Charlie Bilello's 5 Charts to Show Your Clients: September 2021
Each month, we sit down with Charlie Bilello, Founder and CEO of Compound Capital Advisors, to discuss the most important and current market trends for advisors and their clients. Illustrated through visuals that Charlie creates using YCharts, these trends and topics provide fascinating insights and also make for excellent talking points in your own client communication. Click here to register for our next webinar with Charlie Bilello.
Watch the full discussion here, or read on for select highlights from the September 29th webinar:
Expectations Are Everything
Suppose you were told nothing but the information in the table below. Which would you say has the higher market capitalization? Company A or Company B?
If you chose Company A, you’re…incorrect. Company A is Lockheed Martin (LMT), and Company B is Snowflake (SNOW). As of September 16th, 2021, the companies boasted market caps of $94.57 billion and $97.35 billion, respectively:
Despite Lockheed Martin generating 78.5x higher TTM revenue than Snowflake and having a 45x larger employee base, the long-time defense equipment manufacturer is smaller than the ten-year-old cloud computing company based on market cap. “Make it make sense”, chants the chorus of Wall Street analysts.
Furthermore, expectations for future growth are quite lofty for Snowflake, as reflected in current price-to-sales figures. Snowflake shares trade at nearly 100 times sales, while Lockheed Martin’s P/S sits around 1.4, indicating a less rapid but steadier pace of growth:
Charlie translates Snowflake’s P/S ratio as: investors are betting on its 100-plus percent quarterly YoY revenue growth rate continuing for the foreseeable future. But even if Snowflake executes on that lofty number, Charlie forecasts that the fate of Snowflake’s P/S ratio ultimately rests on investors’ expectations for the company’s growth rate a few years from now. If Snowflake is no longer generating 100% growth but, say, 80% growth in 2023 and 50% growth in out years, Charlie sees that P/S number coming down as a result of lowered expectations.
How to Win Any Argument Over Investments
Whether it’s in small circles or on social media, Charlie notices people often like to play a game of “winning arguments” by claiming a favorite investment of theirs is superior to someone else’s. This can be done through nefarious tactics, such as sharing a chart that includes only certain investments and timeframes—a great example is the performance of stocks vs. gold over the past 20 years. From September 2001 through August 2011‚ gold’s 586.9% rise in price significantly outperformed the SPDR S&P 500 ETF (SPY) total return of 24.5%.
Two major recessions, a 5% effective fed funds rate in the mid-2000s, and higher levels of inflation made gold a more attractive investment than stocks—which are more sensitive to economic factors—to the point where it looked like “gold could do no wrong”, as Charlie put it.
However, the tables have turned in the ten years since. Below-average inflation and 0% interest rates helped set up a major bull market in equities from September 2011 through August 2021, sending the SPDR S&P 500 ETF’s total return up 368% while the price of gold actually declined 3.3% during that time period:
While one investment looked promising and the other… less so, the perspective can reverse quickly with a simple alteration to the time period shown. This proved quite true in the comparison of stocks vs. gold. It’s a case of “being right or making money”—an old finance phrase Charlie quoted—where he makes the distinction: “you can be right about winning this argument, but that’s very different than making money in investing going forward”.
Join us for next month’s webinar with Charlie Bilello on Tuesday, October 26th. Click here to register for the webinar.
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