Today our group had a call with one of our submanagers, Fidelity's Mark Schmehl. Here are the notes from the meeting:
Thoughts on recent correction
- Mark believes the recent sell-off was in large part due to Softbank ‘jamming into the market’ with millions of options
- Similar thoughts on the previous rally being driven by Robinhood investors
- None of the themes have changed, so there is no reason for valuations to change
- Believes we may see a correction in time rather than price
- Choppy sideways pattern for a while as we digest the ‘euphoria’
Virus stocks vs a new secular shift
- One of the big questions investors are asking now is when do you leave the work-from-home stocks?
- I.e. when do you sell Zoom and buy cruise lines
- The virus can be viewed as cyclical - it will go away; BUT it has created a new way of working that will be with us forever
- As a company you need to enable ALL of your employees to work from home at least some of the time rather than just ~10% pre-pandemic
- Organizational priorities have changed
- Maybe Zoom isn’t a virus stock, maybe it is a new world work-from-home stock; maybe you should be buying more Zoom
- Zoom was up 40% last Monday and Mark believes this is the market saying wake up, this is not a virus stock, this is a secular change
- Mark has done nothing with his Zoom position
- Peloton is another good example - fewer people are going to want to go back to a big sweaty gym, this is not necessarily a virus stock
- However, there are virus stocks that Mark believes can be traded
- Eventually people ‘cocooning’ at home will stop
- Maybe you’ll be making less Nespresso’s, less home decorating, less renovations
Current ideas
- Trying to find strong secular trends that are going to last beyond this year
- Technologies that are transformative (ex. Zoom)
- Health care is of interest on a stock specific basis
- There are some industrial technology names that he’s very interested in
Technology bubble?
- Most of the businesses that are being massively bid are great businesses, this is not the early 2000’s where the .com stocks had 0 revenue
- Example is Shopify - they keep executing, growing like crazy quarter after quarter, making money, making the world a better place, why shouldn’t it trade at a high valuation?
- Mark does think the Robinhood investors are here to stay, and are bidding these valuations higher
US election
- Thinks this will be ‘the biggest non-event in history’ and is comparing it to Y2K
- Market says Biden is going to win, you can see that in the ESG stocks
- Typically markets want a Republican administration but now, it seems like it’s the opposite
ESG (Environment, Social and Governance) aka Responsible Investing
- Governments have been moving in this direction for a while
- Mark thinks only now is there a consumer realization that the world is getting hot
- The fires in Australia, California is burning, water levels are higher - people are seeing this now for themselves
- Europe is way ahead of North America in this realization
- The hard part of ESG investing is 2 fold:
- There aren’t a ton of ESG stocks to buy
- Big industrial problems take time to fix and therefore the ESG stocks don’t grow as fast
- Thinks that government dollars are going to come in like a tidal wave
- Since there aren’t many stocks to buy, Mark thinks the few that there are will do very well
‘Reopening’ stocks
- Dipping your toe is a good way to do it, that’s what Mark’s practice has been
- “When this is over we’re going to have the biggest party you’ve ever seen”
- People will travel, spend money, throw parties
- Compared it to the roaring 20’s
- BUT the market is telling you this isn’t going to happen soon
- People are very fearful about the election and a 2nd wave - hard to get them excited
- Mark does not think there will be a 2nd wave in the devastating way people expect and doesn’t think the election is going to be as big as people think
Gold & commodities
- Still likes gold
- The only way we can pay off this massive pandemic-created debt is to inflate our way out; gold wins out of that environment
- Not interested in other commodities at this time
Clarity & market/company management insight
- There is more clarity now than in March, which makes the job harder
- Everyone’s in limbo; ‘wait and see’ for a vaccine - company management, consumers, policy makers
- Trying to find stock ideas unrelated to the virus or election that will do well on their own
Mergers and Acquisitions (M&A) activity
- Does not think you’re going to see much M&A in software stocks
- Valuations are too high, even with the recent pullback
- If you do see larger companies like Microsoft taking out some software companies at crazy prices, maybe this means you’re close to a top
Initial Public Offering (IPO) market
- Everyone wants to IPO right now - the market is hot
- Some bad stocks have IPO’d and doing quite well
- Feels that the market is bubbling but can continue to bubble here for a long time
- With unlimited stimulus the market can keep chugging along
Please let us know if you have any questions or need anything else.
All the best,
Vito and Eric