The ABCs of crazy
Market commentary and discussion sometimes revolves around a group of stocks or asset class that have performed well and offer exciting stories. Lately this group known as the Fang stocks (Facebook, Amazon, Netflix and Google) has captured serious airtime and pontification.
The conversations have ranged from adoration to admonition. But what about the ABCs (Altcoins, Boeing and Caterpillar)? Let me briefly discuss why I think this is a bit crazy.
Altcoins or cryptocurrencies including bitcoin, have exploded in value. Examples of altcoins include litecoin, dogecoin, peercoin, feathercoin, and zetacoin (about 1,400 total). What is astonishing is how much money is being raised in initial coin offerings, or ICOs, for essentially a concept.
According to Techcrunch, “in the third quarter of 2017 alone, ICOs raised more than $1.3 billion for crypto ventures — approximately five times more than funding raised through venture capital in the blockchain space.”
ICOs raise funds in an unregulated process where, in some cases, a simple white paper is the sole source of information. It's important to stress that ICO fund raising endeavours are not regulated by financial authorities like the Securities Exchange Commission and any funds lost due to fraudulent activities or initiatives may never be recovered.
Furthermore, ICOs do not grant ownership in the company developing the new cryptocurrency or proof of concept. The fact that many altcoins have raised millions of dollars despite these factors strikes me to be a little eye-opening. It is possible that some ideas will evolve into successful ventures but some, like “Useless Ethereum Token” which raised $40,000 in three days, would appear to be questionable. This is what is posted on its website: “You're going to give some random person on the internet money, and they're going to take it and go buy stuff with it. Probably electronics, to be honest. Maybe even a big-screen television. Seriously, don't buy these tokens.”
The B and C's of crazy — Boeing and Caterpillar, seem, at least to me, to epitomise some of the exuberance going on. For example, Boeing currently trades at 33 times 2017 estimated earnings. This is about 1.4 times higher than the S&P 500 multiple for a cyclical stock. Typically cyclical companies trade at a discount to market multiples at high earnings or near peak earnings. Caterpillar (CAT) looks similar. On an enterprise to EBITDA multiple (a proxy for cashflow), Caterpillar's valuation looks a bit extended at a ten-year record of about 20 times trailing 12 months. Furthermore, CAT sports a PE ratio like Google — a company that is far less cyclical and growing almost twice as fast long-term. These shares seem to be priced to perfection and any earnings stumble would likely be negative. Of course I could be wrong to be overly sceptical on the prospects these companies have and they could exceed what seems like lofty expectations, but the margin of safety looks low and the extended valuations are a bit odd at this late stage of the economic cycle.
As financials assets continue to rise, more and more pockets of craziness seem to develop. It's even more important to remain disciplined after extended advances to ensure you do not get sucked into the euphoria and irrational exuberance finding its way into all sorts of assets. Taking gains and selling fully valued positions while remaining patient on acquisitions will pay off in spades when a correction appears.
We expect blockchain to become an exciting investment area looking forward but investors need to separate the hype from the facts. Remember investing is not a popularity contest and Fomo (fear of missing out) can lead to significant investment losses. Don't go crazy out there.
• “6 red flags of an ICO scam” by Deep Patel: https://techcrunch.com/2017/12/07/6-red-flags-of-an-ico-scam/
• “Eager cryptocurrency investors have sunk thousands of dollars into joke tokens” by Joon Ian Wong: https://qz.com/1023501/ethereum-ico-people-invested-thousands-of-dollars-in-useless-ethereum-token-uet/
• Useless Ethereum Token: https://uetoken.com/
Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and the views expressed are his own.
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