Many investors may not be aware of it, but those with assets in the sector could be sorry. Alcohol stocks, and specifically bourbon shares, are in a bubble. Tech has stolen all the limelight, but whiskey stocks—one of America’s oldest industries—have had a great decade. Millennials have revived American whiskey makers, such as Brown-Forman and MGP Ingredients, the latter of which’s shares have jumped from $6 in 2014 to $98 in 2018! P/E ratios are at about 30x and the stocks have recently started to fall sharply. It looks like the bubble is bursting.
FINSUM: The performance of this sector is pretty amazing—doubled revenues in the last decade. That is outstanding for such an old industry. However, valuations seemed to have significantly outpaced realistic value.
One of the most respected hedge fund managers, Jeremy Grantham, believes that this is a false rebound. And not only is it a false rebound, rather, it is the beginning of a big bubble bursting. The head of GMO believes as far as the fourth quarter is concerned, “The volatility is consistent with a bubble bursting”. Though he does caution that stocks could reflate before the burst continues, as they did in 1998-2000. Grantham is famous for his calls of the 2000 and 2008 downturns, but has been criticized for being overly bearish during this bull market.
FINSUM: We do not think there is going to be a further meltdown. Valuations reached their nadir at a 13.6 p/e ratio last month, down from eye popping numbers. Between earnings gains and price declines, we think the worst may be behind stocks for now.
Barron’s ran an interesting article today chronicling the market views of famed investor Leon Cooperman. The legendary hedge fund manager argues that investors should stay away from bonds, but that stocks are “fundamentally cheap”. “My world is cash and stocks … I think bonds are the bubble”, says Cooperman. He argues that a big downturn in stocks is not in the cards because the economy “if anything, is too strong”.
FINSUM: This argument makes sense, bonds do seem overvalued. However, what if stocks and bonds are too pricey? That seems logical too.
Losses on Bitcoin and other cryptocurrencies are reaching legendary proportions. Total losses on Bitcoin are now around 70% since its peak last December. The loss brings it close to the 78% decline in the Nasdaq seen during the Dotcom bubble. Many other coins have gone to essentially zero.
FINSUM: The Dotcom bubble is an interesting comparison. The reason why is that though prices were far too high, the market did call correctly that the internet would be hugely disruptive to industry and create very valuable businesses. Will the same happen with crypto, but ten years down the line?
Many investors are currently worried about the potential for a tech bubble. Between high valuations, data breaches, and a growing call for more regulation of the sector, it is easy to feel bearish. However, Barron’s is telling investors to not be too worried. The opinion is based on analysis of tech price movements and outperformance against a new Harvard study. Historically speaking, a bubble can be referred to as at least a 100 percentage point outperformance of a sector versus the market as a whole over a two-year period, followed by at least a 40% drop over the following two years. By that metric, the tech sector isn’t even close, as it has only outperformed the market by 36% over the last two years.
FINSUM: So this was a valuation-based study, but it could theoretically also be applied to individual stocks. When you do that, both Amazon and Netflix look vulnerable, as both have satisfied criteria for a bubble.