Roku versus Cat!
OK, it's not King Kong vs. Godzilla, the only real box office hit so far this year, but when it comes to stocks it might as will be.
Every market has a coloration, a stock that typifies it, that stands for it and that defines it.
Some markets have two heads though, and this market has two of the most ridiculously stark two heads I can recall, Caterpillar (CAT) , the huge machinery company, and Roku (ROKU) , the box that makes staying at home and watching non-linear TV so much fun.
I know we speak as if there are two markets out there, the freedom market, which is us going out to the movies or dinner or getting on a plane to travel again, and the imprisoned market, the one where we ride on our Pelotons (PTON) and cook with our Conagra (CAG) while wiping our kitchens and baths with Clorox (CLX) wipes, but that's actually a false dichotomy when it comes to what's going to happen next.
The real battle, the reason why I keep those two stocks front and center is because they define a much more powerful leitmotif of the moment, the future valuations of what things can be worth and therefore they tell you the direction of what's going to happen that given day.
That's right, if you see Roku's stock leading the market in the morning, that's a sign that soon you will see Okta (OKTA) , or CrowdStrike (CRWD) or Snowflake (SNOW) roaring. You most likely will see RingCentral (RNG) and HubSpot (HUBS) and Zendesk (ZEN) or Zscaler (ZS) about to fly.
But if Caterpillar takes off first, that's when you can expect Honeywell (HON) , Ingersoll Rand (IR) , Union Pacific (UNP) , Federal Express (FDX) , 3M (MMM) , Dupont (DD) and Dow (DOW) are about to get rolling.
I know this is all ridiculous that you can distill the market down to two names, but this is happening because they stand for palpable themes.
First, Roku means streaming internet content into the home in an easy and quick way. The internet content ranges from Netflix (NFLX) and Amazon (AMZN) to HBO. It also has an advertising component that is more and more cherished by advertisers because it reaches the hard-to-get younger people. It is something that is perceived to be able to survive a re-opening of the economy because it is the ultimate learned behavior for younger people. No one is going to rip out Roku. They are going to rip out cable. The thought is that when we all go 5G you might not even want cable from a quality point of view. That's why ROKU sells for 682 times next year's earnings and is much better advocated by saying it sells at only 13 times sales, way down from about 20 times sales when all looked bleak in the world. It's got the secular growth, though, that you are looking for because it doesn't depend on economic growth, it depends on economic contraction, stingy millennials, cheap Gen Xers and cord cutting. It should lose money this year but make some money next year when it would trade at 167 times 2023 earnings. It doesn't matter, of course, because many of the buyers are of the WallStreetBets variety who don't care about any of this, including the terrible chart the stock has. Too much inflation and the stock's P/E will fall because that's what happens to secular growth stocks.
Caterpillar, on the other hand, is supposed to earn $8.24 this year and $10.66 next year, making its price-to-earnings ratio 27 this year and 21 next year. But here's the kicker. If you think the second stimulus bill passes, with all sorts of infrastructure money, and you think that China comes back to the table while the world snaps back into growth and more housing will be built then it has great leverage and could earn say 15 times earnings. If it can pass on the metal inflation that will come from that boom then call it maybe 14 times earnings. So it will go from trading at premium price-to-earnings ratio to a discount. That's the cyclical growth the money managers want.
They care passionately about the upside surprise and know it will move the stock if the forecast gets raised and the chart is a thing of beauty. The Fed may raise rates but CAT is protected for at least a double in rates because that won't slow down the growth. Too much momentum.
That's why Roku vs. Cat defines the market. It's a great way to measure the temperature of everything from the bond market to the Fed to buying habits to inflation to valuation. If you trade, then keep them on your screen, if you invest, then CAT's the one to buy.