Macro: Sandcastle economics
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Stunning divergence in equities is a short-term opportunity
Peter Garnry
Chief Investment Strategist
Summary: Travel stocks are soaring on good Omicron news and a quicker path to normalisation and the broader commodity sector is still favoured as investors are adding protection against inflation to their portfolios. The flipside is a bloodbath in speculative bubble stocks and themes such as NextGen Medicine and E-commerce. The divergence in just two trading session is stunningly 9.1%-point between the travel and bubble stocks baskets. While there are many arguments for why bubble stocks could fall more, we think the selloff will soon turn into a "buying-the-dip" situation with the market betting on bubble stocks going into the earnings season on the notion that this part of the market will deliver growth surprises.
Speculative growth stocks are continuing their 2021 descent
We are only two full trading sessions into the new year and we are already observing a 9.1%-point difference in performance between the travel basket, helped by the good news on the Omicron variant, and bubble stocks which suffering from the latest move higher in the US 10-year yield and investors continuing their rotating out of speculative growth and adding inflation hedges such as mega caps, financials, energy and mining.
While we think that a better balance between the physical and the online is warranted in the portfolio as inflation will run higher for longer due to physical constraints across energy and metals during the green transformation. But short-term we think a tactical trading opportunity is emerging as many bubble stocks will continue to show high revenue growth, whether they can deliver on operating margin is a different story, and that they will be bought back again by investors. The next couple of weeks could be tough for speculative bubble stocks, but our thinking is that investors will pick them up ahead of the earnings season betting on revenue surprises lifting share price against deteriorating expectations.
Bubble stocks basket
| Name | Mkt Cap (USD mn.) | 12M Fwd EPS | 12M Fwd EV/Sales | Diff to PT (%) | 5yr return (%) | YTD return (%) |
| Kuaishou Technology | 213,499 | -0.85 | 16.2 | 95.5 | NA | -6.2 |
| Sea Ltd | 140,384 | -1.26 | 17.3 | 101.5 | NA | -11.6 |
| Airbnb Inc | 130,635 | -1.31 | 28.1 | 14.0 | NA | 2.6 |
| NIO Inc | 94,795 | -1.59 | 18.0 | 89.8 | NA | -0.3 |
| Snowflake Inc | 84,570 | -0.87 | 71.5 | 25.7 | NA | -6.9 |
| DoorDash Inc | 67,743 | -0.19 | 17.6 | 71.9 | NA | -8.7 |
| Roku Inc | 59,111 | -0.26 | 23.1 | 60.9 | NA | -2.4 |
| Bilibili Inc | 51,601 | -4.76 | 18.2 | 159.8 | NA | -12.9 |
| Teladoc Health Inc | 41,124 | -0.30 | 20.3 | 72.3 | 452.7 | -0.4 |
| XPeng Inc | 37,228 | -2.41 | 15.0 | 32.2 | NA | -5.4 |
| Affirm Holdings Inc | 34,499 | -0.89 | 39.7 | 82.5 | NA | -15.1 |
| BeiGene Ltd | 34,490 | -9.78 | 35.8 | 71.1 | 699.2 | -9.1 |
| Unity Software Inc | 34,299 | -0.35 | 32.7 | 34.5 | NA | -9.3 |
| Plug Power Inc | 32,156 | -0.18 | 68.1 | 75.5 | 2,152.0 | -0.3 |
| Seagen Inc | 31,016 | -0.11 | 15.9 | 23.3 | 165.3 | -1.2 |
| Cloudflare Inc | 28,050 | -0.08 | 46.1 | 87.0 | NA | -12.6 |
| Splunk Inc | 27,486 | -0.21 | 10.8 | 44.5 | 106.2 | 0.1 |
| MongoDB Inc | 25,201 | -0.98 | 34.1 | 20.5 | NA | -12.1 |
| Exact Sciences Corp | 24,752 | -1.14 | 13.3 | 60.7 | 429.9 | 2.8 |
| Gaotu Techedu Inc | 24,455 | -3.34 | 11.8 | NA | NA | NA |
| Farfetch Ltd | 23,465 | -0.66 | 10.3 | 49.1 | NA | -1.1 |
| DraftKings Inc | 23,186 | -1.16 | 26.5 | 118.3 | NA | -3.1 |
| GDS Holdings Ltd | 20,998 | -0.15 | 18.6 | 95.9 | 389.5 | -13.0 |
| 10X Genomics Inc | 20,458 | -0.32 | 38.9 | 41.5 | NA | -5.1 |
| Argenx SE | 19,397 | -10.72 | 105.2 | 7.7 | 1,718.1 | -3.9 |
| Alnylam Pharmaceuticals Inc | 19,214 | -4.77 | 21.0 | 25.3 | 291.3 | -2.6 |
| Ping An Healthcare and Technology Co Ltd | 18,942 | -0.91 | 11.6 | 115.1 | NA | -10.2 |
| Innovent Biologics Inc | 18,305 | -0.61 | 24.0 | 140.5 | NA | -17.2 |
| Guardant Health Inc | 16,826 | -1.50 | 40.5 | 63.9 | NA | -2.0 |
| Zai Lab Ltd | 15,781 | -2.52 | 87.5 | 163.3 | NA | -12.1 |
| Kingsoft Cloud Holdings Ltd | 15,710 | -2.56 | 9.6 | 145.9 | NA | -12.4 |
| Yatsen Holding Ltd | 15,665 | -1.17 | 10.7 | 66.0 | NA | -7.9 |
| Oak Street Health Inc | 15,461 | -0.46 | 11.1 | 67.9 | NA | -3.2 |
| C3.ai Inc | 15,370 | -0.79 | 69.6 | 68.4 | NA | -1.4 |
| Bill.com Holdings Inc | 15,319 | -0.19 | 57.4 | 65.3 | NA | -12.3 |
| Canopy Growth Corp | 15,279 | -0.90 | 24.2 | 34.1 | 16.7 | 3.7 |
| Appian Corp | 15,229 | -0.40 | 43.3 | 57.5 | NA | 1.1 |
| Avalara Inc | 14,770 | -0.16 | 21.3 | 70.7 | NA | -5.9 |
| Elastic NV | 14,429 | -0.44 | 20.6 | 50.1 | NA | -5.5 |
| Wolfspeed Inc | 14,240 | -0.59 | 21.3 | NA | NA | NA |
| Aggregate / median | 1,565,141 | 21.3 | 67.0 | 409.7 | -5.5 |
The market is betting on a totally different car industry
As a follow up to yesterday’s equity note, we extended our commentary on the EV battle in today’s podcast. We failed to cover all our thoughts because we have to be conscious of time, so we expanded further on our thinking in this Twitter thread. At any case, the EV battle this year is one of the most interesting to watch and a defining moment for the car industry. A lot of market value is at risk this year. We forgot in our Twitter thread to elaborate a bit on the car as a platform. The idea for the bulls on Tesla is that 1) the company takes 25% global market share, and 2) cars will become a major digital platform in which you can sell software services on. In that scenario, Tesla could be extremely profitable, but the path to the endpoint is not without risk and while we have seen Volkswagen having difficulties ramping up production to beat Tesla, we do not yet know the dynamics of the remaining large players (Ford, GM, Toyota etc.) entering the EV race at full force.
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