The Canary Is Dead: The Current State Of Stocks
I get it.
There’s something odd about the current market correction though.
None of it is too crazy.
Carvana (CVNA) was a subprime loan generator that also sold cars. Its 97% decline is reasonable as its loans go bad.
Digital pictures marketed as “NFT’s” were stupid. The NFT index should be down 86% in the last year.
There’s been a lot of pain.
But much of it has been clearing off obvious excesses.
That brings us to the current state of the markets which, according to the bellwether we’re going to look at today, is actually in much better shape than most investors realize right now.
A Return To Reason
Alphabet Inc (GOOGL), parent company of Google, is one of the best real-time barometers of market and economic health.
As goes Google, so goes the world, and all that.
It’s also a great example now of where stocks were, where they are now, and where they can go from here.
For today’s analysis, we’re going compare Google in 2019 to Google of the last twelcomes months.
Google was a giant in 2019.
Its annual revenue had grown to $161 billion.
Its net earnings hit $34.3 billion.
And at a price of $75 per share and a total market cap of $920 million.
That’s the baseline before the pandemic-fueled madness ensued.
Needless to say, the pandemic was good to Google.
Over the last twelve months Goole posted $289 billion in revenue.
That’s a 79% increase in revenues over 2019.
Google’s earnings have exploded to $67.9 billion.
That’s a 98% increase in net earnings.
Google got a lot bigger over that time.
But the Internet giant also got a lot stronger.
In 2019 Google made 21.3 cents in earnings for every dollar of revenue.
Over the last twelve months it made 23.5 cents in net earnings for every dollar of revenue.
So there we have Google getting much bigger (almost double) and stronger (more profits from each dollar of revenue).
But what it didn't do is create much value for shareholders.
This week Google is trading for around $85 per share.
Basically, Google has almost doubled, but its shares are only up about 12%.
That’s the perfect indicator of how brutal and needed this correction has been.
And it’s also a sign of a harsh return of one of the key tenets of investing success.
Price Matters
Google had a P/E ratio of 30-to-1 in 2019.
You can argue that’s not too expensive for a dominant, growing company like Google.
But it’s definitely not cheap.
Today Google is a reasonable value at 16-to-1.
On a relative basis, Google is about half the price it was three years ago.
Does that mean the bottom is in?
No, certainly not.
But it’s a sign that investors have become price-conscious and reality matters far more again.
Now, I’m not going to say it’s easy from here.
But signs of rationality like these mean investing successfully is going to be a lot easier than it was at the start of 2022.
That’s the best we have right now. You may not be running downhill yet, but at least your not running uphill anymore.
