• Is the US about to go into a recession?
• What does April’s yield curve inversion actually mean?
• What should I expect from the stock market in 2022?

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Unedited Transcript

Edited transcript coming soon!

Simon Erickson  00:09

All right, and welcome, everybody to our seventh investing state of the stock market call. Today is June the 10th 2022. Welcome, why don’t you grab a cup of coffee, we’ve got a couple of our lead advisors here today, you know, seven investing as a company, what we do is we look at companies and we make stock market recommendations. Each and every month, we actually publish our seven best ideas in the stock market, which you can always check out at seven investing.com. But every now and then we also like to take a step back and look at what’s going on in the market. You know, there’s a lot of fear in the market. Right now, we’ve seen the Fear Index kind of hitting a high lately, a lot of people are looking at volatility and interest rates and just kind of all these things that are impacting investors. And we said, Wouldn’t it be great to kind of have a conversation, it was a little more free flowing, not as nitty gritty about stocks themselves, but about the market and what some of the bigger picture things we’re looking at are. And so we’re actually going to do both of those. We’re going to use this call to talk about some of the bigger picture things we’re looking at. And then our subscriber call, which will happen in exactly 28 minutes from now is where if you are a seven investing member, if you are subscribed to seven investing, we actually do talk about specific companies, including our top recommendations for June, and also our best buys from our existing recommendations as well. And so my name is Simon Erickson. I’m joined here by my fellow lead advisors, and Luke Hallard. And Steve Symington, there are six advisors on the seven investing team, all of us will be on the call that starts the subscriber call, except for Matt. Matt is out on vacation and off the grid in Yellowstone this week. But we always like to bring some some good ideas for you each and every month. We also have our Director of Marketing Samantha Bailey on the call with us as well. Sam, is there anything we would like to ask someone who wants to sign up for seven investing and wants to be part of that subscriber call? What is the easiest way that they could do that here this morning?

Samantha Bailey  02:00

Sure, you can go to seven investing.com/subscribe. And we have a special deal for you today through the end of the week. So if you use code 747 Number 747. At checkout, that gets you your first month of seven investing for only $7. So on the the subscriber call in within the hour, we will be giving out our best buys, each advisor will choose their top idea on the scorecard. So at this call, you could learn 14 actionable buys that you could purchase today that our team of market experts thinks are our goodbyes. And they’re what’s trending on Twitter right now is stock market crash. So this is the time to purchase stocks, even though it seems scary. This is the time that if you invest now you become wealthy. So hope you join us for that call at 11 o’clock.

Simon Erickson  02:44

Absolutely. Thanks very much, Sam, you know, we are long term investors, you know, we take a long term approach. And there’s certainly a lot to talk about in the markets today. So thanks for that, you know, we’re going to be talking about a couple of topics here in 30 minutes. If you would like to ask questions or chat, we have a chat function, which is at the bottom of the screen, you can you can use that to add comments that you’d like to make. Or you could ask specific questions using the q&a at the bottom of the screen as well, please feel free to use those, we’re going to kind of key up a couple of topics, talk about them as a group and then open it up. We want this to be interactive, we want this to be valuable. So we’ll be chatting a little bit later about stock based compensation. That’s the topic that Luke is going to be talking about. I will be talking about the yield curve inversion and rising interest rates here in a minute. But perhaps let’s start with Steve, because Steve wanted to talk about Steve, we have seen tech stocks selling off quite dramatically in the last couple of months. What is your take on this? And how should investors think about it and the floor is yours, my friend

Steve Symington  03:43

feels like it’s been a rough year for tech stocks, year and a half or so. And when I guess really the last attempted peak was maybe last November. And what’s been really interesting is, is the markets flight from risk, right. And in I think right now what we’re seeing is a fear of liquidity, or lack thereof. And that’s kind of what’s we’re just entering this quantitative tightening cycle. But I think the markets a forward looking machine, they’ve kind of they saw this coming. Lot of growth stocks bottomed. I mean, it was only several weeks ago here in May, and some of them have bounced 50 60% already from those highs and kind of retraced hard, just stomach churning volatility. But one of the things that I’m watching right now, you know, the broader market is tanking right now, because of this high CPI print that we got this morning. And people looking at, you know, terrible consumer sentiment and terrible investor sentiment and fears of quantitative tightening and that’s basically the Fed, you know, tightening up its balance sheet removing liquidity from the system and liquidity is one of those key drivers. have kind of easy market gains, that’s part of the reason that we saw stocks reach those exorbitant highs previously was because there was so much liquidity injected into the system. And now we’re getting, we’re having some of that removed. But one of the things that I think is still on the table, and one of the things that I’m kind of watching is the likelihood that growth stocks and tech stocks is particularly in the small and mid cap range have been pummeled so hard that they might resist dropping back to those lows we saw in early May. And even if the market corrects further, I suspect we might see some relative strength there in the small and mid cap growth. Names and and that’s something that’s kind of interesting right now watching the NASDAQ fall more than 3% on consecutive days, which it’s, that’s that feels historic, when it’s at the end of a drop that was already the worst for tech stocks since the.com. Crash. So that’s is that we’re seeing a lot of these growth stocks that are showing relative strength. And a lot of these already beaten down small and mid cap tech names, and growth names that that are only down half a percent or one or 2% Today, when the entire NASDAQ index is down 3% for each of the last two days. So I think this is we’re fast entering the time when when the market will favor stock pickers once again. And I think once we get kind of this, this green light to turn back toward potentially riskier investments that are actually growing well in or healthy and and generating cash flows. That could be really, really interesting from an outsized returns driver point of view.

Luke Hallard  06:58

But if I jump in on that, as well, Steve, like, totally support what you’re saying, I think something really interesting has happened, because the companies in my portfolio are down, because suddenly they’re giving much more conservative pessimistic guidance. So if we would go places zoom out. And we think about the last couple of years, everyone’s been in kind of, you know, growth at any cost mode. And they’ve been super optimistic, you know, trying to drive excitement in the market and, you know, get investors interested in the stock. And now suddenly, they’re on the backfoot, things are going a little bit sideways, and they’ve had to take this big reset. But in my mind, this is really healthy, because a lot of these companies have kind of just taken the pain now during this tough period. And now they’re now they’re actually probably being a bit too pessimistic with their forward guidance, which means they’re going to start, you know, over delivering, which is what you want, you know, under promise over deliver. So I think we’re, we’re hopefully over the next few quarters going to see, like, you know, the market rewarding that kind of, Oh, you did more than I thought you’re going to do behavior.

Steve Symington  07:59

Yeah, yeah. And we’ve already seen some of that. And some of the stocks we’re going to talk about in the next call here. The subscriber call, I’ve seen some of the businesses that were just smashed two quarters ago, because they offered conservative guidance, because they were kind of looking ahead. And now they’re beating that guidance. And it turns out, it was indeed conservative. And I think some of these businesses that you know, that are that are necessary and healthy. Yeah, they’re going to be the ones that are going to generate these outsized returns. But that’s my view, that won’t be without some pain, probably, and you need to have a stomach for volatility. In the meantime, these you know, you’ll see some of these stocks that are swinging 15%, up and down in a single day, I have no news. And that’s, that’s par for the course, in this kind of market. But over the long term, I’m looking at businesses that are trading at what I believe to be relative discounts to their intrinsic value, and what they know the premiums they should command in a more normal market, which we don’t have right now.

Simon Erickson  09:04

And I want to hop on that one. That’s a great point, Steve about like, where is the role of individual investors versus the role of institutional investors in this right? If you if you are a fund manager right now, and you’re you’re managing, you know, high net worth client money, it’s a flight to safety. You know, this has been kind of a six month gradual move out of growth stocks, and into value and blend stocks. And we look at that on this team. We look at the fund flows, and we’ve seen over $100 billion flowing out of large growth funds and over $100 billion going into large value and into large blend. And so this is kind of like trying to swim upstream against a very, very strong current right in the middle of a hurricane. It’s going against you too, right? It’s very hard. When the herd is going in one direction when you’ve got funds that are that are holding 10s of billions of dollars of capital. Basically saying their clients say hey, we want out we want to we want to take the risk off The table right now. Now the good news, the optimistic news for growth investors is that that doesn’t last forever. You know, there’s also a market dynamic that the pendulum swings the other way. And eventually those same clients, you know, even though risk is off the table, you’re okay with getting three to 5% returns, eventually, they’re going to start asking for eight to 10 to 10%, return eight to 10 to 12% returns, because under five other fund managers will be will be outperforming and so that’s a dynamic of the market too. You know, it’s not, it’s not fundamentals, like we tend to look at in a company’s revenues or earnings, but it certainly plays a role in like what you’re talking about. Great. Okay. Well, thanks, Steve, thanks for kind of giving some some perspective on where growth stocks stand and you know where this might be going in the future. Luke will hand it to you next reminder for anyone who’s just joining us that you can sign up for seven investing at seven investing.com/subscribe. You gotta get you access to our subscriber call. That’s it’s going to be starting in about 18 minutes from now, I’ve also added a another neat little thing into the chat here, we’re going to say I’m going to give away a free coffee mug, a free seven investing coffee mug, to help you stay caffeinated to look at our stock picks to whoever asked the best question. And as always, I like to have Samantha Bailey be the judge who’s asking you the best question, please go ahead and ask those to the q&a. And the chat, Luke something about growth companies that comes up quite a bit of stock based compensation, you did some looking into that this past month.

Luke Hallard  11:23

I did. I will say also, though, the mug comes in black, and I prefer the black one personally, but a stock based comp, right? This is actually something I’ve got a real eye on right now. And it’s quite ugly. But let’s restart with what is stock based compensation, I think it’s quite bad for shareholders. So stock based comp is a way of paying your employees, you know, maybe the founders or maybe like the whole team with equity. So as well as giving them a salary might earn, you know, if you’re a high flying tech developer in in Silicon Valley, maybe you had like half a million dollars in cash, you might get another half a million or million dollars in stock. And that’s great for the employee, clearly they’re getting rewarded is good for shareholders in the sense that you want to, you know, you want to give the team a stake in the company, and you want their incentives to be aligned with shareholders or given stock, they’re going to make decisions that are good for you the shareholder. But this has really got out of hand, I think in the last well year or two. And I’m kind of taking stock on this. And maybe we need to call time on this certainly is not in my power. But I’m looking more judiciously at the things I’m investing in. So why is it bad? Well, when companies kind of flagrantly give away a load of stock, they’re usually issuing a ton more shares. So actually, there’s more shares out there, you know, the value of an individual share is proportionally lower, that hurts you, it also makes things a bit more complex, because kind of dodgy things happen in the accounting depending on the accounting practices. And often, stock based comp gets written down as a kind of one time cost, even though happens year after year, there’s nothing one time about it. So I can kind of make can allow companies to kind of obfuscate what’s going on in their books a little bit. So they said stock based comp is common. It’s common in tech companies. And I kind of get it and it’s super common in like young, you know, private, early stage companies who just have no money, they’ve got no cash. They’re plowing money into the business, they have to give away stock. But I’ll give you an example now of a public company that is wild with this. So I’m going to point the finger here at Robin Hood. So Robinhood Would you believe. So their revenue in the last full year was just over $1.8 billion. And they gave away nearly $1.6 billion in stock based comp. So that’s like almost all of the revenue basically went to the two founders, Vlad TANF and buys you bad. There’s guys between them, they took the majority of not the profits, not the free cash flow, the sales, like the money that came in the door before anyone else gets to hand on it. So that’s a pretty ugly position to be in. And you know, sure there’s they’re only a year or so post IPO. And so you can kind of you can kind of give them a break on that. But that’s just a wild number. But they’re not they’re not an outlier, that although they certainly are an outlier, but they’re not alone in this, like many tech companies, I think just they’ve they’ve got lazy remuneration policies, and they’ve kind of fallen into this trap, perhaps, where they’re now feeling a bit beholden to some of their most important key staff who might be, you know, founders might be the developers, you know, the key tech folk. And I think something interesting happened here a company I’m very publicly very bullish about Shopify, and they’re actually have quite sensible stock based comp policies. But when the stock was climbing and climbing at incredible rates over the last couple of years, everybody was super happy, you know, the team was enthusiastic because those stock options are getting a worth a fortune, suddenly, the stock has taken a precipitous drop along with the rest of the market. And now I see over Twitter almost every day for a little while ago, employees saying, I’m out of here, you know, they’re not paying me, well guys get with the program, right? You’re getting paid a fixed salary. And then you’ve got this discretionary bonus on top, great, you know, when, when the sun is shining, and things are good, make a new profit along with the organization. But things are going bad, and it’s bad for shareholders? Well, you know, everybody has to kind of suffer along with that and work through that period. And this is probably in my mind what’s coming up, there needs to be a bit of a real leadership reset, in my mind, among many of these companies that have just let it get a bit out of hand. And I don’t know the answer to this, I imagine the people who are going to go because they just need the dollars, they want the money, you just gotta let them go and work through that. And maybe you have to do your best with other things around kind of culture, environment, flexible working, learning environment, things that are not just, you know, options and cash in the bank to try and retain your best people. So I don’t know how we get out of this. It’s, it’s bad for shareholders. The only people it’s really good for are these high flying highly paid developers. But in my mind, I think they need to take a bit of a reset and kind of wake up to what’s happening in the wider market.

Simon Erickson  16:32

I’ll try and win on this one, too. It’s a great point, Luke, you know, we’ve kind of gotten used to and calloused to seeing executives making $50 million a year. And you know, so much of that is tied up in stock and stock based comp and options. The thing that investors can always look at as the definitive proxy, which you have to file every year with the SEC, if you’re publicly traded, that is formed def 14 A if anyone wants to go check out sec.gov. And look at actually what these are. They’re always available for the public to see. But it’s interesting because shareholders have to vote on the compensation plans every year. And to your point, Luke, some site especially some of these high flying companies have gotten away with murder on their stock base competitions, diluted the heck out of the rest of shareholders. And I think it’s really good that we start waking up to what these plants look like. Some of them do it very well. You know, some of them actually have compensation that’s tied to long term shareholder, accretive metrics Mercado Libre does is very, very well, if you look at their stock based competence tied directly to metrics you want to see. And then there’s others, you know, I can think of quite a few nuance was one of the the egregious offenders of this, that would just basically be compensated based on revenue and earnings growth. And of course, any CEO can manipulate you or at least your earnings, you know, based on cutting back expenses, or, you know, going out and acquiring companies to choose the top line. So I think it’s a great point that, you know, maybe it’s time for a reset in, in stock based comp for a lot of these companies, especially the ones that have been offenders and have gotten away with it for short term metrics for an extended period of time here. Do you have any thoughts? You want to chime in on this? Or should I shall I bring it to interest rates as our third topic?

Steve Symington  18:09

No, I think you guys covered that exceptionally well. I feel like I don’t have anything too valuable to add without beating that topic to too much.

Luke Hallard  18:19

Want to say that. Steve, Steve, just like me, you and I have both got a pic in the seven investing scorecard that are pretty, pretty egregious to use Simon term in terms of stock based comp. Yeah.

Steve Symington  18:30

Yeah, yeah, it’s worth watching. I like that. I appreciate that you dug further into that this month?

Simon Erickson  18:38

Yeah, we’ve got a couple of minutes left here. As you know, we’re coming up at the top of the hour where we’re going to start a subscriber call, that’ll be in 10 minutes. We encourage everybody to check out Simon investing.com/subscribe, you’ll get a welcome email, he can immediately sign up for our our subscriber call within that if you would like to join and talk about maybe even some of those companies we just mentioned, that are recommendations of ours that are active on the scorecard. But then the last one that I wanted to chat about is a topic that’s hitting the media. You may have seen it recently about the yield curve inversion. This was something that happened in on April 1, the yield curve inversion is a comparison between the two year Treasury and the 10 year treasury. And under normal cycles, the 10 year Treasury is paying a higher interest rate than the two year treasury. But when the Fed the Federal Reserve, you know very quickly and aggressively increases interest rates, it can cause what’s called an inversion where the two year Treasury is actually paying a higher interest rate than the 10. Year that happened right at around 2.6%. Right on the first of April there. The reason this is important is a yield curve. Inversion like that has only happened four times in the last 34 years. And each one of those four times it was predictive of the United States recession, a recession defined as two consecutive quarters of negative GDP growth within the United States. And it’s really interesting because kind of when you say that it sounds like this is John At dark cloud that’s about to dump, you know, a thunderstorm on you, it’s going to be terrible news for the economy. And everyone immediately thinks, Well, I’m out, you know, I’m done with stocks, I don’t want to be a part of this. Interestingly, the opposite is actually true. On average, there has been a recession that started 18.7 months after the yield curve inversion the last four times that had happened. And interestingly, over that same timeframe, actually, about one month, less 17 months after the yield curve inversion, the s&p as a whole raised an average of 29%. And in all cases, it was actually up by at least 18%. And you say, how can that possibly be true? Simon, how can we be going into recession, the economy is going through such a negative time, at the same time that the stock market is stumbling. It’s exactly the point that Steve made earlier, which is that the stock market is forward looking, a lot of the bad news has already gone in, not only to several s&p, or larger companies, but specifically into NASDAQ companies, or companies a little bit more volatile, a little bit higher beta, we might call this a trade more more aggressively than the rest of the market does. And so my takeaway for this is if you hear about yield curve inversions, and interest rates going up, and you know, recessions, and kind of a lot of this, it’s going to be in the financial media, yes, it’s very serious. Yes, that’s going to have impacts on employment, on on the cost of things that we’re buying out there. I mean, there’s a lot of things that are going to impact the economy in the labor markets. But for the stock market, it might not necessarily be doom and gloom. And in fact, the last three and a half decades have showed us that yield curve inversions, like we saw a lap or two months ago now can actually be a very contrarian indicator, a very bullish indicator that you might not expect for the stock market as a whole. So I’ll open up to Steve or Luke, see if you’ll have any thoughts about that, as we kind of wrap up the call on a maybe an optimistic note, perhaps question mark.

Steve Symington  21:53

I never mind, you know, keeping in mind, that forward looking nature of our market, and I try not to think too hard about trying to time the bottom. Right. And I think that’s something that that a lot of people fail to appreciate about long term investing is, you know, the, the best way you can generate outsized returns is just to continually add to your portfolio over time in businesses that you think are attractively valued, and, you know, we’re just keeping our heads down. You can see some red on the scorecard. Considering the the state of things, you know, you know, an interesting point to notice that, you know, there’s 14,000 stocks listed on the NASDAQ index, right are the NASDAQ exchange rather. And almost half, those stocks are down more than 50% from their rolling highs right now. And when you see the NASDAQ, that’s only down 23%, it’s actually masking worse pain underneath. And there’s a lot of people out there who think they’re the worst investors in the world. But this was, is the worst pullback. As I mentioned before, in tech, in particular, since the.com, crash in 2003, we have experienced a historic crash, and I don’t beat yourself up over it. But get excited for what’s to come and continue to add and look forward. Don’t Don’t think too hard about trying to make sense of of, you know, there’s a lot of information, you know, we’ve thrown at you all this stock based compensation, yield curve, inversions, quantitative tightening. There’s a lot of factors at play. But the stock market I remain convinced is the world’s most effective wealth generating machine over long periods of time, and keep your heads down. Keep doing your homework and keep investing, you know, scare you away.

Luke Hallard  23:52

So history is on your side that when you make that statement as well, Steve like this, right? There’s over any 20 year period of time, there’s never you’ve never been down if you’re invested in the stock market over a 20 year period, ever, plenty of five year periods couple of 10 year periods where if you’ve got a bit unlucky, but if you take a long enough horizon as you said, on a real money basis, you will outperform like almost any other hand asset class

Simon Erickson  24:20

today and we’re approaching the top of the hour here it’s time for us to jump off and grab another cup of coffee and start up that subscriber call but maybe Could you could you share some final thoughts about seven investing you know, Luke and Steven and myself have been investors we’ve worked together for quite some time. So you and I go back almost a decade now I think it is but you know you join the team not as a an investor but as a marketer Any final thoughts about seven investing for people who may not be familiar with the company or the lender, like Steve just mentioned we’re chatting about the reason

Samantha Bailey  24:51

why I love seven investing so much is exactly what was described during this call today. It helped I’ve learned so much about investing. I went to business school I ended up Sit in stock market for 15 years now. But I’ve learned so much I’ve learned how to stay calm. I’ve learned how to trust in my thesis. And I’m so grateful for seven investing because I don’t have the time anymore to research individual stocks. I am busy, I just don’t have the time. And I have not invested in a single stock since I joined some investing because I trust you guys. And I trust the research and not I might be down right now. But I know I’m not going to stay down and just keep incrementally adding to my positions when my funds allow and I know it’s going to pay off in the long run. Okay, off dividends.

Simon Erickson  25:37

Investing fun to even. Well, thanks very much, Sam. Thanks, everybody for joining this, this call right before a subscriber call, we want to talk about seeing the bigger picture things we’re looking at. Of course, Luke talked about stock based compensation. Steve talked about what’s going on with tech stocks in the sector rotation, I chatted for just a little bit about the yield curve. We’re now going to go into our subscriber call in three minutes from now we’re going to share our seven recommendations for June and we’re going to talk about them we’re going to field questions and have an open and interactive discussion. And then we’re also going to be sharing our best buys. Those are a little different because they’re our favorite previous recommendations that are already on the scorecard that we’re actually coming back around and we’re going to double down on. We are making them into official picks this month because we have such conviction in long term investing. And we think that right now is a great time to be a long term investor. So thank you, Luke. Thank you, Stan. Thank you, Steve. Thank you everybody for joining in. We’ll see you in a couple of minutes for the subscriber call again, seven investing.com/subscribe. And then the number seven, the word for fo r and then the number seven to get your first month for $7. If you’d like to join us and talk about stocks, we hope you have a great Friday. We hope you have a great weekend and we’ll hope to talk to you soon. Take care