Making sense of the markets this week: September 7

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. 

The U.S. tech sector is worth more than the entire European stock market

Your first thought is likely: “That doesn’t make sense.” How could one sector from the U.S. be worth more than the collective stock markets in Europe? But that’s where we stand today, according to Bank of America. 

The U.S. tech sector is now worth $9.1 trillion, compared to $8.9 trillion for the European stock markets—and that includes stocks out of Great Britain and Switzerland. 

Apple, Microsoft, Amazon, Alphabet (Google’s holding company) and Facebook alone account for $7.5 trillion in value. 

The most common word I hear to describe the above is “bubble”. And the time period that will be mentioned for comparison is the late 1990’s and the dot-com bubble era. I’ve even seen it described as the return of dot-comedy. Of course the tech rally of the 1990’s led to a spectacular crash. The sector fell by over 80% from 2000 to 2002, and the sector also dragged down the total S&P 500. 

Today, investors have crowded into tech mega stocks to ride out pandemic.  

Of course, nobody knows where the stock markets will go next.  Some caution might be warranted for those who have too many eggs in that tech basket. In the Financial Post, economic consultant David Rosenberg called the U.S. stock market a bubble of historic proportions. 

History has a habit of repeating, or at least rhyming. 

The best August in 36 years for the S&P 500

There’s nothing like a pandemic to rain on the “sell in May and go away” rule of thumb. Last month signified the best August in 36 years for the S&P 500, with a 7% increase. And we are starting to see some rotation away from tech stocks. What is surprising is that many of the best performing stocks in August included “recovery stocks”—that is, companies that might rely on a vaccine and a return to “the old normal.” Remember, when we would travel and visit restaurants without care? 

Royal Caribbean Group was up 41.5%. That’s the holding company for Carribean Cruise Lines. Norweigan Cruise Line was up 25.4%. The cruise ships are grounded, so why have the stocks started to take off? Royal Caribbean Group is burning $250 million per month in the non-cruise era. That is, with no income they are spending $250 million every month on debt payments and the maintenance of ships and other operational needs. 

At the same time, investors have been scooping up shares of airlines. 

Delta Airlines was up 23.7% for the month, while the Southwest Airlines stock price soared 21.7%. Again, these companies are burning more cash than fuel. These airlines are largely grounded. 

Grounded companies and soaring stocks? That’s not my cup of tea. Might be a bet on a workable and very effective vaccine. And certainly it is a risk/return proposition. Higher risk can lead to greater returns at times. But, for my money, that is more like speculating compared to investing. 

Buyer beware. 

And the next headline might explain the investor enthusiasm for cruise line stocks. 

Individual investor participation is at new highs

With casinos closed in the early stages of the pandemic lockdown, many found another place to gamble: the stock markets. And as the stock markets continue their climb, these stock-pickers have not lost their enthusiasm. In fact, individual investor participation is at a 10-year high:

And many of those traders/investors in the U.S. moved to the Robinhood trading platform that became famous or infamous. And their “leader” might be David Portnoy of Barstool Sports, who claimed that stocks can only go up. While it appears  many are listening to this stock market cheerleader, history shows us that stock markets do not go up in a straight line. Corrections are normal and expected. 

Mixed in with these stock market gamblers are long-term retail investors who self-direct, and create their own ETF and stock portfolios. I chat with so many of them through my site and on Seeking Alpha, where I write and have more than 10,000 followers. 

Not all stock investors are throwing scrabble tiles on a table looking for the next stock ticker symbol and “investment opportunity.”

Surprise stock of the week: Alimentation Couche-Tard

This is an incredible Canadian success story. You may not know the company by name, but you’ve likely filled up at one of their gas stations. You may have grabbed some snacks as well at their convenience store before you went on your way. 

Alimentation Couche-Tard is the second-largest convenience store chain and one of the largest fuel service station operators on the planet. They operate those Circle K locations that you’re likely familiar with and, of course, Couche-Tard in Quebec. They operate under many more names and licensing agreements in North American and around the world. 

As of 2019, Couche-Tard operated in 27 countries and territories with plans to grow its footprint in Asia and Australia. From 2004 they have made more than 60 acquisitions and added over 10,000 locations. 

Mike Heroux, who runs the Dividend Stocks Rock service, offers that their secret sauce is… 

“In two words: disciplined acquisitions. Couche-Tard has proven many times over the past decade that it can pay a fair price for their acquisitions and then integrate convenience store chains in their model and make them more profitable.” 

Incredibly, they increased profits year-over-year during a pandemic when car travel and fuel consumption was greatly reduced. They reported earnings this week. 

Net earnings were $777.1 million or $0.70 per diluted share for the first quarter of fiscal 2021 compared with $538.8 million or $0.48 per diluted share for the first quarter of fiscal 2020.

• Total merchandise and service revenues of $3.9 billion, an increase of 7.0%. Same-store merchandise revenues increased 7.7% in the U.S., 3.4% in Europe, and 19.9% in Canada.
• Same-store road transportation fuel volume decreased 21.2% in the U.S., 12.4% in Europe, and 25.6% in Canada.

They had better margins on the fuel that they sold. And to avoid any long lines at grocery stores, more consumers hit their convenience stores for snacks, drinks and other items. 

If you hold a Canadian stock mutual fund or index ETF, you likely own a piece of Alimentation Couche-Tard. They are a staple with funds. And the company is the 16th largest holding in the TSX 60. 

It’s great to see a Canadian staple doing so well in the new normal. 

Tweet of the week

Thanks to Dan Hallet of Highview Financial Group for this research and Tweet:

With the value of Tesla, one could purchase those six major global automakers and you’d still have a few billion left over. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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