We all know Wall Street lives in its own universe, it is a given, but increasingly now more than ever. If ever there was a time in the financial markets where there is a disconnect between reality and price, the current environment is it. As a prime example, recently Wall Street analysts decided Apple was doomed because their new I-phone was not priced lower and the company did not sign a deal with China Mobile. Even further, the company was criticized, and the stock sold off, in part because they are seen as not innovative and have not introduced a new 'cool' product in a few years. So guess what? Over the last weekend, Apple sold 9 million I-phones, shattering any previous weekend sales number by a wide margin. Wall Street gets it right a great deal of the time, but to think they don't make mistakes would be wrong as well. The key point is to try and identify those mistakes, and potentially profit from them. It is easy to say, hard to do.
If you want even more evidence of the delusional forces which are currently in place in the equity markets, just investigate the market price of Tesla Motors versus nearly any stock in the energy complex, especially the major integrated international oil companies. Tesla is now valued at over $20 billion and operationally has had one cash flow positive quarter in the last four. It would not be surprising to see this situation last for the rest of the year, however, Elan Musk better sell millions upon millions of electric cars over the next five years or this could be a repeat of the internet bubble tragedy. Just a caveat, I have been wrong about TSLA since it was priced at 50 bucks a share, so take that for what it is worth (it is now at 182 and change).
Meanwhile, the biggest oil companies in the world are being given very little respect by the market. Yes, big oil has some issues to deal with right now, but upon careful investigation, the environment might be starting to improve in this sector. In Brazil, the largest oil companies passed on bidding for a new block available in conjunction with the state run oil company, Petrobras. In Nigeria, a few major international companies are selling their ownership stakes in their blocks. Even further, all over the globe countries are discovering they need the expertise which big oil provides in order to get these precious and valuable resources out of the ground. Usually, it involves deep water discovery, so finding trained and competent people who want to work at state salaries to potentially risk their lives is not in the cards. As a result, these trained professionals, who are rare and very much in demand, are typically going to be employed by the biggest oil companies in the world. Human capital and specialized skills are going to go where they will be compensated well, treated fairly, and given incentives to be rewarded when they do a good job. This would be dramatically different from a state run enterprise, where questionable practices, if not out and out fraud and cronyism, are the typical modus operandi.
In conjunction with these human capital problems, large international oil companies are now thinking very long and hard about what projects they are going to spend billions of dollars on. You can be sure that where those projects are located, who they are partnering with, and how the rule of law is implemented are going to factor into their calculations. The current situation in the public markets where these massive international oil companies are valued at historically very low multiples is not going to sit well with their management teams and board of directors. They all have long histories of creating quite a bit of wealth for shareholders and I am sure they believe they will continue to do so for quite some time. Elan Musk and Wall Street might not necessarily currently agree, but I suspect when we revisit the issue in three to five years time, how investors see these companies may be dramatically different.
Elsewhere in the financial markets, Facebook recently received several upgrades from investment banks and the stock has rocketed higher over the last few months. Twitter publicly announced, in a tweet interestingly enough, they are going to go public. In addition, the massive internet giant Alibaba is going to go public on a U.S. exchange as opposed to somewhere in Asia. In the meantime, investors are looking at the debt limit and budget negotiations, the incompetence of our politicians, as well as the initial implementation of Obamacare, and have adopted a very cautious approach- unless of course, they own Tesla.
If you ever want a sense of how dominant the I-phone is- http://www.businessweek.com/articles/2013-09-25/listen-up-apple-haters-iphone-sales-eclipse-microsoft-and-amazon#r=rss
The new JOBS act enables crowdfunding in all sorts of different areas- especially startups-
If you think being a CFO in a private equity job is a picnic, uh, think again-http://www3.cfo.com/article/2013/9/job-hunting_private-equity-jobs-john-touey-salveson-stetson-recruiter
Thanks for reading the blog this week, and enjoy the lovely fall weather. If you have any comments, thoughts, or questions regarding the blog, please post them!
Y H &C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.