In all this tech euphoria and COVID-19 quarantining, investors are missing a key fact. People need people. In the song, People, writer Bob Merrill and composer, Jule Styne, wrote and composed it best:
People who need people, Are the luckiest people in the world We're children, needing other children And yet letting a grown-up pride Hide all the need inside Acting more like children than children
Barbra Streisand sang it best; academic studies prove that people who get normal human interaction have much better mental health. Despite this fact, investors have been scrambling to capitalize companies which benefit from people voluntarily imprisoning themselves in their own homes. Work from home (WFH), exercise from home, cook from home, movies from home, sports from home and just about everything else from home is all the rage. Every newbie tech company attached to this phenomenon is capitalized at an enormous price-to-sales ratio (P/S) and a huge price-to-earnings ratio (P/E), if they have one.1
- Peloton (PTON) P/S: 12.6x; 348x P/E
- Shopify (SHOP) P/S 38.7x; 69.7x P/E
- Teledoc (TDOC) P/S: 31.1x; 95x P/E
- Amazon (AMZN) P/S: 4.5x; 148x P/E
- GrubHub (GRUB): P/S 4x; 249x P/E
To give you a feel for the premium in the pricing of these WFH stocks, we picked out a non-WFH stock, which is a glam growth stock, for comparison. Here is Chipotle (CMG):
- Chipotle: P/S 3.3x; 69x P/E
Compared to the WFH stocks, CMG looks like a screaming bargain. Barbra Streisand’s song tell us that those who go to Chipotle and interact with a human are “the luckiest people in the world.” Something is very wrong here unless we stay imprisoned in our homes forever.
The song tells us what is wrong and so does security pricing. We are all “children” in need of social interaction with “other children.” We are “letting our grown-up pride” get caught up in owning expensive stocks which have gone up more after already being expensive. Our imprisonment and poor mental condition make us like Mo Green in The Godfather. Michael Corleone says that he is going to buy Mo out of his casino ownership. He says, “you think I’m skimming, Michael.” Corleone replies, “you’re unlucky!” People who don’t think they need people are “unlucky.”
Owners of these massively over-priced and momentum based WFH stocks could prove to be extremely unlucky. Historically, the average P/S is around 2 for growth stocks and the average P/E ratio is around 20x. Gravitation to the mean could inflict huge damage on these glam winners when we get out of the COVID-19 era.
No more hunger or thirst First be a person who needs people (people need people) People who need people Are the luckiest (luckiest) people in the world
You now know who we think the unlucky people are, who do we think will be “the luckiest people” in U.S. common stock ownership? The prices for companies which benefit from our economy reopening have rallied lately but look to offer the most reward per dollar of risk. We like the idea that “people who need people” will “hunger” to drive all over the place to visit those who they have been unable to love on in person. We like Chevron (CVX) and Continental Resources (CLR) in the oil patch.
Betting that nobody wants to shop in physical stores can only be understood through the lens of someone in Manhattan or downtown Seattle, where only ghosts shop. Simon Properties (SPG) and Macerich (MAC) own many of the premier Class-A malls in America. Watch the folks flock there when the vaccines and treatments have put COVID-19 on the same footing as influenza and quench their “thirst” for human interaction.
Lastly, one WFH attitude that struck millennials for the first time is home ownership. Those millennials might just fill their homes with children. The home builders have a huge tailwind as there are 36% more millennials than there are GenXers. This means that home builders like NVR (NVR), Lennar (LEN) and D.R. Horton (DHI) look very attractive at well below stock market P/S and P/E levels with an avalanche of new buyers coming. It also means that Carter’s (CRI), the most popular maker of children’s clothing, could receive some affection from investors as millennials fill empty bedrooms.
We will end these thoughts with some additional lyrics from the song:
People who need people Are the luckiest (luckiest) people in the world
Warm regards, William Smead
1Source: Bloomberg. Price-to-Sales and Trailing Price-to-Earnings ratios shown are as of November 18, 2020.
The information contained in this missive represents Smead Capital Management's opinions and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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