Opinion: What do Coke, Tesla, crypto and NFTs have in common? Investors taking crazy to a whole new level

Many of us played this game when we were kids: you say a number; your friend is trying to demonstrate his knowledge by saying a bigger number. At some point you proudly reach infinity – the greatest number of all. Your friend doesn’t blink; he says, “Infinite times a hundred,” then he thinks for a moment and spits out, “Infinite times infinite!”

How do you beat that? When assets get overvalued and get into crazy territory, explaining their overvaluation feels like playing this “infinite times infinite” game. But if we put different crazy ratings side by side, it at least makes it easier to distinguish levels of crazy.

Let’s start with the least insane of all insane: bond-substituting stocks. In this example I will focus on Coca-Cola KO,
but I could name almost any consumer goods company like Kimberly-Clark KMB,
McCormick MKC,
and many others that pay a stable dividend.

Coca-Cola is truly an incredible business: the company makes a concentrate and ships it to bottlers, who put in the hard capital, who bottle the syrup and distribute it to all corners of the world. Coke, together with its bottlers, has the best distribution system in the world.

Since bottlers do all the heavy lifting, this business earns a very high return on capital. Coke is one of the most loved brands in the world (unless you’re a Pepsi person). This company has experienced incredible growth over the past century. However, unless Coke gets penguins in the South Pole to consume its fine bubbles, it will have no new markets to sell. This is exactly what has happened to Coke since 2010 – revenue and earnings have stagnated. If you look at the financial numbers, only two things have grown: the stock dividend (due to a higher dividend payout) and the company’s debt – which has tripled.

Coke is a high-quality company – it can raise prices along with the inflation of its eponymous product, which accounts for about half of its revenue. It may be difficult to do this for other more standardized parts of its product portfolio, but no one doubts Coca-Cola will be there in 10 or 20 years. Most importantly, investors are confident that Coke will continue to produce its 2.6% dividend until the end of time. They are so focused on the dividend that they ignore how much they pay for this income stream: Mr. Market gives you Coke today at 30 times the profit.

But what happens to Coke’s stock price if interest rates rise? Coke’s “infinite” dividend of 2.6% won’t be as brilliant if US interest rates rise a few percentage points. If the 10-year Treasury TMUBMUSD10Y,
5%, Coke’s dividend will lose its luster and the stock will fall to a valuation multiple with a “1” in front of it.

Today, many Coke shareholders are experiencing what behavioral economists call an “empathy gap.” They say to themselves, “I’m fine even if the stock drops 30-50%. I’ll stick with getting my 2.6% dividend, which will go up with inflation.” However, when the stock price falls and safe alternatives offer double that yield, they will change their thinking – thus the gap.

Side note: Dividends don’t have to be a shiny object that will ultimately lead you to financial ruin if/when interest rates rise. Just change the order of your analysis. Here’s what we do at IMA in dividend portfolios: We identify the universe of stocks in the US and other countries that pay stable dividends, but only those that are both high-quality and undervalued end up in the portfolio.

Coke is just a lightweight on the crazy spectrum. The degree of madness will increase with each example, culminating in stinking, hot air, I promise.

Next up is Tesla TSLA,
I spilled a lot of ink on this company. I even wrote a series of essays that I turned into a little book (you can get it here). I love my Model 3. Almost three years after I bought it, I still enjoy driving it, and I’m not even a “car guy.” My wife is about to buy a Tesla. I like many things about the company.

But stock is an entirely different matter. An important lesson many tech investors have learned since the dotcom bubble burst in 1999 and the dotcom bubble in 2021 is that there is a difference between a good company with great products and good inventory. The connection between the two is appreciation. The price you pay determines your future return. The price didn’t matter when valuations rose, but it mattered if they didn’t.

Tesla has arguably the best electric car on the market. Customers love his products. This is no small matter. Unlike the Detroit Three, the German Three and the Asian Five, which spend tens of billions of dollars on advertising, Tesla has no advertising budget. Hundreds of thousands of his fanatically loyal customers are his marketing power. Most auto companies don’t have that kind of goodwill. Tesla can put these billions of dollars in savings into more R&D or lower prices or higher profitability.

But Tesla has a market cap of $1 trillion — roughly equivalent to what the entire rest of the global auto industry is worth. When Tesla’s market cap was half a trillion dollars, I described its valuation as “discounting a temporary wormhole into the future”. Today it is priced at double infinity.

Let’s move on to the next level of crazy. GameStop GME,
is in the hands of self-proclaimed “monkeys” who stand up for the little man against what they see as a corrupt system, and are willing to inflate themselves financially while inflating the prices of worthless companies. GameStop is a retailer of packaged games as the world transitions to digital downloads – a tsunami that will wash away this brick-and-mortar retailer. At its peak in 2016, the company made $400 million in profit. Sales have since halved and are now losing money. These monkeys currently give this dying relic a market cap of $8 billion. Valuation is near a record high, while the financial situation is at an all-time low. Imagine you have won an 8 billion dollar lottery. Would you invest it in an impending melting, money-losing ice cube whose revenues will eventually dwindle to zero?

GameStop makes Tesla look like a value investment. Tesla is in any case a company of the future. Of course there is another “monkey” stock – AMC Entertainment Holdings AMC,
the cinema chain. AMC has lost money many times during its existence; before the pandemic, it made $110 million. Revenues have since fallen two-thirds, while the number of stocks is up 4x and debt is up 5x. You can buy this darling outright for just under $10 billion, and it comes with $10 billion in debt. GameStop has at least a net cash balance.

Then there is the insanity of the crypto universe. I spilled a lot of ink on bitcoin BTCUSD,
but I want to point out again that there are thousands of competing cryptocurrencies fighting for dominance. For bitcoin maximalists, bitcoin is their only lord and savior and all other cryptos are heretics. Still, many believe that bitcoin is an inferior technology from the crypto stone age and that new, technologically advanced alternatives are better (i.e. the thousands of cryptocurrencies). This crypto debate will end peacefully – with people losing money.

Since cryptos have no cash flows, I have no idea what their value is. However, my gut tells me that the price of cryptos today reflects an abundance of both optimism and easy money.

But then we have the whole new level of crazy: NFTs (nonfungible tokens). You put a drawing of a flying monkey or a happy goat on a blockchain and you have priceless, “finite”, “non-ephemeral” art. NFTs of monkeys that happen to be bored sell for hundreds of thousands of dollars.

My son Jonah, a student at the University of Colorado, Boulder, told me that many of his friends make money with NFTs, and most importantly, they brag about it. They have suddenly become connoisseurs of digital art.

Jonah told me about the latest and greatest NFT: Ozzy Osborne of Black Sabbath fame recently decided to become a crypto artist and will drop “only” 9,500 drawings of bats, which Ozzy calls “crypto bats.” To get Ozzy’s art for a “wholesale” price, you have to get on his discussion board and tell the world how much you love it. If you do this enough, forum moderators can let you buy it wholesale so you can pass it on to a bigger fool at “retail” who will try to sell an even bigger fool for a higher price after he brags about how much money he has. earned with NFTs, which are our digital future. Jonah asked me, “Dad, isn’t that a pyramid scheme by definition?” I am a proud parent!

As I type this, I find myself trying to say every other sentence, “I’m not kidding you.” So maybe we’re approaching the pinnacle of madness.

When I talk about Coke, its overvaluation is not an abstract concept; it is quantifiable in brushstroke terms. Even Tesla’s overvaluation isn’t entirely abstract – you’re paying more for a company that produces 1 million cars a year than the rest of the industry that produces 40-50 times more cars.

Everything out there, from GameStop and AMC to crypto and NFTs, can easily be worthless and so quickly turns into an abstract discussion. How much will Ozzy’s crypto bats be worth if the last student blows his tuition on them? I have an answer for you: zero. When zero is priced in relation to $300 or $30,000, it is infinitely expensive; in both cases the loss is 100%. In many cases, the losses will be even greater. What we have learned from previous bubbles is that greed and FOMO eat people up from within and cause them to resort to leverage. Leverage is ruining people’s lives, and borrowing money has never been easier than it is today.

Unfortunately, many people who pat their chests and brag about how much money they are hitting will lose their temporary gains and much more.
The ultimate prize for crazy goes to Stephanie Mato – not really to her, but to the people who spent $200,000 buying her farts in a jar. Stephanie had to make a personal sacrifice to produce them, resorting to an unhealthy, gas-producing diet. She had a mild health anxiety and decided to quit, but don’t worry (I’m not kidding), she’s doing NFTs now.

How do we invest in an inflationary environment? Read this article

Here are links to more of my views on the inflation landscape (read, listen) and how we invest in inflation (read, listen).

Vitaliy Katsenelson is CEO and Chief Investment Officer of Investment Management Associates. He is the author of Active Value Investing: Making Money in Range-Bound Markets and The Little Book of Sideways Markets..

To avoid being taken for a ride in speculative markets, learn the basics by reading the 6 commandments of value investing. For more insights from Katsenelson on investing, visit ContrarianEdge.com or listen to his podcast on Investor.FM.

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