Wednesday Briefs – 13 May 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: High growth companies; Coronavirus – United States outside New York; Coronavirus – BRIC countries.

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High growth companies

As long as there is no shortage of liquidity in the market, growing companies that exemplify secular shifts in consumption could see a boost in their valuations. This includes the likes of Tesla, Beyond Meat and Peloton.

Looking at Tesla for example, what is a fair price? Modeling cash flows is a difficult exercise given the uncertainty surrounding every quarter and the fact that most profits are beyond the next two or three years. But if we apply a generous 5x 2019 sales multiple to reflect high sales growth and to incorporate Elon Musk’s unique management and execution, we get a valuation of approximately $125 billion and a stock price near $700 (compared to $820 today). This level is higher than warranted by current results but would reflect the unconditional almost cultish backing of many investors and Tesla car owners.

A 5x multiple seems random: why not 3x or 8x?. One gets a $400 stock price and the other $1,100. Valuing Tesla’s promise is a nebulous task that explains the stock’s high volatility. Beyond the solid foundation of impressive technology in batteries and automated driving, this is largely a faith and emotion trade for the foreseeable future. As with the other high growth names, pick your team or stay away.

Coronavirus – United States outside New York State

The impact of the virus is fading not only in New York State but also in the rest of the country. It is true that new confirmed cases outside NYS are still holding at a high level near 20,000 per day. But this is mainly a result of expanded testing. On a fixed number of tests, we would see a sharp decline in those testing positive. This can be seen in the following chart if we fix the number of daily tests at 100,000.

Screen Shot 2020-05-13 at 9.32.58 AM

This improvement is also confirmed by the number of daily deaths outside of New York State, which has also been trending down. The daily volatility is explained by a weekend reporting effect, but the seven-day average has fallen from over 1,600 per day to now near 1,200 per day as shown in the following:

Screen Shot 2020-05-13 at 8.20.38 AM

Coronavirus – BRIC countries

Although it has all but disappeared in China, the pandemic is heating up in Brazil, Russia and India. Confirmed cases in these countries now figure in the top twelve worldwide and are growing at or just below 5% per day. Total death counts remain relatively low compared to Europe or America, but they too are growing at 4-5% per day.

All three bear watching but Brazil in the Southern hemisphere could give a clue about the pandemic’s spread in the event of a second wave in the US and Europe next fall and winter. If there is seasonality in the virus, as there appears to be, Brazil’s number of cases and deaths should be mitigated by a UV Index that is comparable to that of Florida but on the other hand it has not adopted a shelter in place policy.

Disclaimer: Discussions of securities here are not recommendations. The reader alone bears the risk of trading them.

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