I’ve just updated my Keeping Score page for August 2023. No recession signal but ample evidence that growth is slowing.

DG reported disappointing quarterly results overnight and is down by almost 17% in pre-market trading. Two things:

–it will be interesting to see how the stock fares once the market is open. I read the sharp drop as bots being more aggressive and lack of buy-and-hold participation in the aftermarket. I have no real thoughts on how trading will go, just that a bounceback would be evidence that trading against bots may not be as foolish as might seem …and the lack of one, or a further decline, will be equally instructuve

–I see the pecking order of traditional retail, moving from the most affluent customer base to the least, as:

luxury goods

department stores (maybe an anachronism)

Target (TGT)

Walmart (WMT)

dollar stores.

In good times, customers shift upmarket from where they usually shop. In bad times, they shift down.

As I read the DG news, the company is facing two issues: it has too much inventory (a la TGT) and customers who shifted down during the pandemic are beginning to return back up. It may well be able to keep some of this higher-end traffic and this long-term plus is being obscured by the inventory issue. Still, the message for the economy is that buyers are giving an all-clear signal. The chief beneficiary should be WMT.

WMT, in turn, will be hoping to keep customers who have shifted down from TGT.

If I were still an institutional portfolio manager, and if I were interested in US mainstream retail (which, I think, we all should be) I would have a more-or-less permanent position that would consist of TGT + WMT. In a good economy, I’d be much heavier in TGT; in a bad economy, I’d be heavier in WMT, with maybe a smaller position in dollar stores. Right now, I’d be shifting out of my more defensive, WMT-heavy stance.

As an individual investor, I’m much more interested in IT than retail. I’ve had a substantial position in TGT for years. It has been a bad mistake over the past year not to have shifted into WMT. But I find myself just starting to add to TGT again.

Another thought: I think there’s a big question mark over luxury retail. A significant chunk of this sector’s revenues (20%?) and a larger part of profits (1/3?) come from China. Not a good place to be right now, and potentially a source of negative earnings surprise over the coming few quarters. Another potential plus for other retail stocks.

I’ve been noticing recently that, especially clearly in the after-market, trading bots have been buying and selling much more aggressively than I’d become used to. Assuming my perception is correct, it prompts the question why this is happening.

My conclusion is that bots have begun to probe more actively for resistance levels, trying to reach more quickly the points where either other bots or human traders will step in to absorb the selling bots are generating (or selling heavily into the buying bots are doing). If that’s correct, the effect of this new tactic will likely be to increase short-term volatility but leave the longer-term patterns of stock behavior untouched.

For you and me, this would also increase the rewards of trading, in stocks we know well, against this newest bot quirk.

What else might be going on? I have two thoughts:

–it may be that bot runners have specific profit targets in mind for themselves, which they can no longer reach without upping the risk they take on. This would be a natural result of today’s higher interest rates–raising the cost of holding a position as well as inducing a less speculative, more buy-and-hold attitude among market participants

–it could also be that there’s been some internal change in the options market. I know just enough about derivatives to be dangerous, so I have no idea what this might be. …although the first place I’d look would be the major brokers, on the thought that increasing options activity is offsetting risks that lie elsewhere on their worldwide books.

…where my wife and I have been visiting family.

The ongoing writers’ strike, the worst-in-close-to-a-century hurricane whose center just missed LA but devastated points east and one of our grandsons starting kindergarten have been the most notable events here so far.

We’ve been visiting for over 40 years, but this is the first time that I’ve been having trouble watching the stock market through the time difference lens. What follows is what I’m seeing in price changes, which might not be 100% the same as if I were in New York.

—Nvidia (NVDA). Blowout quarterly earnings, but the stock went down. How so?

In a very broad sense, we’re in a new investment environment, with the pandemic emergency lows in interest rates in the rear view mirror as well as being past the end of the falling nominal rate trend that began in the early 1980s. Money market funds yielding 5% are a more formidable competitor for investment funds than they’ve been in a long while–capping how high the stock market (as well as any individual equity) PE can rise.

As to NVDA in particular, the big earnings surprise was in the previous quarter, not now. This report was more confirming that news, in my view, than revealing substantial new earning power. I read recent price action as saying ~50x forward earnings is rich enough a price to pay for now.

I’ve owned the stock for years, thanks in good measure to urging from one of my children. I’m in no rush to sell, although I think the stock will go sideways, at best, for a while from here.

–Target (TGT) vs. Walmart (WMT)

From five years ago to the market peak in 2021, TGT had 150% better performance than WMT. From there, the two moved more or less in tandem until the worst of the pandemic was behind us and both firms revealed they were stuck with large excess inventories of stay-at-home necessities like electronics. Both cratered on the news, with enough extra damage to TGT that it is now 25 percentage points lower than WMT on a five-year view. Part of this is product mix, part is that WMT typically gains market share in bad times, partly that–as far as outsiders can see–the TGT miscalculation was substantially bigger than WMT’s (I think that in both cases, the misstep was much bigger than the companies owned up to).

TGT’s most recent quarter was worse vs. expectations than WMT’s. But TGT went up on its news and WMT down. That relative movement didn’t last long, but–as with NVDA–is still indicative of a market where valuation counts for a lot more than it did during the pandemic, and concept for substantially less. Admittedly, in the case of TGT it’s not 100% clear that the concept (or “story,” if you will) is still intact.

There’s an interesting article in the Financial Times today in the Unhedged opinion column (Robert Armstrong and Ethan Wu) titled “Nvidia 2023 = Cisco 2020?”

It points out that CSCO, a maker of networking hardware and software, had a fabulous run from August 1996 through 1999, posting a 10x gain over the period. It has pretty much gone 0-for-the-21st-century since. It lost 80% of its value in early 2000, as the Internet bubble popped, and is still 20% below its last-century close.

NVDA has had an eerily similar run to CSCO’s sunshine period over the past several years. The implicit question: what’s next? The implicit answer: nothing good.

Unhedged admits that it has made the comparison deliberately scary, by cherry-picking starting/ending dates for its charts. This is, in my view, also an illustration of the shifty nature of charts, whose axes can be bent and twisted to support almost any conclusion (not a big issue here, though).

picky, picky

There’s a picky (in this case) point to be made about interest rates. Stocks don’t exist in an investment vacuum. They compete for your money and mine, based on expected returns, with the other two liquid investment types–bonds and cash (and, for some, maybe foreign currency, gold, diamonds and crypto). Anyway, the 10-year Treasury was yielding 6.5% or so as CSCO was topping, vs. 4.1% today. This suggests, to me anyway, that the speculative fever behind CSCO a quarter-century ago was much higher than that behind NVDA today.

the much more important point

The main argument behind the chart behavior, as I see it, has to do with the nature of growth stocks. In my experience, the typical great new idea that sends a stock headed for the sky has about a five-year shelf life. The great companies reinvent themselves. The rest, which is the vast majority of growth companies, fall by the wayside.

For example:

Walmart (WMT) started out building variety stores with lots of low-priced merchandise at the edges of small towns in the US. As that business began to mature, it expanded into Mexico (other international efforts weren’t so hot). Then it opened Sams warehouse clubs. Then it added groceries to compete with traditional supermarkets. All the while, it worked on its logistics network to make every operation more profitable. All this created a highly unusual, multi-decade growth stock. Eventually, though, some combination of the company running out of new ideas and the huge size of the existing company ushered the firm into maturity.

Apple (AAPL) was a near-death experience when the company rehired Steve Jobs and took a big gamble on the iPod. Then came the iPhone and tablets, and the Apple store, with its emphasis on high-end consumers. Then came Tim Cook’s emphasis on manufacturing and distribution efficiency, and the reinvention of the AOL-style walled garden–requiring merchants to pay for access to Apple customers. Again, a company stringing together multiple successive five-year growth ideas.

CSCO, on the other hand, was the king of computer networking, but, like most growth companies, was unable to stave off maturity in the way that WMT and APPL have been.

So,

… the fundamental question the Unhedged article is pointing to is: can NVDA be another AAPL, or is it a CSCO, whose run of new ideas, however epic, is now coming to a close.