Investor Essentials Daily

This ETF lets investors buy “meme” stocks, here’s why that may be a better opportunity than you think

March 26, 2021

Today, we look at how one portfolio has ridden the wave of retail investor excitement in the stock market.

To highlight if investing based on investor sentiment is actually successful through the lens of the Uniform Accounting, we will break down this portfolio’s holdings.

In addition to examining the portfolio, we’re including a deeper look into the fund’s largest current holding, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Investor Essentials Daily:
Friday Uniform Portfolio Analytics
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It is said in 1929 while Joe Kennedy was getting his shoes shined, the boy shining his loafers wouldn’t stop giving him stock advice.

When Joe Kennedy paid the boy and left, he sold all the stock he owned. He thought it was crazy to be having a kid shoe shiner give advice regarding the stock market.

Even though some of it had to do with luck in timing the market, Joe Kennedy sold all of his stock right before the market collapse in 1929.

While the story is apocryphal, it serves as a useful story for learning about market exuberance today.

More layman or retail investors than ever before are becoming interested in stock trading, not only thanks to the ease of trading, but the ability to learn as well.

There are many other examples of the above story. Whether it is a cab driver pitching the purchase of gold as a hedge, or just everyday people trading stocks on the subway, some feel this democratization of trading is leading to market danger.

However, others think it’s a sign of the changing times. While it may have been reasonable for Joe Kennedy to think a shoe shiner giving stock advice was crazy in 1929, the average retail investor has a much better understanding and bigger impact in today’s environment.

Anyone working in finance can tell you they have experienced their family and friends asking them about “meme” stocks like AMC (AMC) and GameStop (GME), sometimes referred to as “stonks” the last several months.

Recently, Dave Portnoy, the founder of Barstool Sports and also known as the “Davey Day Trader Global” (DDTG) figure head, teamed up with VanEck to launch an ETF.

$BUZZ is an ETF solely focused on investor sentiment around social media platforms. The ETF aims to capture the essence of the mania in the market today.

The real question drawn from this new ETF is if investors want to actually own the stocks in the portfolio.

Additionally, we will outline if Uniform Accounting suggests these companies in the portfolio are strong performers on a fundamental level.

In order to provide context and show the portfolio’s holdings, we’ve conducted a portfolio audit of BUZZ’s top holdings, based on its most recent 13-F, to see its investments based on investor sentiment.

On an as-reported basis, many of these companies are poor performers with negative returns. Furthermore, the average as-reported return on assets (ROA) is -1%.

In reality, the average company in the index displays an average Uniform ROA of -11%.

Once we make Uniform Accounting (UAFRS) adjustments to accurately calculate earnings power, we can see the underlying strength of the portfolio.

Once the distortions from as-reported accounting are removed, we can see Apple (AAPL) does not have a return of 13%, but a sizable ROA of 41%.

Similarly, Microsoft’s (MSFT) ROA is really 35%, not at 11%. While as-reported metrics are portraying the company as a slightly above-average business, Uniform Accounting shows the company’s truly robust profitability.

The list goes on from there, for names ranging from Facebook (FB) and Pfizer (PFE), to Novavax (NVAX) and Netflix (NFLX).

Now, let us see how these firms’ returns can strengthen over time through EPS growth.

This chart shows three interesting data points:

  1. The 2-year Uniform EPS growth represents what Uniform earnings growth is forecast to be over the next two years. The EPS number used is the value of when we take consensus Wall Street estimates and we convert them to the Uniform Accounting framework.
  2. The market expected Uniform EPS growth is what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next 2 years to justify the current stock price of the company. If you’ve been reading our daily analyses and reports for a while, you’ll be familiar with the term embedded expectations. This is the market’s embedded expectations for Uniform earnings growth.
  3. The Uniform EPS growth spread is the spread between how much the company’s Uniform earnings could grow if the Uniform earnings estimates are right, and what the market expects Uniform earnings growth to be.

The average company in the U.S. is forecast to have 5% annual Uniform Accounting earnings growth over the next 2 years. In comparison, these top stocks are forecasted by analysts for 37% Uniform earnings growth.

On average, the market is pricing these companies to shrink earnings by 57% a year. Analyst’s are forecasting wildly higher expectations, which may mean the market is leaving upside on the table.

One example of a company with high growth potential is Draftkings (DKNG). While the market expects Draftkings to shrink earnings by 250%, analysts project the firm to grow by 35%.

Plug Power (PLUG) is another example. While analysts forecast Plug Power to shrink by 58% over the next two years, the market expects the firm to see a 279% shrinkage over the same period.

That being said, there are many companies forecast to have earnings growth less than market expectations. For these companies, like Penn National Gaming (PENN) and Twitter (TWTR), the market has growth expectations in excess of analysts’ predictions.

Ultimately, once we make uniform accounting adjustments, we can see retail investors aren’t excited about bubbles ready to pop, but perhaps interesting market opportunities identified by the wisdom of the crowd.

SUMMARY and DraftKings Inc. Tearsheet

As BUZZ’s largest individual stock holding, we’re highlighting DraftKings Inc.’s tearsheet today.

As the Uniform Accounting tearsheet for DraftKings Inc. (DKNG:USA) highlights, DraftKings’ Uniform P/E trades at -81.7x, which is below the corporate average valuation of 25.2x and its own historical valuation of -35.7x.

Low P/Es require low EPS growth to sustain them. In the case of DraftKings, the company has recently shown a 164% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, DraftKings’ Wall Street analyst-driven forecasts are 44% and 61% EPS shrinkage in 2021 and 2022, respectively.

Based on current stock market valuations, we can back into the required earnings growth rate that would justify $61.53 per share. These are often referred to as market embedded expectations.

Furthermore, the company’s earning power is below the corporate averages. Also, cash flows and cash on hand exceed its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low credit and dividend risk.

To conclude, DraftKings’ Uniform earnings growth is around its peer averages, while their valuations are traded well below its peers.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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