Andrew Mies, 6 Meridian Chief Investment Officer joins Yahoo Finance Live to analyze how markets could fare in 2021 and the prospects for new IPOs in 2021.
Video transcription
JULIE HYMAN: I want to bring our next guest to talk about the configuration of the market here. This is Andrew Mies. He is the Chief Investment Officer for 6 Meridian from Wichita, Kansas this morning.
Andrew, we were talking a few moments ago about possible signs of foam on the market, right? You have the IPO and SPAC boom that we saw. We have top executives like Tesla and even capital letters, as I was discussing before, like Apple up to 80% this year. What does this mean about the balancing act, perhaps, that we are in when we enter 2021?
ANDREW MIES: Right. Thanks for receiving me. I appreciate it. I saw a chart this morning that I found interesting, and it looked at the volume of the IPO this year compared to the previous 25 or 30 years, and this year will end up being double the previous peak. And I really think this is a symbol of an eagerness for investors to take risks that haven’t been around for some time.
And that money also flowed, if you look at the trading apps and look at the activity that we’ve seen in individual trades since Schwab and the others got rid of all the commissions – I think it was about a year ago. I don’t think you can – or I don’t think there is any doubt that speculative activity in the market is extremely high. We haven’t seen anything like this since the late 1990s. And there are many of these companies that have a lot of work to do to achieve the assessments that have been offered to them so far.
BRIAN SOZZI: Andrew, how do you – how do you – how can you choose a stock in an environment where everything is going up and not take the risk of simply overpaying?
ANDREW MIES: Well, some of our customers would say that I’m the wrong person to ask, due to our bias towards value stocks and dividend stocks and things like that, but I think you can look at some of the– in retrospect, looking at what the trends benefited companies that could serve people who needed to stay at home. You see many of the big tech companies that have performed well and are likely to continue to do well.
But I think you also have to look at which assessment point do you think it probably went beyond what is reasonable? And the example I usually use with our customers is Apple versus Altria. And these couldn’t be more different types of companies, obviously. Apple is an incredibly innovative company. Customers love it and will probably have an extremely bright future.
And you look at Altria who makes cigarettes. You know, your product kills your customers and has very little to no growth. And you look at the dichotomy between the performance of these two actions, but what we focus on are the multiples, the front P / L multiples and Apple’s front P / L multiple is the biggest in 10 years. In the past 10 years, you could make a lot of money by buying when it was traded at 10 times the profit and selling when it reached 20 times the profit, and now it is over 35 times the profit.
And Altria, the same case. You know, you could make money by buying 10 times and selling 15, and now he is trading at 8 times the profit.
So the difficulty is when these trends change? And I think there is a chance that we will start to see this, and I think part of that change could come when the Fed starts raising interest rates. And I think that leadership within the market could revert to leadership in shares of the type of value and dividends.
MYLES UDLAND: Okay, so you’re looking at live photos of the New York Stock Exchange. I received the opening bell here on Tuesday morning. Just two more after today, plus two full trading sessions remaining in 2020. An important year, of course, ending, and we see all three majors opening at record highs after hitting a record close on Monday.
So, Andrew, I want to go back to that point, that comparison you just made between Apple and Altria and thinking about the evaluations and what a company serves, right? And you talk about a value slope and look at the reserve price, price for profit, EV for EBIT, whatever type of metrics you want to use.
But, you know, we had a conversation with a guest yesterday about, you know, maybe some of those things like the Graham and Dodd books aren’t really going to work in the future. How do you think about that? And I certainly imagine you get questions like that from customers who say, hey, man, you know, like, in the world of Warren Buffett, he did really well, but this world kind of – it kind of came to an end.
ANDREW MIES: Yes, it sure is. We often hear this from customers who say, why don’t we own some of the things that keep growing? And I go to the introduction of your question. What is the purpose of a company? And it’s to generate earnings that can be reinvested in the business or paid to owners, and there are a number of companies – and it’s probably getting a little tiring for listeners to have to hear people go back to 1999 and 2000 over and over again, but I think that there are lessons that people can learn from that period when companies that were formed and valued a lot never had a chance. Of course, there was no chance that they could grow up to that assessment because the required assumptions were so extraordinary and fantastic that they just weren’t going to happen.
I think two weeks ago, Research Affiliates published a great article about Tesla in particular and said that that’s what has to happen for Tesla to grow in its valuation because, at the end of the day, to its point, the purpose of a company – or As valuation metrics are: do they generate cash that can be reinvested? or do they have to constantly raise new capital? or do they generate money that can be paid to business owners?
And at some point the market is, referring to what you said about Benjamin Graham, the market is a weighing machine in the long run and a voting machine in the short run. This only means that what is popular today can keep going up, keep going up, but at some point this company has to be an entity that generates economic returns for the owners.
JULIE HYMAN: And in the case of Tesla, Andrew or some of the other great executives like him, do you think this will happen? Do you think there will be many investors, perhaps disappointed, or investors who will be evaluating or voting on the other side next year?
ANDREW MIES: I think so. And I’m not going to give you individual names because I think some people may be so passionate about the companies they own that I don’t necessarily want to arouse those passions, but there are companies that are going public … I’m going to get it – a great example is SPAC , what is happening in the SPAC universe. And then these SPACs, they raised money on an IPO. Then they will look for companies to acquire.
About three weeks ago, there were three or four different SPACs that bought companies in the electric vehicle space. Is it likely that 10 years from now electric vehicles will represent a larger portion of the fleet that is in the United States? Absolutely. I don’t think anyone questions that. But is it also true that Ford, GM, Toyota and Volkswagen are going to try to get some of that? Absolutely. I think this is known. It will be a very competitive space.
And I think that now – if you remember in 99, there were companies that the valuation of their shares would rise 20%, 30%, 40% only if they changed their name to something dot com. And this kind of irrational behavior, I think you are seeing a little of that in some of these market pockets. And it takes time for that to happen, and in the short term, you look very stupid if you’re not participating. But at some point, people are the holders of the bags, and they are left, and there is no one else wanting to buy it, willing to buy from you. At that point, recovery can be very quick.
JULIE HYMAN: Indeed. Yes, everything that says they are supplying electric vehicles today, not just the manufacturers of the vehicle itself, seems to be on fire.
Okay, Andrew, nice to talk to you today. Happy New Year. I hope to speak to you again in 2021. Andrew Mies is joining us from Kansas. 6 Investment Director at Meridian. Appreciate.