A word of caution

Danielle Park is a Chartered Financial Analyst; President and investment portfolio manager at Venable Park Investment Counsel in Ontario, Canada; attorney; and finance author. She writes an occasional word of caution when she sees bubbles forming or excessive risk being taken.

On the outside chance that yesterday’s post set your hair on fire with an urge to invest your life’s savings in Nvidia, a fire extinguisher is provided by Park:

In the latest AI-driven chapter of mania, chipmaker Nvidia has leapt 186% year to date and is trading about 15% above its November 2021 top. At less than $50 billion in expected 2023 revenue and a current market cap of $1 trillion, the stock is trading about 44x expected sales. Pure madness. There’s no math being done here. …

As the 2000 tech bust reminded us, the wilder the valuation overshoots, the harder the fall after that. Nvidia collapsed 90% after its 2000 top and spent 15 years trying to make back losses.

The tech rebound has pulled the … S&P 500 higher year to date, with the S&P 500 now 27% concentrated in tech companies (compared with 33% at the cycle top in 2000).

The ongoing bear market for most stocks coincides with recessionary warnings from the Index of leading economic indicators (LEI), which has been contracting for 13 months.

Word to the wise: stocks have never bottomed historically before a recession is recognized and the US Fed has been cutting interest rates for many months. They have not even confirmed a pause yet.

From “Tech Mania Magnifies Downside From Here,” by Danielle Park, Seeking Alpha, May 26, 2023

An Nvidia moment

Technological advancements can bring fundamental changes in economics, which the stock market may anticipate or respond to. In recent years, interest has been building around artificial intelligence (AI).

Last year, AI entered many people’s consciousness when OpenAI announced ChatGPT. Interest in AI exploded on May 24 when Nvidia shocked Wall Street by their projections of growth in AI.

On May 25, Altimeter Capital founder and CEO Brad Gerstner, on CNBC’s Halftime Report, was asked about the market’s enthusiasm. Gerstner said: We have one of the most significant technology disruptions of our lifetime, probably bigger than the Internet itself, called artificial intelligence, and there are two components of AI. One is compute; and the second is data.

The compute layer today is dominated by Nvidia and their GPU stack, which is not just silicon. It’s an increasingly sophisticated stack of software and models that drive AI for the enterprise and AI training for consumer applications. …

The Internet changed all of our lives forever. There’s no business or no human who does things today that doesn’t involve the open web. In 1997-1999, we had 20 million people on the globe connected to the broad-based Internet. It was tiny. What we believed in was the promise and the promise came true. It just took longer than the people in 1997-1999 believed at the time.

What’s so different about this moment is we have billions of people connected via super computers in their pocket to a high-speed Internet. And so the cycle time on innovation (and) the adoption of new technologies occur much faster because you have ubiquity. Both enterprises and consumers can get to the new technology faster.

In 2000-2001, we were just laying down the rails of the Internet. We had to get people online. That was a very different moment in time.

From “Tech stocks surge as wave of interest in AI drives $4tn rally,” by Graeme Wearden, The Guardian, May 26, 2023

Thank you …

Major General Nathanael Greene, Brandywine, Pennsylvania, 1777;

Major General Jacob J. Brown, Lundy’s Lane, Ontario, 1814;

Seaman Joachim Pease, off the coast of Cherbourg, France, 1864;

Major Walter Reed, Havana Cuba, 1900;

Lieutenant Edouard Isaacs, prisoner of war escapee, Germany, 1918;

Civilian Virginia Hall, France, 1941-1945;

PFC Leonard Kravitz, Yangpyong, Korea, 1951;

Sgt. 1st Class Melvin Morris, Mekong Delta, Vietnam, 1969;

Master Sgt. Gary Gordon, Sgt. 1st Class Randy Shughart, Mogadishu, Somalia, 1993;

Sgt. 1st Class Jared C. Monti, Gowardesh, Afghanistan, 2006;

Sgt. 1st Class Christopher Andrew Celiz, Paktia Province, Afghanistan, 2018.

From Normandy American Cemetery, one of thirteen American cemeteries in Europe.

A changing landscape

An old photo confirms my presence in a large preschool choir at Central Methodist Church in Gadsden, Alabama. Many years later, the church relocated to Rainbow City and became Christ Central United Methodist Church. I passed by the church last week and noticed a sign: “Coming Soon: CityChurch.”

CityChurch, formerly Rainbow City Church of God, has purchased Christ Central’s property, enabling the UMC congregation to relocate to nearby Southside, Alabama. The changing landscape of congregations is more than I can monitor, but I sense a stirring of creativity, sometimes born of necessity.

In a Gadsden Times article linked above, the CityChurch pastor was quoted as saying only 17% of Americans attend church. Respectfully skeptical of clergy estimates, I found a survey that asked: How often do you attend church or synagogue – at least once a week, almost every week, about once a month, seldom, or never?

From “Church Attendance of Americans 2022,” by Erin Duffin, Statista, March 29, 2023.

Tina

New Yorker cartoonist Liza Donnelly‘s tribute to Tina Turner (1939-2023):

From Seeing Things, Liza Donnelly’s Substack blog, May 25, 2023. For more about Turner’s iconic rendition of “Proud Mary,” see The Meaning of Creedence Clearwater Revival’s “Proud Mary.”

Credo

This concludes a look at some corporate annual reports. Since 1982, my study of publicly traded companies has been a fun, enlightening hobby that pays dividends.

Only two companies have a Standard and Poor’s credit rating of AAA: Johnson & Johnson and Microsoft. JNJ’s 2022 Annual Report begins with a credo, written in 1943 by Robert Wood Johnson II. Here’s the current edition of “Our Credo,” in its entirety:

We believe our first responsibility is to the patients, doctors and nurses, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to provide value, reduce our costs and maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our business partners must have an opportunity to make a fair profit.

We are responsible to our employees who work with us throughout the world. We must provide an inclusive work environment where each person must be considered as an individual. We must respect their diversity and dignity and recognize their merit. They must have a sense of security, fulfillment and purpose in their jobs. Compensation must be fair and adequate and working conditions clean, orderly and safe. We must support the health and well-being of our employees and help them fulfill their family and other personal responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide highly capable leaders and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must help people be healthier by supporting better access and care in more places around the world. We must be good citizens — support good works and charities, better health and education, and bear our fair share of taxes. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed, investments made for the future and sitmistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

From “Robert Wood Johnson II: A Natural Born Leader,” Johnson & Johnson website

Delivery

The friendly milkman of my childhood delivered fresh milk and picked up empty bottles to recycle. Since COVID, we’ve had an increase of deliveries to our relatively remote area. Our regular USPS mail carrier is a good friend whose husband installed an amazing auxiliary steering wheel on the right side of her vehicle. Our regular United Parcel Service driver is delightful young man.

After a 24 year career at Home Depot, Carol Tomé retired in 2019 as CFO. She left retirement in 2020 to become the CEO of UPS. Her letter to shareholders accompanied the 2022 UPS Annual Report, noting that for the first time in its 115-year history, UPS generated over $100 billion in revenue. She described the UPS strategy: Customer First, People Led, Innovation Driven:

We are laser-focused on reducing friction in the customer experience by improving how we acquire, engage and support customers…. We created individualized dispatch plans for our drivers to give them more choice over the hours they work. … In 2022 we took delivery of over 2,300 alternative fuel and advanced technology vehicles, bringing our rolling laboratory to more than 15,600. … The execution of our strategy will help us reach our goals of carbon neutrality by 2050 …. We are committed to pursuing planet-friendly solutions that enable us to continue to take care of our employees and serve our customers, stakeholders and communities without compromising the ability of future generations to meet their own needs.

From “Skiatook community showing support for UPS driver after loss of her daughter,” by Michele White, Tulsa Fox23 News, May 16, 2023

Big Apple

Apple’s 2022 Annual Report describes a relatively simple business model: The Company designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories, and sells a variety of related services.

Apple’s $394.3 billion in 2022 sales came from Americas (43.0%); Europe (24.1%); Greater China (18.8%); Japan (6.6%); and Rest of Asia Pacific (7.5%). Apple’s size and global footprint put it in the midst of multiple geo-political and social issues.

Apple’s stock market capitalization is $2.7 trillion, which is 6.75% of the value of the entire $40 trillion US stock market. The value of Apple’s stock is greater than the 595 public companies in the UK ($2.6 trillion). Apple is twice the size of Germany’s 255 companies.  Apple’s size presents great opportunities, risks and ethical challenges.

From “Apple versus the world: The iPhone maker is bigger than almost any stock market in the world,” by Bob Pisani, CNBC, May 10, 2023

Shrink

Continuing a look at some corporate annual reports, an important section is “Risk Factors.” Target (on page 9) includes a paragraph entitled If we are unable to protect against inventory shrink, our results of operations and financial condition could be adversely affected.

Our business depends on our ability to effectively manage our inventory. We have historically experienced loss of inventory (also called shrink) due to damage, theft (including from organized retail crime), and other causes. We continue to experience elevated levels of inventory shrink relative to historical levels, which have adversely affected, and could continue to adversely affect, our results of operations and financial condition. To protect against rising inventory shrink, we have taken, and may continue to take, certain operational and strategic actions that could adversely affect our reputation, guest experience, and results of operations. In addition, sustained high rates of inventory shrink at certain stores could impact the profitability of those stores and result in the impairment of long- term assets.

At Target’s recent Q1 earnings call, CFO Michael Fiddelke said, “…we now expect that if current trends continue, shrink will reduce our full year profitability by more than $500 million compared with last year.” CEO Brian Cornell said about organized retail crime and shrink: “…what I’m most concerned with is it puts our team and our guests in harms way.”

Target CEO Brian Cornell, 2022 Annual Report.

A matter of fact

Just for fun, to lighten the space inside my cranium, this week I’ll share some wisdom gleaned from corporate annual reports. These required documents of public companies include nuggets of wisdom tucked away among many pages of tedium.

As climate change becomes irrefutable, corporations report how this change impacts their operations and their bottom line. Page 5 of the 2022 Annual Report Summary of the global insurance company Chubb includes this matter of fact:

Last year was another active year in terms of natural catastrophes (CATs) and one of the costliest on record for the insurance industry. Exacerbated by climate change and urbanization, the industry and society face a growing frequency of costly CATs. It’s part of the new normal — every season of the year is a major CAT season, punctuated by extremes in temperature from hot to cold, moisture from rain and flooding to drought, fire and wind. Industry insured losses last year were estimated at $120 billion, essentially the same as 2021’s elevated level and above the five- year average of $97 billion. For Chubb, our total pre-tax CAT losses in 2022 were $2.2 billion compared with $2.4 billion in 2021 and our five-year average of $2.1 billion.

From the Chubb Investor Relations website page