“I’ve a feeling we’re not in Kansas anymore.”
This is the S&P 500’s second-worst start to a year in history.
The Nasdaq 100 and the Russell 2000 have given back all their gains from 2021.
Around six months ago…
- An imaginary coin was worth over $60,000.
- One car company was worth more than all the car companies in the world combined.
- A company sold cars out of vending machines and called itself a tech company.
Risk wasn’t something investors paid too much attention to.
So, they bid up prices based on stories, not substance.
When a company said it was an “innovative disruptor,” its stock price soared.
It reminded me of another time back in the late 1990s…
Putting dot-com at the end of the company’s name accomplished the same thing.
I had a bad feeling that this time wasn’t going to be different.
Call me old school, but I never got sucked into the hype.
And over the past few months, those stock prices have plunged…
In the past 13 years, stocks have had two tailwinds pushing them higher: low inflation and interest rates.
In fact, TINA (“there is no alternative”) to stocks was in full bloom.
But all of that changed towards the end of last year.
Inflation was moving higher — and so were interest rates.
The two major supports that risk buyers had on their sides were yanked away.
Investors became concerned with the return of their money and not the return on their money.
So, they went into risk-off mode and started selling cryptos, story stocks and special-purpose acquisition companies.
These “disruptors” and “growth at any price” stocks are getting their clocks cleaned.
Some of the crowd favorites are off big time from their all-time highs.
- Zoom Video Communications Inc. (Nasdaq: ZM) is down 85%.
- Robinhood Markets Inc. (Nasdaq: HOOD) is down 88%.
- Teladoc Health Inc. (NYSE: TDOC) is down 90%.
I’d bet you dollars to donuts that they’ll never see their highs — or even come close.
The Ark Innovation ETF (NYSE: ARKK) portfolio of innovators has also started to crack.
Since hitting an all-time high of $160 a share in 2021, it’s been a steep ride downhill.
Ark shareholders have now given back all of those gains.
The once high-flying fund is trailing the S&P 500 and Nasdaq.
Bitcoin — the most popular crypto — is off close to 65% from its November peak.
According to new data from Glassnode, 40% of bitcoin investors are now underwater.
Investors’ appetite for risk has gone stone cold.
And what was old is now new again…
Story vs. Substance
Investors are learning that quality of revenue and earnings matter.
But Alpha Investors knew that all along.
And that’s because we view stocks as pieces of a business.
If a stock price was trading significantly below the underlying worth of the business, I’d recommend it to the portfolio.
It’s that simple.
That’s why we avoided Carvana Co. (NYSE: CVNA) and bought CarMax Inc. (NYSE: KMX).
Both companies were in the same industry: selling used cars.
But Carvana wasn’t making money. And I didn’t have confidence in its management.
CarMax was making money and had a rock-star CEO.
Yet Carvana did have something that CarMax didn’t: a great story.
The company was selling used cars out of vending machines.
That was much cooler than selling them in showrooms, car lots and online.
But under the hood, Carvana was more story than business.
The company showed a loss of $280 million in 2019. It had no earnings and was living on borrowed money.
Since I couldn’t figure out how to value a business that didn’t make money, I passed on Carvana.
Instead, I recommended CarMax on May 21, 2019.
At the time, the company’s operating profits were $1.2 billion.
And CarMax didn’t have to rely on stories to sell cars.
The company was making money and had a unique, no-haggle sales experience.
So, how are things playing out now?
After soaring to a high of $376 in 2021, Carvana’s stock is down 90% from its peak.
The company is now fighting for its life and needs to borrow more money.
Alpha Investors are ahead since we added CarMax, while Carvana is down more than 53% over the same time period.
With Carvana on the ropes, that’s good news for CarMax.
CarMax continues to increase its market share and grow its business.
The Real Talk is: The tortoise beats the hare, and earnings beat stories.
It’s much easier to figure out the worth of a business than trying to pick the latest disruptor.
And the good news is that I do all of the heavy lifting for you in Alpha Investor.
If you’re ready to join our family of subscribers, we’d love to have you.
Find out how right here. Your timing couldn’t be better.
Founder, Alpha Investor