A rising tide lifts all boats but, as a less prosaic axiom also notes, human effluent floats. So, as the market cheers today's non-farm payrolls report from the U.S. Bureau of Labor Statistics, I will continue to revisit the names that are not working in a week in which the S&P 500 and Nasdaq Composite hit new all-time highs.
A few weeks ago in my Real Money column I coined a phrase for a subsector I call "third-tier tech". If you are looking for the pain in this exuberant market it is in the names classified as technology plays with market caps between $5 billion and $100 billion.
In my RM column last Friday I named a full 15 third-tier tech names as ripe for shorting. Already there have been notable blowups, but again, I want to clearly define third-tier. There will be a day to short the market's tech giants, MAFANG - Microsoft (MSFT) , Apple (AAPL) , Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Alphabet (GOOGL) (parent company of Google) - but today is not that day. All those companies, except for Netflix, generate copious amounts of free cash flow, and all those stocks, except for Netflix, are leading the market higher in today's trading.
Remember, though, there is a cohort in this market that is composed of stocks with negative cash flows and ridiculous valuations. It would be logical that those companies would just be coming public now as the market reaches new highs and older tech names (this was most evident in AMZN's figures) start to report earnings results that show the hallmarks of maturity.
So, if maturity is no longer cool, let's go with the youngest, least profitable names. What could go wrong? Well, a lot, according to this week's trading. The tape never lies.
I have covered my short position in Beyond Meat (BYND) , but Tuesday's 22% decline on higher expenses/lockup expiration was quite predictable and quite lucrative for my firm, Excelsior Capital Partners. Beyond Meat looks like one of the microcap names I used to follow in the days I styled myself as MicroCap Guru. It's an interesting little company that has reached the breakeven level of profitability. If you believe in the concept of plant-based proteins and you are very, very loose with valuation, you could probably stretch BYND's value to $1 billion. That would be between $16 and $17 per share versus today's price of $83 per share. Today BYND is worth $5.05 billion but a week ago it was worth $6 billion, a month ago it was worth $9 billion, and in July it reached a market cap of $13.85 billion. There is so much more downside ahead for BYND shares. Valuation matters.
Among the other names I mentioned in last week's RM column, Pinterest (PINS) has been eviscerated, falling 22% in today's trading, and Lyft (LYFT) has been sold off this week by about 4% despite the rising Nasdaq. Snap (SNAP) shares have recovered to the $15 level, but as my bearish options position requires it not to reach $20 by January, I am still feeling great about that third-tier tech trade.
What's next? Well one of the hallmarks of companies that lack the proper discipline to be viable public entities is slow earnings reporting. It's inefficiency in action.
Slack (WORK) has been a huge dog since its June IPO, with shares down 40%. Slack management has not even set a date for their September quarter earnings release. I will be short it when they do. Peloton Interactive (PTON) also has not yet reported earnings, but management has set a date, Tuesday November 5th. Zoom (ZM) will report that day, as well.
One of the other lessons from following third-tier techs is that the first earnings release out of the gate (PTON's IPO priced on September 25th) tends to reveal information that further fuels the bears. It's like buy on the rumor/sell on the news. The IPO is the rumor, with the bell-ringing and the endless fascination with the potential of these "ideas," and the first earnings report is the news, with financial statements showing low profitability, negative cash flows, and ridiculous valuations.
So, I am sharpening my pencil and getting ready to short these names ahead of earnings. Excelsior's returns have been fantastic in the four months since its inception, proving it is possible to profitably run a short fund in a period of irrational exuberance in the overall markets. I am going to keep at it, and I will keep chronicling the foibles of third-tier tech names for RM.