{"id":4777,"date":"2024-07-11T18:01:32","date_gmt":"2024-07-11T16:01:32","guid":{"rendered":"https:\/\/monocle.lu\/?p=4777"},"modified":"2024-07-11T18:01:32","modified_gmt":"2024-07-11T16:01:32","slug":"extrapolation","status":"publish","type":"post","link":"https:\/\/monocle.lu\/en\/2024\/07\/11\/extrapolation\/","title":{"rendered":"Extrapolation"},"content":{"rendered":"

The SP500 is up 18%.<\/strong><\/u>\u00a0since the start of the year,\u00a0driven for the most part by a handful of megacaps<\/strong><\/u>. The market is paying increasingly high multiples on these because\u00a0it anticipates significantly higher future profits thanks to the development of AI.<\/strong><\/u>.<\/p>\n

Knowing whether they are right or wrong is a difficult exercise\u00a0<\/strong><\/u>What will be the adoption rate of this new technology, its financial impact, development costs, societal impact and possible reactions?<\/p>\n

It was the same thing in 2000 with the internet<\/strong><\/u>. And few managers fared well: those who said it was a bubble had only a handful of clients by 1999. Those who said the opposite disappeared after 2000.<\/p>\n

 <\/p>\n

We can try to look at the problem from another angle:\u00a0why not look at the valuation of companies that are sufficiently far removed from the major issues of the day - the internet then, AI now?\u00a0<\/strong><\/u><\/p>\n

For 2000, we won't be looking at \u2018server\u2019 or \u2018software\u2019, but at \u2018soda\u2019, \u2018basketball\u2019 and \u2018supermarkets\u2019. The Internet revolution should normally have little effect on businesses such as Coca-Cola, Nike or Costco.<\/p>\n

However, the PE forward multiples of these companies doubled between 1995 and 2000: Coca went from 20x to 49x, Nike from 12x to 28x and Costco from 17x to 31x.<\/p>\n

In fact, the market has decided to pay twice as much for the same business as before.<\/strong><\/u><\/p>\n

 <\/p>\n

Le 8 f\u00e9vrier 2000, Nike avertit :<\/p>\n

\"Nike said profits for the fiscal year ending May 31 would be slightly below the $2.08 per share expected by analysts polled by First Call\/Thomson Financial. The company also said that next year's profits would rise by less than the 20% expected by analysts. Of the 19 analysts who follow the stock, 9 had strong buy recommendations on the stock before yesterday and another 3 had rated the stock a buy.\" (New York Times)<\/p>\n

The share price lost 18% during the session. We will have to wait 3 years to review its entry price.<\/strong><\/u><\/p>\n

 <\/p>\n

Three months later, on 24 May 2000, Costco published results that were slightly worse than expected. Earnings per share were 1 cent below analysts' estimates for the current quarter, and the forecast for the following year was lowered by 2 cents.<\/p>\n

This minor revision caused the share price to fall by 22% in one day and 40% in one month. Five years later, the Costco share is still trading at levels 25% lower than before the publication.<\/strong><\/u><\/p>\n

 <\/p>\n

The story is the same for Coca-Cola -\u00a0we had to wait 13 years to see its entry price at the top in 2000.<\/strong><\/u><\/p>\n

 <\/p>\n

What can we conclude from these facts of twenty years ago?<\/p>\n

> The overvaluation of companies not affected by the Internet in 2000 shows that it was indeed a bubble.<\/p>\n

> We can extrapolate that if traditional companies were valued at 2x too high at the time, we can intuitively assume that Internet companies were valued at 4x too high. This is consistent with the Nasdaq falling by 80% at the time.<\/p>\n

>\u00a0These twenty years have been enough to dissolve the collective memory and the market is doing the same thing all over again.<\/strong><\/u>\u00a0Nike was paying 50x earnings not so long ago, Costco is paying more than 50x today. These companies have nothing to do with AI. If they are once again valued at twice the price, then intuitively a 4x premium on AI-related companies makes sense.<\/p>\n

 <\/p>\n

And finally, \u2018the proof is in the pudding\u2019 as the old saying goes:<\/p>\n

A fortnight ago, on 27 June, Nike published slightly disappointing results.\u00a0The share price fell by 18% during the day.<\/strong><\/u>\u00a0Elle se traite d\u00e9sormais \u00e0 $75.\u00a0Elle cotait $175 en novembre 2021.<\/p>\n

Its multiple at the time was... 51x.<\/strong><\/u><\/p>\n

 <\/p>\n

So Costco published its monthly sales figures last night. Sales were up 6.9% for the month, and the company announced, for the first time in 7 years, an increase in its annual subscription*. In response, the market took the stock above $900 and the multiple solidly above 50x. 60% higher than in 2000.<\/p>\n

 <\/p>\n

So for the time being, there's nothing to worry about.\u00a0But as we've just seen, history tells us that it would only take one grain to make a big difference.\u00a0<\/strong><\/u><\/p>\n

 <\/p>\n

* Change in Costco subscription price:<\/p>\n

1983 – 25$
\n1992 – 30$
\n1995 – 35$
\n1998 – 40$
\n2000 – 45$
\n2006 – 50$
\n2011 – 55$
\n2017 – 60$
\n2024 – 65$<\/p>\n

PE Forward – Costco Wholesale<\/strong><\/p>\n

\"\"<\/p>\n

Source: Reuters<\/span><\/p>\n

\n

PE Forward – Nike<\/strong><\/p>\n

\"\"<\/p>\n

Source: Reuters<\/span><\/p>\n

\n

PE Forward – Coca-Cola<\/strong><\/p>\n

\"\"<\/p>\n

Source: Reuters<\/span><\/p>\n

\n

Market and portfolio focus<\/strong><\/p>\n

Behaviour:<\/strong><\/p>\n

From 28 June to 5 July, the Monocle lost 0.2%, while the CAC gained 2.6% and the S&P 2.0%.<\/p>\n

 <\/p>\n

Overall, our equity portfolio was in balance this week. Teleperformance benefited greatly from the rebound in the CAC 40, adding 40bps. Five Below and Lamb Weston partly wiped out this gain following earnings releases in their sectors. Each cost us around 15bps.<\/p>\n

 <\/p>\n

Finally, the position on Bunds futures that we had taken as insurance before the elections was cut after the results. It cost us 20 bps over the week.<\/p>\n

Lines:<\/strong><\/p>\n

No changes in our lines this week. Our gross equity exposure remains at 52%, and our net exposure at 40%.<\/p>\n

 <\/p>\n

On the bond front, last week we mentioned the main change: our position in US long yields. We remain 32% exposed to this line. On the corporate bond side, good opportunities remain rare, so our exposure remains unchanged at 13% (average yield of 8.5%).<\/p>\n

\n

Have a great weekend,<\/p>\n

Charles<\/p>","protected":false},"excerpt":{"rendered":"

Le SP500 est \u00e0 +18%\u00a0depuis le d\u00e9but de l’ann\u00e9e,\u00a0tir\u00e9 en majeure partie par une poign\u00e9e de megacaps. Sur celles-ci, le march\u00e9 paye des multiples de plus en plus…<\/p>","protected":false},"author":8,"featured_media":4783,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-4777","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-le-billet-de-monocle"],"acf":[],"yoast_head":"\nMonocle - Extrapolation<\/title>\n<meta name=\"description\" content=\"Ces vingt ann\u00e9es ont suffi pour dissoudre la m\u00e9moire collective et le march\u00e9 refait donc la m\u00eame chose.\" \/>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Monocle - Extrapolation\" \/>\n<meta property=\"og:description\" content=\"Ces vingt ann\u00e9es ont suffi pour dissoudre la m\u00e9moire collective et le march\u00e9 refait donc la m\u00eame chose.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/monocle.lu\/en\/2024\/07\/11\/extrapolation\/\" \/>\n<meta property=\"og:site_name\" content=\"Monocle\" \/>\n<meta property=\"article:published_time\" content=\"2024-07-11T16:01:32+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/monocle.lu\/wp-content\/uploads\/2024\/07\/Streched-band-leger-1024x639.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1024\" \/>\n\t<meta property=\"og:image:height\" content=\"639\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"L'\u00e9quipe Monocle\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"L'\u00e9quipe Monocle\" \/>\n\t<meta name=\"twitter:label2\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/monocle.lu\\\/2024\\\/07\\\/11\\\/extrapolation\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/monocle.lu\\\/2024\\\/07\\\/11\\\/extrapolation\\\/\"},\"author\":{\"name\":\"L'\u00e9quipe Monocle\",\"@id\":\"https:\\\/\\\/monocle.lu\\\/#\\\/schema\\\/person\\\/f095305e6c0f0cb67a0905de33670595\"},\"headline\":\"Extrapolation\",\"datePublished\":\"2024-07-11T16:01:32+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/monocle.lu\\\/2024\\\/07\\\/11\\\/extrapolation\\\/\"},\"wordCount\":1019,\"publisher\":{\"@id\":\"https:\\\/\\\/monocle.lu\\\/#organization\"},\"image\":{\"@id\":\"https:\\\/\\\/monocle.lu\\\/2024\\\/07\\\/11\\\/extrapolation\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/monocle.lu\\\/wp-content\\\/uploads\\\/2024\\\/07\\\/Streched-band-leger.png\",\"articleSection\":[\"Les Billets de Monocle\"],\"inLanguage\":\"en-GB\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/monocle.lu\\\/2024\\\/07\\\/11\\\/extrapolation\\\/\",\"url\":\"https:\\\/\\\/monocle.lu\\\/2024\\\/07\\\/11\\\/extrapolation\\\/\",\"name\":\"Monocle - 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