CWS Market Review – November 9, 2021

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On Monday, the S&P 500 did something it hasn’t done in more than 50 years: the index closed higher for the 17th time in 19 trading sessions. That includes a seven-day winning streak followed closely by an eight-day winning streak, the latter of which was snapped today. Also today, the Nasdaq snapped an 11-day winning streak. The last time the S&P 500 went 17-for-19 was 1971.

Many of these recent up days have been pretty small. Twelve of the last 17 daily gains were less than 0.5%, but that’s typical for a rally. Many of the best times for stock investors are fairly dull markets. George Soros once said, “If investing is entertaining, if you’re having fun, you’re probably not making any money.” That’s probably true.

A few years ago, I looked at 60 years of daily market data. I found that if you take all the days when the S&P 500 moved more than 1.14% in a day, up or down, then the combined return comes out to zero. They completely balance each other out. The market’s entire return, more than 55-fold over 60 years, comes on the low-volatility days (up or down less than 1.14%).

The high-volatility days happen 16.5% of the time, or roughly one day in six (just capital gains and not dividends). Historically, it’s been to your advantage to stick with a boring, low-vol market. To be a successful investor, the real profits are made in small steps.

Over time, the gains add up. In this latest 19-day run, the S&P 500 gained 8%. Going back to early March, the S&P 500 is up close to 25%. Bear in mind how many scary headlines there were.

The Trade Desk Rallies 42% in Two Days

Having said that, let’s look at some gigantic one-day returns. Six months ago, I highlighted The Trade Desk (TTD) for you after it had plunged 26% in one day. When good stocks get creamed, most people run away. For me, a rotten day gets my attention. At the time, I wrote: “Thanks to yesterday’s train wreck, this sounds like a good opportunity to take a closer look at this stock that’s still not very well-known.”

The Trade Desk is up 88% since then. Thanks to a very good earnings report, the stock jumped almost 30% yesterday, and it added another 9% today. For Q3, The Trade Desk earned 18 cents per share. Wall Street had been expecting 15 cents. Quarterly revenue rose 39% to $301.1 million. Wall Street had been expecting $283.5 million.

It’s an interesting company. Think Don Draper meets Jeff Bezos. The Trade Desk markets a software platform that’s used by digital ad buyers to build data-driven advertising campaigns. In other words, they help companies get the most bang for their buck on the web.

The Trade Desk offers a real-time bidding technology platform that allows media buyers to target specific audiences with customized ads. Users can manage their digital ad campaigns in real time. They can even use third-party data to optimize their strategies. This saves a lot of time and money for companies’ media strategies.

There’s been some misunderstanding about The Trade Desk’s business. That’s because some investors seem to think that it can easily be blown out by giants like Google or Facebook. That’s not true and this highlights the key difference that The Trade Desk offers. If a company wants to advertise with, say, Google, then they go to Google. If a company wants to advertise with Facebook, then they go to Facebook.

But if a company wants to use The Trade Desk, then it can tell them that the best and most cost-effective place for them is The New York Times or The Wall Street Journal or Hulu or any number of places.

The numbers for The Trade Desk are very impressive. The company’s gross margins typically run close to 80%. In other words, they can charge five times what it costs them.

The company also provided optimistic guidance. For Q4, The Trade Desk sees revenues of at least $388 million and $175 million in adjusted EBITDA. Both numbers were above expectations. I expect to see more good news from The Trade Desk.

Trex Soars 15% on Strong Earnings

The Trade Desk isn’t on our Buy List but Trex (TREX) is and it had a very good day today. Shares of Trex gained 14.7% in today’s session to reach a new all-time high.

Trex reported Q3 earnings of 64 cents per share. That was six cents higher than expectations and 73% higher than a year ago. Quarterly sales rose 45% to $336 million.

If you’re not familiar with the company, Trex is a major maker of wood-alternative decking and railing. In my opinion, what they make looks a lot like wood, but it’s cheaper and involves a lot less maintenance.

Trex is also better for the environment. Pressure-treated wood still dominates which means there’s plenty of room for Trex to grow. It’s also nice to know that with Trex, you don’t have to take another tree out of the Amazon rainforest to make your backyard deck.

Check out their products at their homepage (www.trex.com), and you’ll see why Trex has become so popular.

Trex is made from 95% recycled material. Every year, the company effectively takes 500 pounds of plastic out of landfills and uses it for alternative wood. It’s not just good for the planet, but it’s smart business. Trex takes all those used bags and bottles, then combines it with recycled sawdust from cabinet and furniture manufacturers, and that’s what Trex is made of. By the way, this also saves a lot of water.

Some other key advantages are that Trex weighs less than wood and that it’s also more resistant to mold and insects. You don’t need expensive staining or sanding, and repairs are much less frequent. You’ll often hear people say that Trex looks fake. I think that used to be true, but it’s much less the case today.

Commercial railing is another big business for Trex. Their railings are especially common at stadiums and arenas across North America. Trex is sold in 40 different countries and over 6,700 retailers.

It’s a very efficient business. Trex doesn’t carry a dime in long-term debt and its operating margin runs about 25%. We first added Trex to our Buy List at the beginning of last year. Since then, the stock has surged 195% for us. That means it’s nearly a three-bagger in just two years! Trex now sees Q4 revenue of $295 million to $305 million. The midpoint is up 31% from last year’s Q4.

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Will Inflation Really Be Transitory?

Tomorrow morning, the government will report on consumer inflation for October. This will be a key report to watch because inflation has heated up this year. Earlier this year, we had the highest core inflation report in 40 years.

The Federal Reserve has said that the recent run of inflation will be “transitory.” That’s become the central bank’s latest favorite word.

I don’t know if the Fed is right about that, but I tend to be an empiricist on these issues. The latest figures show that some of the recent inflation has cooled off, but it’s too early to declare victory.

Inflation is very damaging to capital markets. Once it gets embedded in consumer expectations, it’s hard to shake loose. It’s basically a tax on capital and it punishes savings.

Inflation also has an unusual impact on earnings. First, you have to understand that not all earnings are the same. Inflation exacts a heavy toll on asset-heavy businesses. As a result, companies with high assets relative to their profits tend to report ersatz earnings.

Inflation has an impact similar to putting a magnet near a compass. Investors who remember the 1970s certainly remember how unpleasant persistent inflation can be. During the entire decade of the 1970s, the Dow gained a grand total of 38 points.

While inflation has been bad for stocks, equities have a higher threshold than many people realize. I found that inflation doesn’t put the squeeze on stocks until it gets over 5%. Inflation over 5% tends to wreak havoc on the stock and bond markets. You’ll see consumers change their behavior. For example, Walmart (WMT) did very well during the 1960s and 1970s as it became known for its low prices. I suspect that inflation will gradually subside but I won’t be convinced until the data confirms it.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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