“At ten times revenues, to give you a ten year payback, I have to pay you 100% of revenues for ten straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next ten years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
Of course, this has all happened before, with the Nifty Fifty and in the Nasdaq bust. Yet, every generation of investors seems doomed to learn from painful experience rather than from history.
So, having fallen from their highs, are these companies now gift-wrapped presents? We say not and see a compelling argument for equities to head lower again in 2023. Stocks are down in 2022 because bond yields are up, we have yet to see any widening of the equity risk premium or a fall in earnings expectations.
The market seems to think four things can happen: the Fed funds rate peaks in Q1; this engenders a soft landing or very shallow recession; that slowdown sucks all of the inflationary pressure out of the system; and all of that can be achieved whilst corporates still generate about 8% earnings growth for 2023.
That story seems like the lie that draws a smile. How could corporates deliver on earnings despite a potential recession, rising labour costs and the huge change in financing costs versus a year ago?
If we’re to see a Santa rally this year, it will be powered by a bull market in belief.