Summary

David Trainer argues that there's not much to contest the idea that fundamentals matter given what we've seen in the market so far in 2022. The rock and hard place that the Fed sits between means that the easy money go-go momentum plays have ended very badly already for a lot of stocks. As a result, it's going to be time to get back into sharpening your pencils and doing some homework. An amount of homework that most people don't have the time to do these days. Getting to the fundamentals is difficult and this was one of the key drivers of the retail mutiny in the market via Wall Street Bets and meme stock investing. The retail crowd feels like they don't have a chance to make informed decisions because they don't have access to reliable fundamentals. Neither does anybody really, unless you're reading 200 plus page annual and quarterly reports four times a year for every company you cover. This is why New Constructs created the Robo Analyst, acknowledged by the Journal for Financial Economics, Harvard Business School, Ernst & Young and MIT Sloan as having better data and analytics than anyone else.

New Constructs use expectations investing – or reverse DCF analysis – where they quantify what kind of economics, cash flows or profits the company has to achieve to justify the stock price - what Mr. Market is saying the company will do. To this end, the first short idea David discussed was Uber (UBER). At $43 a share, it implies that they would own 134% of their total addressable market and are going to be generating NOPAT in the range of FedEx, a ridiculous notion. The economics of the business will not improve much because it’s extremely commoditized. Anytime they try to charge too much, people go to taxis or to another service that's cheaper. What does Uber need to justify just $4 a share? They've got to get to a positive NOPAT margin of 2% and still grow revenue at almost 30% compounded annually for the next seven years, again this is extremely unlikely.

Tesla (TSLA), everyone knows is extremely overvalued, but how overvalued is it? At its current price range its priced to be the most profitable company in the world of all time. To justify $1200 a share Tesla needs to double Toyota’s margin and grow 38% compounded annually for the next decade. Very few companies, and no large cap companies have grown revenue at 38% compounded annually for a decade. They would have to be generating 783 billion in revenue in 2030, which is 102% of the combined revenue of a lot of the other major auto makers. At 31% market share by 2030, the stock is only worth $483, that’s 60% downside when they’re selling 8 million cars a year and with a NOPAT that’s 17x better than what it’s managing now. The bull argument is that Tesla isn't just one business, even then they’re going to have to become the most profitable company in the world to justify current price ranges. If you believe they're a car company then they're drastically overvalued especially with competition already taking significant market share Europe and even in the US.

With the Fed putting an end to easy money, investors are going to become much more discerning, not just throwing money after momentum plays and profitless growth companies. Owens Corning (OC) is a stock that is cheap and profitable. It is a supplier of roofing & asphalt shingles. US housing is under supplied, and well below historic levels. The demand for the products they sell; insulation and roofing is going to be high and their zero carbon policies provide great products on the ESG side too. They’ve got a vertically integrated supply chain and profitability is only improving. To justify current price levels their margin has to fall to 10% and grow revenue at 1% compounded vs the consensus of 90% from now to 2030. In our scenario 2 - where we show the stock's worth 136 bucks or more. We say the margin falls to 11% from 30% of the TTM. They grow revenue at consensus for the next couple of years. And then at 3.5% after that. That gets you to 136 bucks a share.

AutoZone (AZO), one of the big winners from New Constructs’ long focus list last year. It’s a nice counter to Tesla: it's cheap, it's steady, easy to understand and not based on Dancing robots or amazing battery technology or a lot of other technologies of which other companies and countries around the world have invested heavily. EVs need parts too and AutoZone can sell those parts just as well. Their ability to fulfil is outstanding, think about AutoZone like the Amazon for auto parts. With their store network they have leveraged extremely intelligently in order to get products to customers quickly. Some of their stores are a lot bigger than others and those service many distribution centres for smaller stores. People can trust when they go to AutoZone that they're going to get what they need. The average age of vehicles on the road these days is getting older up from - 9.6 to 12.1 years over the last 20 years or so. The stock is worth $3,300 or more even if the margin falls to 16%, and AutoZone grows at consensus estimates for the next several few years, and then grows by 3% after that - well below its tenure group’s 6%.

Topics