senses of “concept”

concept stock

“Concept stock” is a derogatory term used for a stock whose sole merit is that it has a good story about how its future will unfold–and little else. “Story stock” is another way of saying the same thing. WeWork is a good recent example, although a case could likely be made in today’s world for any stock brought public through a SPAC. Sometime a healthy dose of fraud is also involved, but that’s not an absolute requirement.

Usually, the company so named is purported to be a growth stock, meaning one whose profits will grow faster than the market expects and/or for a longer time than the consensus believes. Tesla was one of these when it went public, and probably still is one now.

However, I recently heard a Wall Street analyst describe GM as a company with a long history, good brand name and distribution network and reasonable cash flow, but whose domestic market share has shrunk from half the domestic market fifty years ago to 1/7th (despite serious government protection against foreign competition) and whose core business is about to be disrupted by electric vehicles. His argument for the company’s stock is that if GM doesn’t change its hidebound ways the company will die. Therefore, he concludes, GM will change.

This is the quintessential value stock argument.

There can also be a hybrid case, like MSFT, not a deep-value, asset-rich train wreck, but a growthy company that had (very sub-par) earnings growth. It spent the first decade+ of this century in the doldrums until activists forced inept top management to hand over the reins in 2014. The stock is up 9x since.

In all cases, earnings will eventually trump concept, as reported results establish whether the people proposing the concept whether the dreamers who have proposed the concept are right or wrong.

today’s market: concept vs. earnings

There’s a second sense of concept that’s more relevant for the overall stock market today. we still have the same general opposition of concept vs. earnings. But the current situation is one in which large numbers of publicly-traded companies have had either minimal earnings or large losses, due to the pandemic. Others, in contrast, have received stay-at-home bonanzas. ETSY is a good example. It averaged pre-tax income of about $62 million a year during 2017-19. Over the trailing twelve months, it has taken in $513 million.

It seems logical to figure that earnings for the first group will bounce back as the world reopens. It also seems, to me at least, that we may already have seen peak earnings for the second group, or will see the peak during the current quarterly reporting season. But, I think the market is mostly dealing with concept–if for no other reason than because it’s genuinely difficult in uncertain times like these to accurately forecast earnings.

This makes the next couple of reporting periods very important. They’ll either validate of undermine the market assumptions of future growth that are imbedded in today’s prices.

ETSY is an interesting case in this regard. The stock is trading at 52x earnings. The consensus of the 13 analysts Yahoo lists as following the company is that 2021 earnings will be around $3.10/share vs. $2.69 for 2020. For 2022, the high estimate is $5.22, the average is $3.80 and the low is $1.25. I imagine the high estimate assumes that ETSY has finally been discovered and will continue to gain customers as time goes on. The low estimate seems to figure that competition will emerge (if nowhere else, from reopened physical stores) that will pressure both sales growth and margins. I have no idea which camp is right. My point is that they can’t both be.

more tomorrow

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