Skip to content

A Bull Market – But Only in the Index

The market keeps going up – literally every day – but you would never know if it you just looked at stocks.

Well, some stocks that is. Large cap stocks are on fire. The mega-cap tech stocks that I got into a few weeks ago have been on a tear. Typically boring stocks like Deere and Caterpillar are in a whole other world. Yet almost every day they go a bit higher.

But if you aren’t in the high-flying mega-caps then woah, man, it is nasty out there.

I think Thursday was the epitome of what is going on. The S&P was on fire, up 46 points, over 1%. But I could list dozens of stocks that were not just down for the day but down big.

And I’m not just talking about perennially out of favor sectors like oil or gold. These are former market leaders and darlings that were pummeled.

Plug Power, the hydrogen fuel cell leader of the next energy age, was down 8%. Exone, the Ark owned (they own nearly 10% of the company!), high flying 3D printing stock, was down over 6%. On Wednesday the leader of the Bitcoin banking revolution (and previous portfolio holding) Silvergate was down 15%.

Apart from Tesla, the EV stocks are getting shellacked. Apart from Tesla, the ARK stocks are getting shellacked. Even the SaaS names, which have had some recovery over the last few weeks, remain 10%, 20%, or 30% below their highs of mid-February.

Always Overthinking

Honestly, I should have stuck with my original thesis – buy mega cap tech (Facebook, Amazon, Google) and touch nothing else. Because everything else (except for the gold stocks, which I did manage to pick the bottom in) has been a drag on my portfolio.

I was right about Facebook and Amazon and I have done well on them. But much of those gains have been negated by the down moves of Intellicheck, Eastside Distilling and Biomerica – remember I (foolishly) bought those back.

I have since ended up selling down some of these small-cap positions. I am sheepish to admit another flip flop but they just haven’t been “acting” right. I still own all 3 names but the size of the positions is smaller. I sold out of Rada completely again.

It is a bizarre twist that in a market that only goes up, if I ignore the mega-cap stocks I own, what is doing the best are the short positions.

In the one portfolio where I can own puts and have shorts, I am doing better because stocks like Plug Power, Exone and Silvergate have free fallen. But where I have to be long only, I’m basically running to stand still as these small-cap losses offset mega-cap gains.

It is confounding. You wonder what to do? Do you double down on small-caps because if the market is this strong how can they continue to be this weak? Do you sell the shorts that are working because how can they keep going down in a roaring bull market? Do you sell the large-cap winners because this market must be broken if so many of the former leaders are going down and so inevitably they will break down too?

Bull Markets in Hubris and Valuation

The one thing that you CAN’T seem to do is put on index shorts. Believe me I try. Individual stocks may go down every day but the indexes only go up.

I read the Einhorn letter a couple days ago. He describes how his firm was killed by their shorts in Q1. They were hurt so bad they took them off and replaced them with shorts on the indexes.

That makes me go hmmm. How many other funds have given up shorting individual stocks and are now shorting the S&P? And how many of those funds are seeing that trade go completely and totally south as the niche stocks they own (because they are smart guys) go down while the index goes up?

That makes it very hard to hold too much short the S&P. As much as I want to be a bear, the market won’t let me.

But this can’t go on forever. I really should write a post on valuations and hubris, both of which are in huge bull markets.

Valuations of some stocks are just mind-blowing to me. That Caterpillar trades at 28x earnings, roughly double the average multiple of the last five years, while its revenue is not expected to get back to 2019 levels until 2023 does not make much sense. Or that EPAM Systems, which is basically an IT outsourcing company, can go parabolic to 60x earnings in a job market that is still far from healthy.

Hubris is best seen in stocks like Sea Limited or Peloton, twitter DARLINGS, which, well, I don’t even know where to start. What astounds me are that those most vocal about these names have nothing useful to say about them. I have yet to see the Twitter longs post a single thoughtful point, they don’t even bother refuting the bear case, they just say they aren’t worried (which, to be fair, they have had no need to be for the last year) and the bull case seems mainly to be “look at how fast these online/stay-at-home businesses grew during the pandemic”, rocket ships, diamond hands and so on. How can these guys be the “winners”?

But I am betraying my inner curmudgeon. Must – keep – an – open – mind.

What is Working

The only thing I know right now is that the big cap stocks are working. So I am trying to do more of that. I moved some of the profits out of Amazon and Google but I put that money and more into the large-cap drug stocks. I mentioned in a previous post that I had bought Bristol Myers and Abbvie. I decided to buy even more Bristol Myers (it is my largest position now, overtaking Facebook), and I added a new position in Eli Lilly. I may add Merck as well.

Bristol Myers

Bristol Myers has full-year 2021 guidance of $7.35-$7.45 per share. They also have a ~3% dividend. That puts the stock, even after having a nice move this week, at under 10x earnings.

There are not many stocks that you can say trade under 10x earnings right now. In fact, outside of the drug stocks, a few banks, and OTC listed names that are hard to own in any size, I don’t think there are any stocks that you can say trade under 10x earnings in this market.

And yes, Bristol Myers has some pipeline issues with drugs running off patent and they will need to replace those drugs. But still – 9x earnings.

And those pipeline issues are not imminent. From 2020 to 2025 Bank of America is estimating 4% top line growth. Even further out, with run-offs of Revlimid, Opdivo, and Eliquis, BMY still will only see a -2% annual decline in revenue – and that assumes the company does not do anything to stem it.

Eli Lilly

Eli Lilly is not as cheap as Bristol Myers (it trades at 23x this year’s earnings) but that is because Eli Lilly has a far better pipeline of drugs and therefore more potential for growth in the future.

Their drug tirzepatide (a diabetes & obesity candidate) exceeded expectations and performed better in head-to-head competition with Ozempic (from Novo Nordisk) in recently released data.

And Eli Lilly has an Alzheimer drug, Donanemab, that could be another blockbuster if approved.

Lilly just announced results for the Ph2 trial on Donanemab. Those results appeared to be very positively. But after Lilly released more details a month or so later, the market soured on it.

The reason is because Donanemab both worked and did not work.

It worked in the sense of doing what it was supposed to do – the drug removes amyloid plaque from the brain. Donanemab reduced amyloid plaque by 78% versus the placebo.

But, what it did not do is improve the disease as much as hoped. The drug showed a 3 point improvement on a cognitive measurement technique called the integrated Alzheimers Disease Rating Scale (iADRS). The hope had been that the improvement would be double that.

What that means is that Donanemab will not see accelerated approval. But Donanemab will still go to a Ph3 trial. So the drug is far from dead.

Meanwhile the stock took a big hit because when Lilly came out with the preliminary results in January, they focused on the plaque reduction. All the analysts upgraded the stock and the price of the stock jumped to $210. Then the complete results were released and the stock was sitting with all these bagholders that lost their conviction.

I just think that at $180, in this market, and with the Alzheimer drug very much alive and kicking, Lilly is another good bet.


The final good bet that I added a few weeks ago is Novavax, though it has already moved quite a bit. My thought there was that the problems with the AstraZeneca and J&J vaccines were going to become a bigger issue over time.

While I would happily take the AstraZeneca vaccine if I could, that is because here in Canada getting a vaccine remains elusive. Once the vaccine production begins to catch up with demand, I think the AZ and J&J vaccines are going to lose their market share to competition like Novavax.

Novavax has their Ph3 results coming up in the United States and Mexico. Now it is possible that those results could fall flat, but given that the Ph3 trial in the UK already showed strong efficacy, that seems unlikely.

Meanwhile we have started to get the first rumblings that the vaccine may be dosed every year – like a flu shot. If that is the case, companies like Novavax and Moderna are way too cheap. Novavax trades at 11x this years earnings and 7x next years earnings. Moderna trades at 7x this years earnings. Those numbers make sense if this is one-and-done, but they seem too low if we have to be inoculated for COVID every year.

A Sucker for Pain

And even with all my reticence with index shorts, I did add back some hedge for the IWM and NASDAQ when I added back the small cap names (and of course I have lost money on both ). I also added a small position in the VXX late this week, which has been hammered of late.

I fully expect to be balled over on these, but hopefully if I am it will be because some of these micro-cap stocks have finally perked up.

5 Comments Post a comment
  1. Brent Barber #

    You’re in good company with drug cos. Smart Investors, Elliot, moving into GSK –

    Been having good results with non-North American stocks this month. Stocks like Mexican Hotel Chain HCITY up 20% on no news, but still very cheap compared to US-listed Mexican hotels like PLYA. Or UK based, bathroom fixture makes NXR. Maybe investors are moving money overseas. When I look at market valuations, hard to see how the US doesn’t underperform for years.

    Plus agree on PM’s. Wish I had bought more during recent downturn, bought probably not too late to add. Think the money printing may (finally) be reflecting in PM prices. Looking to add a large cap like ABX or KL as an offset to the small ones I own now.

    April 18, 2021
  2. I think you really nailed it in the “Bull Markets in Hubris and Valuation” segment. Based on my past experience, being short the indices as a hedge simply don’t work well. Often times my individual holdings would be down 40-50% already before the indices even pull back 10%. This is especially true in small & micro caps where market liquidity drain has a pronounced effect. Archegos presumably had shorted index futures against its massively levered stock positions and both sides blew up in its face.
    I find selling call spreads against my positions & indices to be much more effective as a hedge when done at the right time

    Another blogger I follow closely also been writing about the carnage in small caps (you have to register for an account to gain access but it’s free).

    I am starting to wonder looking at many stock charts if liquidity has peaked and things will start to get a lot more difficult from here.

    I seriously doubt we’ll see anywhere close to 12T being pumped into the economy/market any time in the near future

    April 20, 2021
    • mlbdraftfan5 #

      Thought this was an interesting blog post on scarcity of demand

      May 1, 2021

Trackbacks & Pingbacks

  1. A Bull Market – But Only in the Index - Enri$hed Feed

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: