Everything Old is New Again

Everything Old is New Again

January 21, 2021

"Those who fail to learn from history are condemned to repeat it." - Winston Churchill

"What is done is done: and the cracked egg cannot be cured." - Howard Pyle, quote from the Merry Adventures of Robin Hood

"Don't throw the past away. You might need it some rainy day. Dreams can come true again. When everything old is new again.” - Peter Allen

I bet you can tell where I’m going with this...As I'm reviewing yesterday's stock market action an old "friend" caught my eye. Plug Power (PLUG) is at it again. Back in 1999 this fuel cell stock became one of the many poster children of what is now known as the Dot com bubble. You remember that period. The stock market exploded higher on the promise of the internet. Valuations didn't matter...It was going to be different this time. Plug went from $35 per share to over $1000! Then came the crash. Plug dropped down to $2/ share and spent most of the subsequent 20 years trading between $2 and $4. Last year as the enthusiasm for electric vehicles bubbled Plug went from $4 to $30. This year, not quite 3 weeks old, Plug has more than doubled and now sits at $68. This price gives Plug a stock market value of just over $20 billion dollars. They have no net income. They lose about 33 cents on every dollar of revenue. The price to sales ratio is now 67 dollars for every dollar of revenue. When the dot com bubble burst in March of 2000 the Nasdaq dropped by almost 80% and took 13 years to recover.

The stock market is not a casino. Over the long term it is an efficient pricing mechanism and the world's greatest wealth creator. Over the long term, stock prices will reflect a reasonable present value of a company’s earnings discounted by current interest rates. That last point is key. In a world with zero to 1% interest rates you can make a case for higher stock prices and that is perfectly reasonable and valid. What we would implore you not to do is to chase a stock to a price that cannot be arrived at through any reasonable estimate of future earnings. I know how intoxicating it can be to get on the train with the Robin Hood investors who have realized some fast and extraordinary profits, but I have seen this play before, and I know how it ends...I just don't know when. Profitability, reliable earnings growth, market cap to potential market size. These things will always matter. Remember, it is a marathon not a sprint.

When designing our model portfolios our team leans into the expertise of our partners. Commonwealth has a team of 10 investment professionals on their investment management team with whom we consult for security selection and asset allocation. We also rely on Blackrock, with their proprietary and forward-looking Aladdin system to determine which areas of the market to overweight and underweight. This year, in recognition of the expected continued Fiscal and Monetary stimulus, as well as the apparent efficacy of the vaccines, we are introducing some cyclicality into the portfolio by leaning into value. We are accomplishing this primarily through the Dividend Growth Style Factor, which while exposing us to more economically sensitive companies still avoids those who are most leveraged to parts of the economy that may recover more slowly. We are also increasing our exposure to smaller companies and emerging markets which are in the early stages of recovery. We maintain exposure to some Technology positions for their extraordinary balance sheets and research and development expenses. Finally, we are balancing these exposures with positions in health care and quality balance sheet companies to provide some stability in the event of a prolonged slowdown.

We wish you all the very best for the new year and welcome your questions and thoughts on any of the above.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.