that “misery likes company’ (Sophocles circa 400BC) and we returned an average of +54% per year for five years and increased our wealth nearly nine-fold, by +770%, with no risk at all because we provided said “company” to these miserable stocks.

Momentum Stocks & The Four Horsemen

The investors who have bought and held the four FANG stocks since 2012 – a no-brainer they say – might have gained about +250% since 2012 based on the market value and the market share of each of them (index weighting) which varies significantly between the current market value of about $300 billion to $500 billion for Facebook, Amazon and Google or Alphabet to Netflix at only $63 billion but which also had the largest percentage gain by far of over +700% since 2012.

But we took home more than twice that amount, +1540% and an average of +75% per year for five years with no risk at all by simply respecting the fact that even love sometimes bites – we used both the long and the short portfolio – and all that we needed was some of our own money and a little bit of leverage in the margin account from our broker – who also loved these stocks – with no risk at all (please see below).

Don Quixote and Sancho Panza go to New York – Not just a fairy tale

All of this is quite surprising because none of these companies have ever paid a dividend and investors have no way to gauge the “worth” of these stocks to them other than through the hypothetical possibility that they might own them, or control them, and therefore have access to all of their earnings which were $29 billion last year with a current market value of $1.4 trillion and, therefore, a “market yield” of only 2% (the inverse of the [P/E] 50x) and a return on the ownership (the net worth or shareholders equity) of 14.6% which is not unusual, or heroic, for almost any company.

To all of which we say, no thanks. because these companies are merely the “underlying” in a bidding war among the investors for earnings that they will never get and we can do a lot better by investing in them – the investors, their money, and the market that they create by tilting at windmills; please see the cash flow summary below for more details (and click on it and again to make it larger as required).

Exhibit 1: (B)(N) Momentum Stocks & The Four Horsemen

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy, UFOs and the High Flying Techs, and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that as well as The Great Rotation & Twenty Hot Canadians 2017.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
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For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.