Friday File: Insurance Co. Highs and Lows
by Travis Johnson, Stock Gumshoe | April 28, 2023 5:18 pm
Earningspalooza of updates from big tech, insurance and others (GOOG, AMZN, ROKU, EQT, NET, AMT, MKL, KNSL, GSHD, BRO, WRB), plus one buy in the Real Money Portfolio
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Source URL: https://www.stockgumshoe.com/2023/04/friday-file-insurance-co-highs-and-lows/
Thanks for all of your great analysis Travis!
Nice news from Treasury Dept. — fixed rate on I Bonds up to 0.9%! Total yield
For the next six months only 4.3%, so no longer shockingly high, but getting a guarantee of 0.9% over inflation for the next 30 years is pretty impressive. Fixed rate hasn’t been this high in about 15 years.
Travis, thanks for the extensive review and personalized prognostications. Much appreciated.
AMZN. I hold a position. The thought or actually question that continues to enter my mind is this: Is Amazon the Cisco of the next decade or two? Cisco had an AGR of 90-100% through the 90’s. At that rate they were on track to be an $8B company, by 2010, or 30-40% of the entire US economy. Seen that way it is no surprise that they have traded sideways for 20 plus years as their lofty multiple regressed to market normals along with their growth rate fundamentals. Of the big five tech names (AAPL. MSFT, GOOG, META, & AMZN) they have the highest multiple on what is now the lowest growth rates of the group and the lowest profit margins. They are capital and personnel intensive which makes achieving higher margins difficult. Their most profitable business is AWS, which growth rate, as Travis’ notes is slowing notably while GOOG and ORCL are gaining traction in the space. More competitors is going to put additional pressure on margins. Even when, or if, they turn the delivery business into a profit center the margin will be considerably lower than other big four core business. Probably more like Walmart.
So is AMZN the new CISCO?
And I wonder if Disney is the new ATT. They have taken on huge debt to add Fox and streaming to their portfolio. These were touted as the new future of huge cash flow and profit generation as was DirecTV, and other acquisitions by ATT. ATT is now just a cash flow generator to service their debt and pay a high dividend. Even Buffett recently mused that content and streaming do very well for the actors and producers, but not much for the shareholders. The current odd duck is Netflix. But they have essentially no debt and a huge lead in streaming. But will $20, $30, $40 billion a year in content creation being them back to the herd? O don’t know. But Disney looks more and more like ATT to me. And the great hope that the man who saddled them with all this debt can correct the ship in 18 months may be just that, a great hope.
That’s always a reasonable worry with these kinds of richly valued companies, and it’s true that some of what keeps Amazon’s valuation elevated, in terms of earnings multiples, is a belief among investors that it’s OK for them to keep building, keep adding productive capacity, and eschew profits in favor of growing the company — which means, if we’re being honest with ourselves, that this is partially a faith-based investment. Faith in the Bezos vision. And that kind of faith is subject to the risk that it could turn quickly if there’s a reason for sentiment to shift.
I think it will work out, though this is a challenging period of adjustment for Amazon, dealing with the fact that they have gone from a dominant provider in cloud services to (probably) one of three dominant providers — and that the competitors, Google and Microsoft, are willing to lose money on Cloud to grow, while Amazon has been relying on AWS as its profit driver. At the same time, Amazon is growing out other profitable businesses, including advertising, so there are levers to pull, but it will be interesting to see how Amazon adjusts in the next couple years… will they double down on growth globally? Will they slow down the growth and focus on generating profits from the merchant services and e-commerce businesses?
It’s not quite the same as Cisco, which was a much narrower company and a monopoly provider in an industry that got overbuilt, but in valuation terms it could certainly end up being similar. Cisco is a good barometer for the mania of the past couple years, in some ways, since it was (marginally) profitable in the late 1990s and was growing, but got up to a wildly unsupportable valuation of 20-30X sales for a couple years, at a time when revenue was slowing (from ~80% growth to about 50% growth and then 18% growth in 2021 before collapsing and seeing revenue drop by 18% in 2002).
Travis , all good points. Thanks.
P.S. I forgot to mention in the note above that I also sold another chunk of NVDA covered calls at $290… the details are in the Real Money Portfolio, as usual, but I neglected to point that out, sorry.
And that could create a transaction pretty soon, we’ll see — NVDA is on fire again this morning and is at $289 as I type, so in retrospect it would have been a bit more profitable if I had waited to sell calls, but I’ll let you know if that (partial) position is called away. And despite how much I like NVIDIA and think they have a bright future, having those shares called away at $290 would be fine with me… even if analysts are pretty wildly underestimating NVDA’s growth potential because of ramped up AI investment, at some point valuation has to matter, and the shares are still at close to 90X estimated earnings for the coming year (60X adjusted earnings).
Maybe it won’t matter, maybe NVIDIA will be the next company to get the “faith” that has typically been given to Amazon, but those two are the only megacap companies ($250b+) that trade at more than 50X forward earnings estimates. Even if you expand that to “companies above $50b” there still aren’t many — the list includes some other stocks I own, Intuitive Surgical (ISRG) and Shopify (SHOP), as well as data center REIT Equinix (EQIX), earnings-starved Intel (INTC), and Latin American e-commerce giant MercadoLibre (MELI). Rarefied air.
I don’t generally send out a “Trade Note” when I make a small options move, but since this is a position I’ve mentioned a couple times in Friday Files I thought I should let you know:
In the wake of Hindenburg’s short attack in Carl Icahn’s Icahn Enterprises (IEP), I sold my 2025 call options on IEP.
This is not due to any deep understanding of Hindenburg’s criticisms, or of Icahn’s (so far very understated) response, it’s pretty much just a function of the price and my exposure. I bought $55 call options for about $1.20 when the shares were around $52, as a low-cost way to get some exposure to the fact that IEP might do well during a credit crisis as Carl Icahn swings his bat at some more boards of directors and makes big moves. We haven’t seen the real crisis emerge yet, and it is still possible he’ll do well in what seems likely to be a wild time for distressed debt, but now those same options are… now around $1.50, and the stock is down to $30. So I sold, with a small and very unexpected profit, probably just because the Hindenburg attention is drawing the focus of more traders who are hoping for a short squeeze (Icahn owns almost all of IEP, the float is tiny, so that’s possible… but there wasn’t much of a short position before, for that same reason). Maybe such a squeeze will happen, and you never know what the future will bring if the Reddit crowd gets involved on the other side, but that’s not the game I was looking to play… so I’ll take my ball and go home.
I’ll comment a bit more on the Icahn/Hindenburg stuff in the Friday File tomorrow, but that’s your Trade Note: Closed out my IEP options at a surprising profit, despite the crash in the shares. The story is very different today than it was last week, and I confess that I’ve popped some popcorn and I’m hoping to watch a show, but Icahn is so far not really climbing into the ring to defend himself. We’ll see how it goes.
Hi Travis, any update on WCC after earnings today? not sure why it went down 13%
Will share my thoughts on that tomorrow. Didn’t see anything glaring that worried me, perhaps they said something gloomy on the conference call.
It looks like the price was already down before the earnings call began. Maybe an analyst said something?