Weekend Reads for Investors: A Building Froth in Stocks

There is a speculative froth building in US stocks that is hard to ignore these days. Facebook (FB) was motivated to pay $19 billion for mobile messaging firm WhatsApp in order to gain access to their reported 450 million users rather than the company’s meager revenue stream, estimated at just $20 million in 2013. This brings to mind the price-to-eyeballs metric that was first popularized by then–Morgan Stanley (MS) analyst Mary Meeker during the dot-com boom of the late 1990s.

Morgan Stanley made headlines again this week when their auto analyst, Adam Jonas, CFA, more than doubled his price target for Tesla (TSLA), courageously taking his financial model out to the year 2028 to justify his new price objective. Tesla shares, trading at 15 times sales, jumped on the news and are up seven-fold over the past year. The bounce in its stock price was an opportune time for Tesla to announce a convertible note offering which, as Zero Hedge pointed out with some irony, is to be co-led by Morgan Stanley.

With nearly 90% of S&P 500 companies reporting fourth quarter profits, FactSet recently noted that 72% of firms have exceeded earnings estimates, roughly in line with recent quarters. At the same time, 82% of companies issued negative guidance for the first quarter of 2014, compared with an average of 64% over the past five years. Companies’ increasing reliance on lowering the earnings bar remains a trend worth watching.

Here are a few other stories (and videos) you may have missed in recent weeks.

Strategic Thinking

• Nobelist Robert Shiller thinks markets have become more prone to bubbles. (Institutional Investor)
• Warren Buffett, in an excerpt from Berkshire Hathaway’s annual letter to shareholders, revisits a pair of real estate investments. (Fortune)
• AllianceBernstein thinks value stocks are poised to outperform. (Context)
• Delphi’s Scott Black on the art of value investing the art of value investing. (Enterprising Investor)
• Sam Zell is bullish on Mexico. (Union Tribune San Diego)
• Smart-beta strategies rely on willing losers. (Morningstar)

Valuation Matters

• A look at stock returns when Shiller’s CAPE ratio stands at 24 or more. (Advisor Perspectives)
• GMO’s James Montier argues that the NIPA-based CAPE ratio is “theoretically dubious.” (GMO, PDF)
• A look at gold mining equities versus gold bullion. (Social Science Research Network)
• The latest Graham & Doddsville newsletter includes interviews with Lee Ainslie, Jim Grant, and others. (Columbia Business School, PDF)

Pension Problems

• Public pension tabs are multiplying. (The New York Times)
• Detroit’s bankruptcy and the revenge of the 99%. (The Economist)
• Nobelist William Sharpe illustrates the novel approach to liabilities of state pension actuaries. (You Tube, video)

What’s Up with Facebook

• Felix Salmon on Facebook’s horrible, stroke-of-genius IPO. (Reuters)
• Aswath Damodaran considers Facebook’s $19 billion acquisition of WhatsApp. (Musings on Markets)
• Mark Zuckerberg is playing billion-dollar Whac-a-Mole. (Slate)

Activist Angle

• Carl Icahn pens an open letter to eBAY stockholders. (Shareholders’ Square Table)

Wall Street (and Washington) Behaving Badly

• The stock picking skills of SEC staffers are simply extraordinary. (University of Virginia, PDF)
• Twitter’s @GSElevator is outed. (The New York Times)
• Crashing the party of a secret Wall Street fraternity. (New York Magazine)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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