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More on the Bifurcated Economy

Yesterday, @SuperMugatu made a “controversial” tweet that said something I’ve been speculating about.  He wrote this long tweet storm, but the one that really caught my attention was this:

My speculation along these same lines has been whether all this stimulus is at least partially offsetting to the huge negative downdraft from the pandemic and because parts of the economy are basically shut down, it is all being funneled into what is left standing, causing this part of the economy to boom.

Make no mistake, I keep wondering whether this could be true because the market is rallying.  I probably wouldn’t be thinking this way if we were down 30% still.

But the market is rallying and it keeps rallying so I have to ask myself why.  I am not going to stubbornly sit in a bearish camp while it runs away from me – and I haven’t.  I have bought stocks, stocks that I like of course, but with an underlying reason that if the market keeps going up maybe it is seeing something I am not.

As I alluded to in my update on Thursday, it does seem clear that the economy is bifurcated.  That means that not everyone is a loser here.  There are some clear winners.  And that really does make this time unusual – its not a full-on economic downturn where everybody loses.

It seems like it is more of a giant wealth transfer.  Yes, some of that is a wealth transfer from poor to rich, and some of it from the government to everyone, but the other wealth transfer is from companies based in the real world (so real estate, restaurants and such) to companies based in the digital world.

I have about 540 companies on my watch list in Sentieo.  These are mostly small companies and many are micro-caps.  Every morning at this time of year I get their earnings updates.  I try to read every earnings release I get every day.  I don’t read every filing or every transcript, that takes too long, but the earnings releases are generally succinct enough that I get through the list each morning of earnings season.

I do this because quite honestly, I find that one of the easiest ways to capture gains is to catch a company that beats the numbers and buy them right at the open.  In my world of micro-cap stocks, the market is rarely efficient.  It is almost guaranteed that the market will not reflect the full nature of an earnings beat at 9:31 am.  Machines don’t seem to be out in front of these stocks on earnings like they are in the larger names.  In a lot of cases I imagine the stocks aren’t liquid enough to make it worth their while.

So front-running the herd is a legitimate strategy that has worked for years.

Anyway, what that means is that I read a lot of earnings reports from a lot of companies, most of them tiny.

In the last two weeks I have been surprised – no shocked – by how many of them are doing really well.

Not everyone of course.  Any company with real world exposure is not doing well.  Any company with small business exposure is removing guidance and talking about reduced visibility.

But man, it is not nearly as bad as I expected it to be.

And some companies are blowing the doors off.  Photon Controls released results Wednesday and they announced a record backlog that was 50% higher than the previous year (!!).  I bought the stock on the open.

Maybe the poster-child of this happened Friday morning.  Well, Thursday night actually – that was when they released earnings – but I didn’t get around to reading it until Friday morning.

It was Identiv.  Little ole Identiv.  It was one of the last reports I read Friday morning.  I got to it like 10 minutes before the market opened.  I almost didn’t even read it.  I mean Identiv – they do on-premise security – that’s got to be a disaster right?  There is no premise right now.

But I read the report and, pardon my language but holy $hit, these guys put together a better backlog than I have ever seen them have.  This is Identiv, a company who perennially disappoints.  Yet they are saying their backlog is up 85% sequentially and 100% year-over-year?!?

I literally said WTF out loud.

What happened is that while the physical premise security stuff is down, just like you would expect, Identiv is doing extremely well on work-from-home smart card readers and Thursby Mobile remote signing authentication software.  They are also a vendor of the government which is not pulling back on orders right now.

Stephen Humphreys, who seems like a nice guy but has to be the most long-winded CEO in the world, put it this way:

“The sudden transition to work-from-home caused demand for smart card readers to suddenly accelerate, and also led to a jump in online Thursby orders, which nearly tripled to over 400 units per week. Our RFID business grew 66% year-over-year, remaining one of the largest growth drivers for our business in both the short and long-term. As we focus our business rigorously on the long term growth opportunity in RFID and on our core strength providing security solutions for federal and state governments, we’re driving to reduce overall operating expenses even while expanding investment in these two focus areas.  With a fortified balance sheet, a resilient federal customer base, an extensive backlog, reduced operating expenses and market trends in our favor, we’re  positioned to not only weather the storm, but to return to our growth trajectory as the world begins to normalize.”

It seems impossible but they are simply doing really well.

So yeah, I bought Identiv at the open.  Now to put this all in perspective, the company just maintained its full-year guidance – they didn’t raise.  But the stock was severely depressed from where it was pre-pandemic and you know what – the business does not look any worse.

The bigger picture point here is that this is a company that I would not have expected in any way to be doing better right now.  It is not a company that should be doing well if this was just a typical recession.   If I had owned the stock in March I am sure I would have sold it.  And that would have been totally wrong.  If you have enough of your business tied to work-from-home, stay-at-home, or parts of the economy that aren’t shut-down, you may actually be doing better now than you were.

It may seem crazy.  I still find it hard to believe.  But when the facts change…

6 Comments Post a comment
  1. PS – one other observation. I am following the mortgage stocks closely of course. I’ve read through most of their reports over the last couple of weeks. And again – I’m surprised. These guys are reporting A. that forbearance is not at the levels that were feared and B. that nearly half (I think it seems to average around 40%) of those in forbearance are still paying their mortgage. So not only is the scary headline number lower, but it is overstating the non-payments by a lot. Again try to reconcile this with what I would be expecting… another puzzle piece that isn’t fitting into the puzzle.

    Btw – Ocwen results were good imo. The stock was like 15% of book Friday morning, even after the pop it is still only around 20% of book. I don’t know…

    May 9, 2020
  2. Brent Barber #

    Thanks for the article. Nice idea about looking for micro-cap earnings announcements. I’ve bought into them many times on ones I own or am following, but I’m going to look into your idea of taking the broader approach.

    I do think the broad market is too high being pushed up by stocks like the FANG stocks, but this is as good as it gets for these stocks and people are extrapolating things like NFLX’s subscriber increase as a long term trend when it is just a pandemic bump. And the microcap stocks, using IWC as a proxy, are still down over 20% this year and 30% from its peak in 2018.

    I’m in the camp that this event is more like a natural disaster, from which there will be a lot of pent up demand and the economy will recover quickly, rather than a drawn our recession. I’ve been bought stocks like the Mexican airports (ASR, PAC), Canadian restaurants (KEG.UN, AW-UN), amusement parks (FUN) and others at lower than current prices. I’m taking the approach that the virus will be dealt with reasonable soon, and once it is, people will be very anxious for normal life.

    If the economy is hurt longer by the virus, then I guess it will have been a bad approach, but I think it is a good bet.

    May 9, 2020
  3. ijw z #

    There was a Reddit thread on the positive aspects of lock down. And some of the highest rated comments were people saying they had more money all of a sudden. No daycare, no commute costs, no expensive lunches, and you still get money from government (or work from home).

    May 11, 2020
  4. swropfef #

    Thank you for the comment, ijw z, that is very interesting

    May 13, 2020
  5. ijw z #

    I think the natural gas trade is actually a dangerous one here. I looked at a lot of oil producers, and it seems to me that especially the Permian is going to be quite durable longer term. There is a lot of <$40 oil there. And they can lower production more, and more quickly ramp it up.

    Offshore and stripper wells are more likely to be permanently shuttered. Full cycle costs are high for shale, but drilling is a much larger % of that, and they generally have lower operating costs.

    The oil market is very opaque, so everyone is sort of in the dark what supply and demand is exactly. And there has been and will be a lot of under investment. Perfect condition for a supply shock. Currently people are talking of the tanker trade collapsing, yet VLCC rates shot up 50% in a few days…

    And shale will be very well positioned to fill in the missing supply and that means more associated gas when there is less demand for gas. Plus it is kind of a big wildcard exactly what % of gas comes out of a shale well. If they turn oil production down, can they keep the amount of gas stable? When everyone thinks associated gas production will go down, isn't everyone going to prepare pumping more, which means the under supply is less likely to happen?

    It took a rig count of about 80-90 for almost a year to get higher prices in 2016. And that was on healthy demand growth.

    May 15, 2020
  6. I agree with you that in the current situation, not all losers. There are several clear winners. And it really makes this time unusual – this is not a complete economic downturn where everyone loses. This is not like the crisis of 2008-2009.

    June 10, 2020

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