We're in a new year and a new phase of the business cycle, Jim Cramer told his Mad Money viewers Tuesday. That means conceptual stocks are out and tangible stocks are back in fashion. If a company doesn't make real things and have real profits, then prepare for big losses.
I've been thinking about this a bit, and it connected to a SA article on ARKK that I read today.
The one justification is that rising rates impair growth, so while all suffer to some degree, the stocks that suffer the most are those that depend on said growth for their value. The value of KMB, for example, is based on the dividend -- nobody expects growth to substantially exceed inflation.
The SA article connected this to "duration", however, which also makes a lot of sense to me. If you project earnings forward, it would take ~14 years for the cumulative earnings of companies like HD, PG, and ABT to equal their current share price. AMZN might manage this in 11 years, if they can somehow maintain that incredible 30% growth rate, but might take 17 years if the growth rate decelerates to 15%. Not totally ridiculous, perhaps, but somebody owning AMZN here is definitely betting on more than 15% growth!
At the high end of my portfolio are MKC and CHD, companies with moderate growth and high P/E ratios. They can expect to take 16 years to earn back their share price. At the low end are companies like WSM, CVS, JPM, and LMT -- which might do it in less than ten years of all goes well.
It is an interesting way to look at valuation -- and I can totally understand why higher interest rates (and presumably a higher discount rate) would take the air out of some of those future cash flows. |
