What If The Economy Is Booming?
On the surface, the market had a pretty quiet week. But underneath, there’s a tension that seems to rip the market in different directions. On one hand, we’ve been hearing for months that consumer spending is weakening, and evidence has shown that unemployment is a growing problem as consumers deal with higher costs.
On the other hand, data this week showed a great labor market and falling inflation just as the Fed started cutting rates, which could be great for the economy and the market.
I’ll get into why I’m comfortable with my investments no matter what happens below.
What If Everything Is Fine?
On Friday, the Bureau of Labor Statistics released a jobs report that showed 254,000 jobs were added to the economy, and the unemployment rate fell slightly to 4.1%. That goes against the concern the economy was slowing, and corporate profits would be next.
Consumers were the biggest worry in the market, including for myself. The slowdown in spending, particularly by budget-conscious consumers, is a theme across retailers and product companies.
What if the problem wasn’t consumer demand; it was how companies viewed the response to higher prices?
Have you been to a grocery store lately and noticed that price increases have been reversed? A bag of chips that cost $2.99 before the pandemic was suddenly $5.99 in 2023. Now, they’re “on sale” for $2.99 again.
Were consumers “weak” because they didn’t want to pay $5.99 for the bag of chips? Or did demand go down as prices went up? Supply/Demand 101!
We are seeing prices fall for food, used cars, travel, and more. Why? Because we are no longer supply-constrained, stimulus checks are no longer flowing, and we are back to a “normal” economy.
Are we seeing a “weak consumer,” or did companies raise prices too far, and consumers simply stop buying overpriced stuff?
Let’s go with it
If the consumer is fine and unemployment remains low, falling interest rates will be fuel to the economy. People will buy more homes and cars and take more vacations.
How do we want to invest in that environment?
We want to find companies that could grow revenue and earnings and where that growth isn’t already priced in.
Some of the cheapest stocks in the Asymmetric Portfolio should benefit.
The dual benefit of value
One of the misconceptions of asymmetric investing is the idea that you need to take extraordinary risks to generate market-beating returns. But most stocks that 10x in value benefit from three simple factors.
Revenue growth
Margin expansion
Multiple expansion
Revenue growth is simple enough to understand. But when revenue growth is combined with margin expansion, it’s called operating leverage. You can see the impact on $Spotify Technology S.A.(SPOT)$ below. Revenue is up over the past year, but margin expansion has impacted the company’s bottom line most, and that’s why the stock is soaring.
If you look at $Apple(AAPL)$ ’s stock, which is up nearly 10x in the past decade, the company grew revenue, but it bought back stock at low multiples and then benefitted from multiple expansions. If a company buys back stock at 15x earnings, which Apple did, and then the stock goes up to a 30x multiple, the stock will more than double.
If the consumer is indeed all right, wouldn’t auto sales remain strong? And wouldn’t buying $General Motors(GM)$ at a 5x earnings multiple pay off as management buys back stock?
Wouldn’t people continue to travel to places like Las Vegas, which has become a cash flow machine for $MGM Resorts International(MGM)$ ?
And won’t people keep eating out? Portillo’s has had ups and downs in its same-store sales in part because of price fluctuations and consumers’ changing trends. But every restaurant has seen volatility. With the stock trading at a low multiple, revenue growing, and margins going up, the stock looks more attractive than ever.
The great thing about buying stocks that trade for a value is their ability to absorb the downside of the market while benefitting from the upside in the form of multiple expansion.
If the economy is indeed alright, some of the cheapest stocks and biggest holdings in the Asymmetric Portfolio should do well.
https://asymmetric-investing.beehiiv.com/p/what-if-the-economy-is-booming
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