One of the biggest questions facing investors today is whether the market optimism that followed the March crash is warranted. In other words, is it right to price in a return to the old normal - even if underlying economic fundamentals and data such as employment numbers are still worse than what they were in January - or are capital allocators being too optimistic?
In a recent interview with BTG Pactual, Bill Ackman was asked to answer this question and to comment on whether he thinks the market is overvalued today.
When the tide rolls out
Of course, it's a generalization to say that "the market" is overvalued or undervalued. There will always be specific sectors that are valued differently relative to each other, and it's extremely rare to see a scenario where all stocks are bid up or sold off in equal measure. Bearing that caveat in mind, here is what Ackman had to say on the matter of market valuation:
"I don't think the markets are entirely wrong. The large, dominant companies that have survived like Starbucks [have survived]. The small local coffee chains have been wiped out - they don't have the resources, they don't have digital applications or delivery, they don't have the staying power or the balance sheet...There was a company called Luckin in China that was nominally a Starbucks (SBUX, Financial) competitor, and it turned out to be a fraud, and it was really the exposure of the pandemic that took it down."
Another example of this phenomenon that Ackman gave is the home improvement retail sector in the U.S. - Lowe's (LOW, Financial) has been able to have one of their best years on record at the expense of the corner hardware store. So in other words, the dominant companies that have been able to remain open, take on more debt, weather the storm and adapt to a new reality have been able to increase their market share at the expense of smaller competitors. Warren Buffett (Trades, Portfolio) likes to say, with characteristic wit, that "when the tide rolls out, you finally see who's been swimming naked." The events of the last six months have exposed weak spots that large, well capitalized businesses have exploited.
This explains the seeming dichotomy between the bad economic data coming out and the stellar performance of the benchmark stock indices. There is no index for the local coffee shop or corner hardware store. The important indices like the S&P 500 and the Nasdaq are increasingly dominated by a small number of huge companies that have done exceptionally well over the last few months. So don't be surprised if the stock market continues to rally, even if the economy remains weak.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Howard Marks: It's Hard to Find Good Risk/Return Today
- Aswath Damodaran: Are Markets Overvalued Right Now?
- Bill Ackman's Pershing Square Capital Books Gains With Chipotle and Starbucks
Not a Premium Member of GuruFocus Sign up for a free 7-day trial here.
