Thursday, February 11, 2021
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Everything bad is now good, market edition.
The stock market is the meme market now.
From the GameStop (GME) saga to Tesla’s Bitcoin buy (BTC-USD) to Elon’s Dogecoin (DOGE-USD) purchase, it seems like any internet-based humor that is even vaguely financial manages to impact asset prices.
But factoring in how much of a meme a given asset might be is just not part of traditional portfolio management or anything they teach in the CFA program. Yet.
What investment managers do learn, however, is that sometimes in markets everything that seems like it shouldn’t happen does. In other words, there are market moments during which it makes sense to think about what trades might make the least sense. And there you find your winners.
“Imagine for a moment that a portfolio manager describes their investment process as follows: they focus exclusively on companies with deteriorating or questionable business prospects, and lots of debt,” writes Credit Suisse analyst Patrick Palfry in a note to clients published Tuesday.
“They go on to highlight their fondness for companies that make poor use of invested capital, and experience large selloffs during periods of stress. While such a process might sound absurd, it is an excellent depiction of what’s been working since Pfizer’s November 6 vaccine announcement, which shifted investor focus toward the reopening process.”
In their note, Palfry and the team at Credit Suisse run through a series of these measures that define this market wherein investors reward what they call “junk and disappointment.”
Notably, Credit Suisse finds that stocks with high short interest have almost doubled the performance of stocks with low short interest. On the heels of the GameStop episode which saw, for a time, a number of other heavily shorted names become market darlings this performance is perhaps not all that surprising.
What is surprising, however, is that this trend was in place before the GameStop meme became a national news story. As Credit Suisse notes, “this pattern mimics other low quality metrics, and is reasonably unaffected by recent headlines on retail investor activity.”
Other measures that surface big winners include screening for stocks that have experienced the highest volatility, shares of companies that produce a low return on assets, and stocks with the biggest 52-week drawdown.
And as if this series of negative indicators turning into alpha generators isn’t frustrating enough for investors inclined to focus on fundamentals, it gets worse. Because actual fundamentals haven’t been helpful at all.
“Interestingly, these signals are much stronger than fundamentally-based metrics,” Credit Suisse writes, noting that the average reaction to shares of a company that beat on the top and bottom line is a decline the following day. Morning Brief readers will recall that Sam Ro highlighted the same trend of negative reactions to good earnings on Monday.
And Credit Suisse’s relative frustration at the explicit shunning of fundamentals by investors isn’t unique to them; on Tuesday, we highlighted work from Goldman Sachs on the same subject.
How long these trends last and how they resolve are topics for folks smarter than us.
But identifying what’s been driving markets, why it’s been driving markets, and how the experts have been flummoxed by these dynamics all help explain what’s been a chaotic start to the year in markets.
By Myles Udland, a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland
What to watch today
8:30 a.m. ET: Initial jobless claims, week ended February 6 (760,000 expected, 779,000 during prior week)
8:30 a.m. ET: Continuing claims, week ended Jan. 30 (4.420 million expected, 4.542 million during prior week)
6:00 a.m. ET: PepsiCo (PEP) is expected to report adjusted earnings of $1.46 per share on revenue of $21.81 billion
6:00 a.m. ET: Yeti Holdings (YETI) is expected to report adjusted earnings of 62 cents per share on revenue of $353.25 million
7:00 a.m. ET: Duke Energy (DUK) is expected to report adjusted earnings of $1.02 per share on revenue of $6.49 billion
7:05 a.m. ET: Kraft Heinz (KHC) is expected to report adjusted earnings of 73 cents per share on revenue of $6.84 billion
7:40 a.m. ET: Tyson Foods (TSN) is expected to report adjusted earnings of $1.53 per share on revenue of $10.86 billion
7:05 a.m. ET: Molson Coors (TAP) is expected to report adjusted earnings of 77 cents per share on revenue of $2.41 billion
8:00 a.m. ET: Kellogg (K) is expected to report adjusted earnings of 89 cents per share on revenue of $3.50 billion
4:00 p.m. ET: Expedia (EXPE) is expected to report an adjusted loss of $2.02 per share on revenue of $1.11 billion
4:05 p.m. ET: GoDaddy (GDDY) is expected to report adjusted earnings of 45 cents per share on revenue of $865.00 million
4:05 p.m. ET: Disney (DIS) is expected to report an adjusted loss of 38 cents per share on revenue of $15.92 billion
4:10 p.m. ET: DataDog (DDOG) is expected to report adjusted earnings of 2 cents per share on revenue of $163.45 million
4:10 p.m. ET: HubSpot (HUBS) is expected to report adjusted earnings of 23 cents per share on revenue of $236.71 million
After market close: Affirm Holdings (AFRM) is expected to report an adjusted loss of 81 cents per share on revenue of $189.33 million
European markets open cautiously higher ahead of US jobless claims data [Yahoo Finance UK]
AstraZeneca hopes for adapted vaccine rollouts six months after new variants found [Yahoo Finance UK]
Powell: Fed ‘will not tighten’ policy until low-income workers recover [Yahoo Finance]
Uber misses earnings expectations on revenue, but Eats business spikes by 130% [Yahoo Finance]
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