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Two centuries ago one of the first economists, David Ricardo coined the still famous investment adage “Let your profits run (on).” Makes sense. All else equal, one would prefer to own or buy stocks in uptrends, and there have been some exceptional uptrends this year. Thirty-six Russell 1000 stocks are up more than 100%. What would Ricardo have done with his winners if he had options to trade? Here’s my take. Let ’em ride: Several of 2023’s best-performing stocks were grossly undervalued at the beginning of the year. In some cases for reasons that were easily identifiable both then and now. Arguably the best example is Meta . At its November 2022 low Meta traded down to $90 a share, less than 7 times the $13.71 in adjusted eps the company earned in FY2021. Although revenue growth paused in 2022 the company had a very strong balance sheet and had historically been a free cash flow generating powerhouse. The problem was that Mark Zuckerberg was losing billions, throwing money at his vision for the metaverse, and investors were concerned it had become an obsession taking precedence over the best course for the business. Many investors were quite vocal about their displeasure, but voicing their concerns was all they could do because Zuckerberg controls more than 50% of the voting rights through a special class of shares. So while investors recognized the company could deliver massive earnings and free cash flow, they were afraid Zuckerberg had gone off the reservation. Eventually, though he did elect to moderate his spending on his ambitious visions. The company has returned to record profitability and free cash flow generation and the stock has responded in kind, up 140% since the November 2022 low. While certainly not as cheap as it was a year ago, Meta remains cheap at not because it is trading at 20 times FY2024 EPS estimates of $18 a share, but because that represents 20% annual EPS growth. The stock sports topline growth, substantial margins, a strong balance sheet, substantial free cash flow, and a moat around its business. META’s biggest threat is itself, and as long as management doesn’t go back down the rabbit hole, it is a poster child for growth at a reasonable price (GARP). Other big winners for 2023 that remain well positioned for 2024 as long-term rates have dropped while unemployment has remained low include Vertiv Holding , Builders Firstsource , Topbuild Corp , and PulteHome . Nvidia and Uber are too, even despite the huge runs they’ve had at reasonable valuation given their respective growth rates, but bear in mind that some investors may have deferred taking gains in these and other large winners for tax reasons. Due to this and their high betas, any market choppiness in the market generally will affect these names more severely. It’s time to hedge some of those gains (or take profits): The second best-performing stock in the Russell 1000 for 2023 is Coinbase (COIN) . As of year-end 2022, COIN was down more than 90% from its November 2021 peak. Investors shunned the stock as cryptocurrencies had plummeted. Bitcoin, the most well-known cryptocurrency, had fallen more than 76% from peak to trough, and it would be reasonable to assume that if cryptocurrencies continued to perform badly, speculators would trade them less often which would hurt the business of a crypto exchange. It did. Revenues fell nearly 60% year-over-year between FY2021 and FY2022. The company, which had made $21 in adjusted EPS in 2021, swung to a $6.63 a share loss. Unsurprisingly, as cryptocurrencies rebounded in 2023, so did COIN. What’s surprising though is the degree to which it rebounded. Where bitcoin rose > 150%, COIN is up over 400%. Some businesses are indeed highly leveraged to prices for other goods or assets. Gold miners’ prices are levered to the price of gold, oil companies to the price of oil, chip makers like MU to the price of NAND and DRAM and cryptocurrency miners and exchanges to the prices of the cryptocurrency. The issue I have with Coinbase is that despite the sharp increase in cryptocurrency prices, revenues and earnings have not rebounded in quite the same way. FY2024 revenue expectations of 2.9 billion are more than 60% below the company’s zenith in 2021 of $7.8 billion. The company is expected to report FY2023 losses of 89 cents share. Street estimates are not forecasting a return to profitability until 2027. Why not? How is it that cryptocurrency prices can rebound so sharply and the company cannot return to the same level of profitability they saw in 2020 when the price of bitcoin for example was far lower than it is today? If I believed that Coinbase could reliably generate $4.7 billion in net income as it did in 2021 this thing would be ludicrously cheap, but it feels as if the landscape is shifting beneath the company’s feet. Other companies I place in this category include Roku and SoFi . The single best-performing stock in the Russell 1000 for 2023 is Affirm , up nearly 420% year-to-date. Affirm Holdings is a popular buy now, pay later fintech company. How popular? It’s growing topline at greater than 20%. Its popularity is understandable. In some cases, it offers purchases at zero interest, considerably more attractive than using a high-interest credit card. Additionally, these loans aren’t currently reported to TransUnion or Equifax, so the impact of taking the loan on the borrower’s credit score may be reduced, and in any case, borrowers may wish to preserve available credit lines for other uses. Likely, the company’s partnerships with big online outlets such as Amazon and Walmart are going to show substantial gains during this holiday shopping season. The market opportunity is also substantial relative to the company’s size. At $15 billion in market capitalization, Affirm is still tiny. To put things in perspective, the combined market capitalization of Visa and Mastercard is nearly $1 trillion. Paypal is nearly $70 billion. The problem here is that the idea of buy-now-pay-later isn’t proprietary. Affirm is likely to face competition from other payment players. Charge-offs remain low, but we know that consumer credit balances have been rising steadily and are now at all-time highs. Auto loan delinquencies have also been rising. If the other large credit agencies TransUnion or Equifax eventually join Experian and begin tracking these loans, that would eliminate a perceived benefit by consumers. Ultimately though it comes down to a question of whether I would prefer to own money-losing Affirm based on their topline growth, or profitable Paypal for 1/10th the multiple betting they’ll catch on to the portions of Affirm’s business that are growing. If you own, but don’t want to sell, consider purchasing the March $45/$35 put spread as a particle hedge, as illustrated below. The answer is simple, I’d much rather own PayPal (or the major credit card companies). Other names I place in this category include Palantir Technologies . Here too is a company that is growing, but it’s unclear whether the growth targets may be a bit ambitious. Palantir relies heavily on government contracts, greater than 56% by revenue. Government business can be great, but it does introduce concentration risk as that segment of their revenue share indicates. One final thing: hedge when you can, not when you have to. As I write this the VIX Index closed at 12.45, only narrowly higher than the 12.07 low for the year on December 12th while the S & P 500 is just slightly below its record high set on January 3, 2022. DISCLOSURES: THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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