Thanks for all your help with my trading. Your service is very effective.
As you know I went heavily into some LEAPS two days ago including United Airlines, (UAL), Delta Airlines (DAL), Wynn Resorts (WYNN), MGM Resorts International (MGM), and Simon Property Group (SPG) that have returned as much as a 25% ROI over that short period.
I know two days does not prove anything, but it is a great way to begin a trade.
Thanks again,
John
Seattle, WA
Mad Hedge Technology Letter
April 26, 2021
Fiat Lux
Featured Trade:
(BUY OR SELL DOORDASH?)
(DASH), (GRUB), (UBER)
As the work from home economy de-levers, the biggest loser of this trend will be the food delivery company DoorDash (DASH).
As the stock rallied last Friday by 6% into the close, I couldn’t help but think to myself that it is a great time to short the stock.
Considering that total sales grew close to 400% last year but the stock is lower, this basically means that DASH couldn’t deliver what shareholders wanted in a historic year for most tech companies.
What makes anyone think that 2021 will be different?
Imagine what the next phase of development looks like, quite bleak.
The health crisis unlocked a tsunami of growth for many emerging and unprofitable technologies.
Software and hardware companies were clear beneficiaries of economic lockdowns that triggered a boom in the food delivery industry.
With nowhere to eat out at, the business of eating a prepared meal was effectively handed to DoorDash on a silver spoon.
Despite this powerful tailwind, the company still failed to deliver positive earnings amid additional expenditure such as marketing.
As the pandemic navigates towards a solid solution and consumers return to restaurants, DoorDash will be left holding the bag.
First, let me say, DoorDash’s operating narrative is weak.
They earn revenue by taking a percentage of restaurant sales on its platform.
A glorified pizza delivery boy at scale is what they really are.
They describe sales as marketplace gross order value or GOV which totaled $24.66 billion in 2020 — a 326% increase over 2019.
In short, it's the total amount of money that DoorDash users paid for food.
For context, this metric grew 187% in 2019 compared to 2018, but off a much lower base from $2.8 billion and now project marketplace GOV in 2021 in the range of $30 billion to $33 billion, which is a substantial deceleration in growth rate from 2020.
The bottom line is they are still losing around the same amount of money with no solution in sight.
The next steps of the global economies are to open further, with fewer people staying home and using food delivery, so the question is whether the DoorDash marketplace will grow at all this year.
Despite a record 2020 that more than quadrupled the company's revenues, it is becoming clear that DoorDash will not even be close to profitable.
It appears DoorDash's growth in costs tracked closely with growth in revenue, in dollar terms, leading to net losses that only marginally improved.
The main thesis of these gig economies is that they become incrementally profitable at scale, but DoorDash’s financials suggest it isn’t.
I would like to hear what the next way forward is, but the firm is essentially a one-trick pony in a hopeless industry.
If interests tick higher and regulation toughens, this stock will get hit hard.
There are too many tech firms in the food delivery space and consolidation will force management’s hand.
Uber Eats is the reason that DASH won’t be able to raise prices.
DoorDash holds an advantage with 55% of the US market, but both Uber Eats (at 21%) and GrubHub (GRUB) (at 16%) have made aggressive acquisitions to help them grab market share.
All of these companies often mirror age products with no differentiation.
It is a very homogenized product.
Uber Eats has the largest global footprint in the industry, with a higher overall gross order value that hit record levels in 2020, yet that company loses money like DASH.
GrubHub also delivers the same terrible unit economics that DASH does, giving investors higher revenue but marginal margin improvements and profitability.
Companies that cannot become profitable when 4X their revenue need to be overlooked and this statement could cut across all industries from energy to retail.
Imagine that Dash also couldn’t improve unit economics when gas prices cratered as well.
It appears that Dash will have most external forces working against them for the rest of the year and this is a great stock to sell rallies on.
The initial peak of $230 could well become the peak for this stock and the current share price is 1/3 lower, but I believe a fair market cap would be half the peak of $230 in 2021.
“If the Starbucks secret is a smile when you get your latte... ours is that the Web site adapts to the individual's taste.” – Said Founder and CEO of Netflix Reed Hastings
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Global Market Comments
April 26, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE CORRECTION IS OVER)
(PAVE), (NFLX), (AAPL), (AMD), (NVDA), (ROKU), (AAPL), (AMZN), (MSFT), (FB), (GOOGL), (TSLA), (KSU), (CP), (GS), (UNP) (LEN), (KBH), (PHM)
This is a classic example of if it looks like a duck and quacks like a duck, it’s definitely not a duck….it’s a giraffe.
In stock market parlance, that means we have just suffered an eight-month correction which is now over. Look at the charts and a correction is nowhere to be found. The largest pullback we have seen in the past year has been a scant 12% dip right before the presidential election.
If that’s all the pain we have to suffer to be rewarded with an 80% gain, I’ll take that all day long.
Instead, what we have seen has been a series of sector-specific rolling corrections that were masked by the indexes that were steadily grinding up.
During this time, the best quality stocks endured pretty dramatic hits, like Netflix (NFLX) (-21%), Apple (AAPL) (-26%), Advanced Micro Devices (AMD) (-25%), NVIDIA (NVDA) (-28%), and Roku (ROKU) (-40%).
Stocks sold off hard after Q1 earnings. They are doing the same now with Q2 earnings. That ends on Tuesday after the close when the 800-pound gorilla of them all announces on Wednesday, April 28.
After that, we could be in for another leg in the bull market that could take us up by 10% by the summer.
Some 85% of all companies are now beating forecasts handily. But half are seeing shares fall after the announcement. That shows how professional the market is getting. So, if you eliminate the earnings announcement, you eliminate the share falls?
This is all in the face of economic growth predictions of lifetime proportions. Analysts are now looking for 43% earnings growth in Q2, 55% in Q3, and 75% in Q4. These are WWII-type numbers.
And the Fed put is still good at the bank. Jerome Powell is promising no rate rises until 2023 on an almost daily basis.
It all sets up a continuing pattern of sideways “time” corrections like we’ve just seen followed by frenetic legs up to new highs. This could go on for years.
It worked last time.
The coming week should be quite a blockbuster. It is only the fifth time in history that the five largest stocks in the S&P 500 accounting for 25% of the market cap all report in the same week. These are Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL).
That’s going to leave a mark! Biden’s rumored proposal that high-end earners will see doubled capital gains taxes knocked 500 points of the Dow in seconds. The new tax would apply to Americans earning a net income of $1 million or more. Never mind that congress would have to approve the move first, as Trump found out to his chagrin. It’s a trial balloon that was shot down immediately. Trump had planned to cut capital gains to a 15% rate and run a bigger deficit.
It would only apply to Americans who own stocks and never sell. Guess why? To avoid taxes, dummy!
US Stock Funds take in a record $157 billion in March. That beats the record $144 billion that came in during February. Warning: these massive cash flows are consistent with short-term market tops. Vanguard and iShares index funds took in far and away the most money. The Global X US Infrastructure Fund (PAVE) was one of the most popular directed funds.
The labor shortage is on, with companies engaging in mass hiring and paying signing bonuses for low-end jobs. I was awoken by workers putting up a fence next door on a Saturday morning. They’re working weekends to pay back the debts they ran up last year to keep eating. If you are planning any jobs this year, buy the materials now. The country will be out of everything in three months, with current quarter GDP topping a historic 10%.
SPACS have crashed, with the average SPAC down 23% since the February top, and some like Virgin Galactic Holdings off by 50%. Don’t touch these things with a ten-foot pole, as 80% will go under or shut down with no investments. It reminds me of five online pet food companies at the Dotcom Bubble top. It's all a symptom of too much cash flooding the financial system.
Takeover battle for Kansas City Southern (KSU) ensues, with Canadian Nation making a sweeter $33.7 billion offer than Canadian Pacific’s (CP) $30 billion bid. It just shows how valuable railroads really are in a booming economy that urgently needs to move a lot of stuff. Good thing I’m long (UNP). Is the Reading Railroad still available? How about the B&O or the Short Line?
Yellen sets Zero Emissions Target for 2035. That sets up one of the biggest investment opportunities of the century. The trick is to find companies that have viable technologies that can make a stand-alone profit that haven’t already gone up ten times, like Tesla (TSLA). Most of the new EV IPOs aren’t going to make it. This will be a major focus of Mad Hedge research going forward. I hope I live that long!
Existing Home Sales down 12.3% YOY, down 3.7% in March, to 6.03 million units. Prices are up 17.02% YOY, the highest on record. Sales of homes over $1 million are up 108%. Inventory is still the issue, down to only 1.07 million units, off 28% in a year. Truly stunning numbers.
New Home Sales up a ballistic 20.7% YOY in March on a signed contracts basis. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 9.48% gain during the first half of April on the heels of a spectacular 20.60% profit in March.
I used the dip early in the week to add two more positions in Goldman Sachs (GS) and Union Pacific (UNP). I suffered a day of buyer’s remorse on Thursday when Biden floated his capital gains plan and tanked the Dow by 500 points. Then everything took off like a rocket to new highs on Friday.
That leaves me 80% invested and 20% in cash. The markets went up too fast to get the last match of money in the market.
My 2021 year-to-date performance soared to 53.57%. The Dow Average is up 12.3% so far in 2021.
That brings my 11-year total return to 476.12%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.01%, the highest in the industry.
My trailing one-year return exploded to positively eye-popping 132.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.
The coming week will be big on the data front, with a couple of historic numbers expected.
On Monday, April 26, at 8:30 AM, US Durable Goods for March are out. Earnings for Tesla (TSLA) and NXP Semiconductors (NXP) are out.
On Tuesday, April 27, at 9:00 AM, we learn the S&P Case Shiller National Home Price Index for February. We also get earnings for Alphabet (GOOGL), Microsoft (MSFT), and Visa (V).
On Wednesday, April 28 at 2:00 PM, The Fed Open Market Committee releases its Interest Rates Decision. The following press conference is more important. Apple (AAPL), Boeing (BA), and QUALCOMM (QCOM) earnings are out.
On Thursday, April 29 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the blockbuster US GDP for Q1. Amazon (AMZN), Caterpillar (CAT, and Merck (MRK) release earnings.
On Friday, April 30 at 8:30 AM, we get US Personal Income and Spending for March. Exxon Mobile (XOM) and Chevron (CVX) release earnings. Berkshire Hathaway (BRK/B) announces the next day. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, after telling you last week why I walked so funny, let me tell you the other reason.
In 1987, to celebrate obtaining my British commercial pilot’s license, I decided to fly a tiny single-engine Grumman Tiger from London to Malta and back.
It turned out to be a one-way trip.
Flying over the many French medieval castles was divine. Flying the length of the Italian coast at 500 feet was fabulous, except for the engine failure over the American airbase at Naples.
But I was a US citizen, wore a New York Yankees baseball cap, and seemed an alright guy, so the Air Force fixed me up for free and sent me on my way. Fortunately, I spotted the heavy cable connecting Sicily with the mainland well in advance.
I had trouble finding Malta and was running low on fuel. So I tuned into a local radio station and homed in on that.
It was on the way home that the trouble started.
I stopped by Palermo in Sicily to see where my grandfather came from and to search for the caves where my great-grandmother lived during the waning days of WWII. Little did I know that Palermo was the worst wind shear airport in Europe.
My next leg home took me over 200 miles of the Mediterranean to Sardinia.
I got about 50 feet into the air when a 70-knot gust of wind flipped me on my side perpendicular to the runway and aimed me right at an Alitalia passenger jet with 100 passengers awaiting takeoff. I managed to level the plane right before I hit the ground.
I heard the British pilot say on the air “Well, that was interesting.”
Giant fire engines descended upon me, but I was fine, sitting on my cockpit, admiring the tree that had suddenly sprouted through my port wing.
Then the Carabinieri arrested me for endangering the lives of 100 Italian tourists. Two days later, the Ente Nazionale per l’Avizione Civile held a hearing and found me innocent, as the wind shear could not be foreseen. I think they really liked my hat, as most probably had distant relatives in New York.
As for the plane, the wreckage was sent back to England by insurance syndicate Lloyds of London, where it was disassembled. Inside the starboard wing tank, they found a rag which the American mechanics in Naples had left by accident.
If I had continued my flight, the rag would have settled over my fuel intake vavle, cut off my gas supply, and I would have crashed into the sea and disappeared forever. Ironically, it would have been close to where French author Antoine de St.-Exupery (The Little Prince) crashed in 1945.
In the end, the crash only cost me a disk in my back, which I had removed in London and led to my funny walk.
Sometimes, it is better to be lucky than smart.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Antoine de St.-Exupery on the Old 50 Franc Note
Mad Hedge Technology Letter
April 23, 2021
Fiat Lux
Featured Trade:
(THE NEXT CAR YOU WILL BUY IS ONLINE)
(CVNA)
Selling used cars isn’t the most glamorous of jobs, but that’s why it should just be moved online, right?
There have been many attempts to get this right, but many failures.
Now, we finally have something good brewing with Carvana (CVNA) who has tried to solve this issue in the U.S. by offering consumers a reliable e-commerce platform for buying and selling used cars.
Not only that, but the latest numbers they have concocted mean that investors might even eye them as a “growth” stock.
Last year was really a historic year for the buying and selling of cars in the U.S. as prolific levels of demand still outpaces the ability to scale production for many companies.
We saw more demand than we had ever seen before, and let’s face it, the supply couldn’t catch up.
And then that was kind of overlaid with three successive waves of a pandemic, which obviously have kind of impacted the entire supply chain and not just contained to cars.
It was a difficult year and investors can almost think about it as being three separate events that led to some supply-side constraints.
The team at Carvana has done an incredible job working out all of those three different events.
And I think that's evidenced by the growth that we saw last year despite the public health limitations.
Then we turned over to 2021, and the growth in January was more than expected.
To build inventory again, and then get hit with the next wave, and starting again are lessons that Carvana is beginning to take in stride.
Now that we are headed into a more normalized world, bottlenecks will solve themselves.
Looking at Carvana’s business, the devil is in the detail.
Buying cars from customers is a business that obviously continues to do incredibly well for Carvana which grew at 96% for 2020.
I do think the most impressive statistic is in the fourth quarter last year, of the cars that were sold to customers, 65% had been bought from customers.
To put that in context, two years ago, they set out a long-term goal of 38% to 52%.
So for roughly 2/3 of their cars that were sold to customers, they bought from other customers which inherently brings down the cost of acquiring goods when management isn’t out fishing in far-flung channels for the incremental car to acquire.
They grew at 80% in January and had only half of the available inventory of the year before, which is the better than expected growth I just mentioned.
There are longer delivery times than last year proving that there are still lingering hangovers from 2020.
Annual revenue totaled $5.6 billion, an increase of 42%, and retail units sold totaled 244,111, an increase of 37%, making them the second largest used automotive retailer in the U.S.
For the fourth quarter, retail units sold totaled 72,172, an increase of 43%. The total revenue was $1.8 billion, an increase of 65%.
In 2020, Carvana opened 120 new markets, bringing a year-end total to 266. With these new market openings, they now serve 74% of the U.S. population, up from 67% at the end of 2019.
They will continue to expand in 2021 and expect to serve 78% to 80% of the U.S. population in more than 300 markets by year-end.
In 2020, they also made significant progress scaling vehicle production capacity, and this continues to be an area of focus for the business.
They added four inspection and reconditioning centers (IRC) in 2020, bringing annual production capacity at full utilization to over 600,000 units at year-end.
I expect two more IRCs to open in 2021 and eight in 2022, ending 2022 with more than 1.25 million units of annual production capacity at full utilization.
Carvana’s eyes are squarely focused on achieving a goal of selling more than two million units per year. And they will continue to maintain a healthy pipeline of future IRCs to support accelerating growth.
I expect this robust momentum to continue while also showing significantly narrowing EBITDA loss margins.
And then when you think about the supply side, Carvana has a supply chain that enables them to deliver a car to a customer's door with a branded hauler and a uniformed Carvana team member to what they hope to be 80% of the U.S. population by the end of this year.
The last mile solution is critical to personalizing a service in 2021 and as the automotive industry at large evolves over the next decade or so, we are effectively seeing the modernization of it in real time.
Highly differentiated car buying experiences are here to stay.
With the growth metrics at the macro level and the fact they did $5.6 billion in revenue last year, Carvana is poised to forage ahead on an easy pathway to $10 billion in annual revenue.
This is becoming a used car selling heavyweight that is starting to really seep into the national consciousness.
No wonder the stock is up around 300% in the last 365 days and I believe any 10-15% dip should be bought in this stock.
“Success in creating AI would be the biggest event in human history. Unfortunately, it might also be the last, unless we learn how to avoid the risks.” – Said English theoretical physicist Stephen Hawking
