Story Hour

25 Feb

We are routinely amazed at the multiples  assigned to the current crop of publicly traded “story” stocks. While this type of price action is not new, we saw it in the late 90’s, it does highlight the degree to which Central Banks have pushed capital markets to the brink of credulity. While we do not profess to understand one tenth of what is occurring in the social media sphere, we have seen this movie before (2001) and it does not end well. We bring up this modern day pixie dust because it is a prime example of how certain sectors of the equity markets always possess the ability to capture investor imagination. This is a nice way of saying that investors always seem to latch unto a good story, particularly if it is backed up not necessarily by fundamentals, but by a good enough narrative and a rising stock price. Compare and contrast this with the resource/commodity sectors. These sectors involve products which for the most part are dull and highly prone to swings in both supply and demand. The one thing they are not prone to however is technological obsolescence. While it is true that high prices can lead to thrifting and the potential for substitution, zinc is not going to replaced by two guys working out of their dorm room. Investors in the resource/commodity sector tend to invest only when both the macro and micro tailwinds are at their back. The problem with their story is there is no sexy story to tell. The only story that can be told is  high prices eventually cure high prices and low prices eventually cure low prices. While it will not make for the most interesting cocktail banter, prospective investors in these sectors that can successfully manage around the cyclicality should be amply rewarded.

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