This Can Only Happen In Frothy Markets
It’s a new year.
Gyms are packed.
Self-help books climbing the bestseller lists.
Investors are getting hopeful for the first time in a long time.
There’s reason to be hopeful too.
But hope is not a strategy.
With the Dow still well over 30,000 and the economic growth needed to drive earnings up to support that level nowhere to be found, there’s still a lot of froth to be taken out in this market.
Today we’re going to look at some proof stocks are still a bit frothy.
A (Warning) Sign Of The Times
I want to introduce you to Kevin Paffrath, who goes by the social media moniker MeetKevin.
He’s a real estate agent and investor who the bubble-in-everything period has propelled into a sizable financial influencer.
Now, to be clear, we don’t know Kevin from many others out there like him.
And we haven’t spent nearly enough time with his research and history to see where his strengths may be outside of building an audience.
Don’t be fooled. There are many fine researchers on the Internet. He may be one of them too.
The thing that caught our eye about him is his latest project – the launch of an ETF.
It’s called the MeetKevin Pricing Power ETF (PP).
The ETF claims to be focused on what Kevin describes as “Pricing Power.”
The “pricing power” principle is described at the MeetKevin Pricing Power ETF website as: “based on “price elasticity,” which is the ability to potentially increase prices for products and services without a corresponding drop in demand.”
It’s a simple theory.
And in the right market, it’s a good one too.
Companies with products and services so much in demand they can charge more for them will see increased earnings, increased margins, and higher stock prices.
Of course, focusing on this single aspect completely discounts price paid for the shares in the company.
Growth is good if it’s priced right…and all that.
But let’s get back to the ETF because that’s where we start to see the frothiness left in this market.
The three largest stock holdings of the ETF are Tesla (TSLA), Apple (AAPL), and TradeDesk (TTD).
Together these stocks make up more than 40% of the entire stock holdings of the ETF.
These were all red-hot pandemic names that may have bright futures, but are incredibly high.
There’s nothing special here.
There’s no need for an ETF.
This is the likely portfolio put together by anyone who started investing in 2018.
It’s all about growth and expensive stocks are just likely to get more expensive than cheaper.
If 2022 taught us anything, price matters.
Eventually.
Worse yet, there’s nothing original here in the ETF.
We didn’t see any names like Transocean (RIG), the offshore oil service company has been hammered over the last decade from more than $200 per share to around $5 today.
But the company is seeing revenue growth and its order backlog has expanded for the last two quarters.
Those are signs it’s getting “pricing power” back.
But it’s not there or anything outside of the formerly hot and widely-held stocks.
Which brings us back to where we are going into 2023.
Two Steps Back
The entire ETF we just reviewed really isn’t anything special.
And it doesn’t offer any extraordinary or unconventional ideas that could excel at this point in the market cycle.
Because that’s what really matters - the cycle.
Check out this chart about market cycles.
You’ve probably seen it before.
But have another look and think about where we are on it:
We’ve definitely turned from the “Wow, am I smart” to where fear is real.
But, judging by the Meet Kevin ETF attracting $10 million, we’re nowhere near the desperation, pain, and despondency of a true market bottom.
That’s a better spot to be for investors, but it’s not the best.
Make sure you’re ready for the worst so it could be the best.
The year is going to be a rocky one again with this much froth left in certain popular and widely-held stocks.
