Blue Chip Blues: Are We Staring Down a Coming Collapse?

“The stock market isn’t about day trading. That’s for gigantic conglomerates and 1 in 100 million lucky stiffs who find a fluke. The stock market is about identifying an undervalued company that is likely to expand exponentially – into new markets, new industries, with radical innovation – and that translates over the course of a decade or two or three into real value attached to the equity. The core of the stock market is research, hold, and grow.”

That’s the idea, anyway, but theory and reality don’t always match up.

So when we take a look at the blue chips in the stock market, the elephant in the room seems to be that these large corporations are massively overvalued, underperforming, and matured to the point where exponential growth just isn’t realistic.

Take Disney for example. Disney has a market cap of $156 billion with a P/E of nearly 70. That means you, as an investor, need to pay almost $70 + to own $1 of actual earnings. Yes, that is wildly out of step with most of the market historically, but let’s take a look at how Disney has been performing.

Disney+ has lost billions of dollars in the last four years, and they continue to operate at a large loss. They have thoroughly mismanaged their massive brand acquisitions Marvel, Lucasfilm, ESPN, and Pixar, to the point where, on the film side, their last eight or so releases have lost a combined total of $900 million. They’ve inserted themselves into divisive political issues, turning off huge swaths of their consumer base. Their hiring practices are textbook examples of ideological capture rather than merit-based, and despite a temporary incursion into China which may now be reversing, they may be alienating themselves from foreign markets with increasingly woke content. Mass layoffs, months of a writers’ strike, and continuing SAG disputes make for dubious near-term performance. The theme park division stands alone as posting a modest gain.

Oh, and they pay no dividends to stockholders.

If you had bought $1,000 worth of Disney stock in January of 2000, by January 2023, after holding it for over 20 years, it would be worth $2,374.38. Adjusting for inflation, it would be worth $1,339.69. So, the value a little more than doubled nominally, but in reality, it took 23 years to gain 34% on your investment.

So now the question is, do we really think that this media company, which has been around since 1923, can even nominally double in value again over the next twenty years? Is it even worth the wait?

Or take another ticker, the infamous AMZN. Amazon may be a little more attractive as far as blue chips go, because of savvy management and executive training practices, broad reach across industries, vertical integration, and an innovative culture. Sure. But take a look at the P/E. It’s greater than 100. Dividend yield? Not applicable.

Amazon lost money for well over a decade before it finally turned a profit, and now it’s a powerhouse. But are investors holding this stock, which experiences significant price fluctuations regularly, as a long term strategy for growth? Do we really expect Amazon to repeat its meteoric rise from the last 20 years? And do they have any trust-busting trouble in their future?

Microsoft? At least they pay some tiny dividends (0.83%), and their P/E isn’t quite as outrageous as the others I’ve mentioned. But at a price to earnings ratio of 33.8 and a market cap of $2.48 trillion, the company is leveraged rather dramatically. With a per share cost of well over $300, is it likely that this mature stock will climb significantly higher? So maybe you hope for a split and then continued growth. Or maybe AI will get them to the other side of this, providing a path to an exponential increase in revenue. We’ll grab another.

SBUX – Seattle’s favorite success story. Starbucks has a P/E of around 30, and a dividend yield of 2.3%. Also a mature stock, with a price tag of nearly $100, is there enough ceiling left over Starbucks’ head in an environment of increased online shopping and the proliferation of boutique roasteries and cafes?

IBM has a P/E of 64. Meta’s is over 35, with a market cap of over $800B.

Tesla has a P/E of over 70 with no dividends to speak of, plus a high price per share, and currently a built-in ceiling on customer base, as the infrastructure has not caught up (and may never catch up) to the projected number of future electric car sales.

Are we operating in the market like the business school professors say we are? Or are blue chips being treated like government bonds, as “stable” assets, rather than as possessing the potential for real value growth? Or, even worse, has the market begun to over-speculate on these large companies and ignore the risk? Is the whole thing a bubble rising up on pure, unadulterated force of optimism?

Bubbles don’t grow forever. At some point they pop.

“The market has always won out over time for those who hold out,” many will respond. Fair enough. I’m no expert, and I’m certainly not telling anybody to pull their stocks.

But Michael Burry did. He’s the subject of the book and movie The Big Short. He’s the man who foresaw the dot com bubble bursting (and made a fortune on shorts), and who saw the housing crisis of 2007-2008 (and made a fortune on shorts). He literally sold every stock he owned in 2022, except for one. What’s more, late this summer, he placed a massive $1.6 billion short on the market, with $890M of $SPY Puts and $740M of $QQQ Puts. This represented a whopping 93% of his total holdings. Two months later, the market has rallied, slid, and certainly has not yet crashed, but in 2008, the housing market took just a little longer to crash than he expected. In any case, Burry clearly thinks a crash is coming.

Not a great sign.

The real insiders will take advantage of all of this. They know we are in a bubble, and probably in the last stages of a bubble. They will invest in recession-proof industries, bet against the market, and make a fortune on short-selling homes. They already know all of this.

But what about the business owner with two franchise locations and a stock-heavy IRA? Or the 54 year-old union worker with a pension tied to the market?

Capitalism is not, in general, a zero sum game. But when the bubble bursts, it is. A lot of people need to lose their lunch in order for the financial upper crust to enjoy the upside. Grantham says the losses could be up to $35 trillion.

The average P/E ratio of the Dow Jones as a whole has been as high as 30 earlier this year, but it has been trending downward over the last several weeks. This either means a correction in the market is taking place that will help things stabilize, or, on the other hand, it could be a prelude to a larger slide. The NASDAQ and S&P have been behaving similarly. The Dow’s P/E average of 20 is higher than usual, but it’s an awful lot more realistic than the giants leveraging farther and farther into the future. If you were to actually purchase one of these companies, would you really assign a 25x or 50x or 110x revenue to compute their value? Is that how you purchased your franchise or small business?

We may be out of step with reality.

Nobody panic, and don’t do anything rash – and none of this should be construed as financial advice. But beware of the bubble, and maybe, just maybe we ought to be careful about what our investments could look like in the next year or two.

INDUSTRY INSIGHTS

Air Travel, Side Hustles, and NGOs

Air Travel

Side Hustles

We may be witnessing the rise of the “side hustle economy.” According to a recent Bankrate Survey, nearly 2 out of every 5 US adults have a side gig, but this isn’t just for spending money. 70% of respondents report needing the extra income for day-to-day necessary expenses, savings, or to repay debt. More than half of Gen Zers have added an additional part-time gig to their income, as well as half of millennials and 40% of Gen Xers. Picking up on this trend, the internet has been cropping up with all sorts of articles on how to make extra money, such as Dave Ramsey’s 5 Great Ways to Make Passive Income on the Weekends, and NerdWallet’s 25 Ways to Make Money Online, Offline, and at Home. This trend may be due to the elevated cost of rent, mortgage, food, and energy since the U.S. inflationary spiral left lingering effects on the consumer, as well as increased credit card debt and decreased savings. The average side hustle adds an additional $12,689 to a household’s income yearly, so for the time being, this trend isn’t going away.

NGOs

As the war in Israel intensifies, the NGO and non-profit sectors have stepped in with millions in aid from concerned supporters, with strong support coming from American evangelicals. Organizations such as the International Fellowship of Christians and Jews have set up mobile bomb shelters, distributed food, and provided medical equipment. According to the Jerusalem Post, hundreds of millions of dollars in aid has been raised already to support the victims of terror attacks, first responders, and other pressing needs. Amidst the ongoing danger, there is actually an increased desire globally of travelling to Israel, indicating strong support for the nation’s cause in this conflict. For a list of five reputable organizations to give to amidst this crisis, click here.

Sunday School

“Yes!” Pam exclaims, when asked if it is possible to have a happy marriage and a happy boss (or a happy business) at the same time. “But you have to be proactive,” she adds. “Bill and I have been married 44 years-”

Bill interrupts her to add, “And we still like each other.”

“We do!” Pam agrees, without missing a beat. They do this a lot – chiming in while the other is speaking. But it isn’t like an unwanted interruption; it’s two people who work very seamlessly together, even in a conversation. A good sign from professional marriage and relationship authors.

“One of the reasons we have a super happy marriage,” Pam says, “and one of the reasons there is less fighting, more fun, more encouragement, and we’re rocking it in business is that we started a marriage meetup every Monday. It’s the Monday Morning Marriage Meet-up.”

Bill and Pam are big on planning and getting on the same page with one another. In their weekly “marriage meet-ups,” they pray together, share progress on their goals, assign tasks to each other, and make a plan for the week. This way, there is much less of the uncertainty, misunderstanding, and lack of communication that can lead to strife, and they feel like they are participating in each other’s success.

“The general rule we abide by,” Bill explains, “is the busier you want to be as a couple, the more intentional you have to be. Marriage needs time. You can’t ignore each other, just build your career, and think that your marriage is automatically going to develop. You have to schedule that time in. If you don’t want to be intentional,” he cautions, “then you pretty much have to slow down your career to nurture your marriage.”

“If you don’t invest in your marriage,” Pam says, “you can lose it, and that is really difficult on a business, especially if you’re an entrepreneur. Nothing hurts more than fractured relationships, and healthy marriages and healthy relationships with your kids take less time. They really do!”

Marriage and work success doesn’t have to be an “either/or” question. If your marriage is healthy, it can actually help you have more confidence, go into work more focused and motivated, and boost your career. If your marriage is in trouble, it can make you distracted when it’s time for business, depressed, and lacking creativity or drive. For those of us who are married, we know this from experience. The effort required to nurture your marriage will pay multiplied dividends in time, because you get to skip the hours of arguing, frustration, and despondency, and it adds to your happiness, because you get to spend time together in a way that is enriching for you both.

“The positivity that is poured into you when your relationships are healthy,” Pam concludes, “makes you more productive.”

So marriage needs time invested into it, and for busy people that means regular, scheduled time. But there is something even more fundamental.

“Most of us got married because we thought the other person was fascinating and beautiful,” Bill explains, “and then we started building a life together. We don’t normally define that purpose while we’re dating. So it takes a little bit of work and some focus to answer the questions, ‘What are we about?’ and ‘Why are we together?’ If you can identify that purpose, it helps you manage everything that it’s going to take to maintain a successful career and a healthy marriage at the same time.”

It can take some time for a couple to define and understand their purpose – and according to Bill and Pam, that’s ok. It’s important not to get discouraged or to throw in the towel if you can’t immediately answer these questions, but instead start walking down the path to getting on the same page with the one you are closest to.

Most of us know what it takes to be successful at work, so we have to ask ourselves:

Am I investing time in my marriage? (Dating, time spent talking without distraction, and planning/goal-setting together)

And

Have we identified our shared purpose as a couple?

“If we are both pulling in the same direction together for a common purpose, there’s just less fighting and more celebration,” Pam says. “And we can get more done.”

Bill and Pam Farrel are best-selling relationship authors of over 50 books and sought-after conference speakers. To learn more, visit their website www.love-wise.com, or check out their book The Marriage Meetup for a more in-depth guide on how to have meetings with your spouse.

Quick Hits ⏱️

Sunday School Answer

A: “It is more blessed to give than to receive.” Luke has Paul quoting Jesus as saying this phrase in Acts 20:35. This is the only place the quotation appears in the Bible.