Schindler Financial Newsletter Q2 2022
by Aaron Schindler CFP and Robert Lovenheim ©2022, All Rights Reserved
In a recent Tom Friedman New York Times piece, the columnist quotes military defense analysis professor John Arquilla (Free Advice for Putin, Make Peace You Fool, NY Times, April 13, 2022), who expounds on three strategic theories that have helped the Ukrainians hold off superior Russian forces. They are:
1. Many and small beats large and heavy
2. Finding always beats flanking
3. Swarming always beats surging
Let’s see how we might apply these military strategies to investments with the S&P 500 already entering “Correction” territory for a second time this year. On average, a market correction, (a 10% drop in stock indices from their most recent highs, but not more than 20%) occurs once a year.* While scary to witness, a “Correction” could be an opportune time to buy securities if you believe, as Nathan Rothschild supposedly advised, "the time to buy is when there's blood in the streets.” Recall our March 8 newsletter entitled Your Portfolios: Chicken Kiev, Market Corrections, Borscht, and Opportunity.
Many and Small Beats Large and Heavy:
Let’s see how that can apply to investing in biotech Davids (Exact Sciences Corp, Oramed Pharma, etc.) versus the usual Goliaths (Merck, Sanofi, J&J, etc.). EXAS and ORMP are only two examples of many small
biotech firms that have managed to weather the current down-market storm better than many others. Today, there is a sea of other biotech and clean energy securities that have lost 15% to 60% of their value. Are they worthless? The run up in these stocks was based on a visionary future where breakthroughs in health, environment, and better living would change our world. Nothing has changed except the timeline has been extended by war and inflation. Some ETFs (exchange traded funds) and stocks can be picked up for next to nothing, assuming you believe in their visions for the future. An ETF allows you to own stocks of many companies versus one individual stock.
Did anyone believe two years ago that Moderna or BioNTech would be worth billions today? Even though Moderna and BioNTech, key components of the iShares Biotechnology ETF (IBB), are down approximately 60% from their recent highs, do you believe that Messenger RNA and immunotherapy technologies won’t continue to be key for developing vaccines and treating cancer? Remember that before COVID, that is what these companies had been working on for up to twenty years. Massive COVID buys by governments have given them the resources to quicken the pace of their original research.
Some promising clean energy ETFs, which hold many smaller cap companies, are trading near 52-week lows– losing approximately 50% from recent highs. Meanwhile the giant legacy energy companies (producers of coal, oil and natural gas) that were faltering during the pandemic have surged. All this because investors realized, courtesy of Mr. Putin, that the world’s energy transition will be more complicated than anyone (but Putin) wishes. Sec. of State Anthony Blinken and Sec. of Defense Lloyd Austin’s meeting with Zelensky in Kyiv days ago produced this message: “We intend to grind down the Russian military.” This translates to realizing that Russia has developed few resources except for coal, oil, gas, and military exports. The first three are diminishing resources; NATO will grind the fourth.
Finding Always Beats Flanking:
This military strategy applies to the direction of resources and capital change. The flanking moves underway by legacy energy companies include increased drilling, especially to replace Russian natural gas and
oil exports, plus construction of additional LPG shipping terminals. In the short term, big energy, particularly natural gas companies, (see Alerian MLP index below) will win some battles but not the war. Non-renewable is doomed by time. (This is exactly what Putin knows and cannot control). Wind, solar, hydrogen and battery storage were the vision before the war, and could be the hot companies of tomorrow. Macron’s defeat of Le Pen in France should be a good sign that European voters are willing to suffer short-term pain to invest in clean energy for better living conditions in the future. The U.S. Senate will likely pass some form of Biden’s Build Back Better bill including clean energy legislation.
Swarming Always Beats Surging: The FAANGS
Let’s apply this military strategy to recent market volatility and the tendency of stocks to “Surge” (or “Plunge”) on a few headlines. Investors should consider all sides of a story including corporate earnings reports. A good case in point is the abandonment of Netflix in the last weeks. When Reed Hastings announced the company had a projected loss of up to 2 million subscribers by the end of the second quarter, it was treated as if the Titanic was sinking. Not one story we have read has pointed out the obvious: 1. You can’t keep growing at pandemic pace when much of the world is out of lockdown. 2. A company with over 200 million subscribers should not suddenly dive when it projects a loss of 1% of its subscribers (Netflix Shares Slide After it Loses 200,000 Subscribers, CBS News, April 20, 2022).
Netflix is part of the FAANGs (Facebook- now Meta, Amazon, Apple, Netflix, and Google- now Alphabet) which make up a large portion of the S&P 500 Growth Index (IVW). IVW is currently down about 20% this year. We don’t see demand for these companies’ services waning even in an inflationary environment.
You might ask yourself if it’s worth picking up shares of these companies if today you have already used an iPhone or Apple notebook, shopped on Amazon, messaged an old friend on Facebook, tuned into Netflix to watch Anatomy of a Scandal, or are googling some of the stocks and ETFs mentioned in this newsletter?
Beware of recent daily market volatility. Try to see the market as a battlefield where you want to swarm around the enemy to observe all sides, find value in perceived weakness, and grab bargain opportunities. And above all, remember what Wellington remarked after defeating Napoleon at Waterloo: “Strategy is what is hidden behind the hill."
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Sources: iShares.com, YahooFinance.com, Nytimes.com, CBS.com
©All rights reserved, 2022, by Robert Lovenheim & Aaron D. Schindler CFP®