Feature image adapted from art by Flickr user bedgemont_dm.
“2020” because it was the year we collectively came to see it clearly: the stock market has nothing to do with the economy.
Everyone who has ever worked in smallcap has been on the receiving end of a patronizing smile from someone to whom they explained that investor demand for exploration stage gold assets / cannabis license applicants / software that mints crypto tokens was growing, and the company they were pitching was in a position to ride that wave. Penny dreadfuls chasing stories didn’t interest them.
Investing is about identifying undervalued companies before the market catches up with them, not chasing hype-filled sentiment that could disappear at any minute. Strong operational cashflow! Competitive advantages in large addressable markets! Moats! That’s what makes for great growths stories that pay off. Not some dream about a coming paradigm shift.
But those fundamental aspects of business being more grounded than dream narratives doesn’t make them any less totems, or make the values that the markets ascribe to them any less arbitrary. Ultimately, the market will price a company’s earnings wherever the punters feel it should, so what’s the difference if the element being priced in is the potential that the company will eventually benefit from a radical paradigm shift? In 2020, everyone has decided to buy the ticket and take the ride.
This space covered Tesla Inc. (NASDAQ: TSLA) ambitious Battery Day in September, as Elon made more audacious claims about his overvalued company’s ability to re-invent metallurgy and the battery manufacturing process, implicitly at the same time that it builds the most ambitious AI and robotics project of all time, making its cars a fleet of self driving taxis of the future with an OTA update (in the future).
Two months later, Tesla was worth more than all of the major car companies…
… and now, at a $669 billion enterprise value, it’s worth more than all of them put together. Its output hasn’t changed, materially, it’s just been blessed by a market that suits its unique talent for selling dreams.
The best performing company trying to draft off of Tesla’s market success is, unsurprisingly, the one with the product that is the closest clone. Nio Inc. (NYSE:NIO) sells glass-top teched-out cars into the Chinese market, and might be showing growth at the right time.
It’s shipped about one tenth the units Tesla has and, neatly, at $62 billion, has about one tenth the market cap.
Attempts to capture investors’ imaginations about the future of commercial shipping in Hyliion (NASDAQ: HYLN) and Nikola Motors (NASDAQ: NKLA) are works in progress. This column’s analysis liked Hyliion’s chances of making the business work better than Nikola’s, but this column is also in the middle of explaining that the market doesn’t care about that anymore.
The all-electric dream driving Tesla’s equity and sucking the rest of these EV stocks along in its wake was fertile ground for battery metals stories, spurring exciting price action in Manganese X (TSXV: MN) and GIGA Metals (TSXV: GIGA)…
…which lasted about as long as it took for investors to realize that, before TSLA buys specialty nickel created by a more environmental process that only works on feed from GIGA’s Northern BC property, or manganese to be used in revolutionary new cathodes, it will need to develop and perfect those processes in the real world.
AI & Enterprise-tech: Palantir
We wrote in October about Palantir Technologies (NASDAQ: PLTR), which conducted an IPO with a bold disregard for the notion that it needed any institutional support, betting that the market would come around when it lived up to aggressive growth targets. Palantir’s is a story that doesn’t need promotion to pervade, because it is being sucked along by the existential dread that the ultimate enterprise software will crush anything and everything that doesn’t get behind it.
We expect to be talking about PLTR for a long time to come. The control freaks at its helm have made certain that the company can only be taken over by a larger enterprise by their consent. There’s no telling if they made it that way because they’re incredibly greedy, or to prevent the company’s development from going any way but their way, but there’s no reason it can’t be both.
The cannabis trade’s resurgence as the political momentum in the United States began to build behind a potential legalization had us bringing up a closer look at stateside cannabis. Since 2019, market realities have devoured the equity of the companies that lacked solid business cases, though some are more solid than others.
We remain confident that a US legalization of cannabis is the “white swan event” that this trade is tied to, and that the producers who can remain going concerns until it happens will be worth multiples on the other side of it.
Anyone looking for a fight might try suggesting on gold twitter that the hollowed out economy and the unprecedented wealth inequality in it are the product of anything other than the evils of fiat currency. Anyone looking for a brawl ought to try it on bitcoin twitter.
We suggested in April that the unprecedented money printing being undertaken by the Federal Reserve to bail out the bond-issuing US corporations that (nominally) underpin the US economy would lead to a runaway gold market, and did our part to contribute by calculating a notional on-paper re-valuation of the Fed’s gold reserves to make them a reserve base that could reasonably backstop the Fed’s lending, and coming out a $4,838/oz, about $15,200 shy of Pierre Lassonde’s forecast.
Gold’s momentum stalled out around $2,100/oz in August of 2020 and the price has since broken trend and drifted in a gentle decline through a trading range where it presently resides in the high $1,800’s.
The anti-fiat sentiment’s momentum is being soaked up, in-part, by bitcoin, which is presently not on the Fed’s balance sheet at any price as far as anyone knows.
The Dive brought you a breakdown of JPM’s manipulation of the gold market through order spoofing in 2021, and may soon do a similar illustrated deconstruction of the roles of the more obscure tokens and the exchanges and payments companies in this latest Bitcoin run, but only once we’ve cleared the decks and prepared a meme arsenal for the twitter fight that’s sure to follow.
In brief, much of the demand driving the bitcoin price is synthetic – generated by the purchase and re-purchase of coins with other, lesser crypto products that are much easier to mine. Meanwhile, any legit entity set up to transact in bitcoin that feels the sell and suspects the demand may be less than genuine does the honorable thing and doesn’t look to close or ask too many questions. If Paypal (NASDAQ: PYPL) sees its users’ BTC accounts catch a tailwind, who are they to get in the way of the bump in transaction fees that would come along with its ability to smooth over the purchase process?
If there were ever a metaphor for the unique economy that governs which story stocks work and which don’t, it would be Hollywood. The pictures that make the most money are the ones that draw the most interest. Marketing helps, generally, but there’s just no telling what’s liable to be consistently popular with audiences and what isn’t.
When something does work, the studios will crank out clones until it stops working. Audiences are fickle, and they’re as liable to flock to a Citizen Kane reboot as they are to Fast and the Furious 27: A Terminal Velocity of Rage, and could just as easily ignore both. The studio doesn’t know what’s going to work, and neither do we. But for an in-depth look at what’s working and what isn’t as we move through 2021, keep it locked on The Dive.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.