What Impact Will Q1 And Q2 Earnings Results Have On Long Term Investments?

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed What Impact Will Q1 And Q2 Earnings Results Have On Long Term Investments? Here’s an excerpt from the episode:

Bill Brewster:
So the reason that I started this show with Royal Caribbean and American and Delta and stuff was I was trying to get a sense of what has been sold really, really hard, and how it’s reacting today. I think modest proposal had a good tweet thread that was, I guess, paraphrasing what Gavin Baker had said to Patrick O’Shaughnessy. I didn’t listen to that interview yet, but basically in the beginning of a market you get rewarded for doing what’s obvious. And then in the end of a bear market, I guess Gavin said something about like, “You get rewarded for doing what’s uncomfortable.”

Bill Brewster:
The thing that’s been really tough for me is I don’t run a lot of traditional value screens, but I do watch what’s been punished. Stuff like casinos… I mean, Eldorado Resorts is one that I follow a lot. I want to buy that thing, but I just think the risk of we open up, everybody goes to the casino, coronavirus spreads like crazy, we shut down again. I think is just a very, very real risk right now based on what we’ve seen, and given that Singapore is re-shutting down.

Bill Brewster:
So the probability to me that people are really eager to go on cruise lines again-

Tobias Carlisle:
There are people still going.

Bill Brewster:
I know. And 80% of people just re-book their reservation. I don’t doubt that people are going to make a ton of money in those stocks when the time is correct. I am very, very worried that the time is early right now. And even in four months, I could see a scenario where everything’s open, the first cruise ship leaves, and then like 17 days later there’s some story about how they’re all stuck at sea again, and people are dying on a ship. I’m not comfortable with that risk being removed from those entities.

Bill Brewster:
So I do think that they’re going to massively outperform on the other side of this. I just don’t know that it’s risk I can get myself to hold.

Jake Taylor:
I think barring some miracle medical breakthrough that happens somehow, and even then, the distribution of that miracle is another miracle that’s required to get it to everybody in an expedient manner. But aside from that, I don’t know how you can be that optimistic without seeing some of the numbers in at least Q1, and especially probably Q2.

Jake Taylor:
I mean, July could be, the numbers that come out in July could be absolutely mindboggling, and way worse than anyone expects. To go back to your operational leverage idea, you take away a ton of revenue from some of these companies, and it could be mindbogglingly bad earnings announcements. I don’t know, it’s hard to say much now. We’re all just speculating until we actually see some numbers, right?

Bill Brewster:
Yeah, the only pushback that I would give is that’s only one quarter, right, so unless that quarter results in a permanent impairment of the balance sheet, which it’s obviously going to relative to what it was in February, but one quarter just isn’t that much of a terminal value. It’s just not that meaningful over a 20-year time horizon.

Bill Brewster:
So I think this is when A) people that are truly long-term actually do have an advantage, and then you’ve got to be really right on the thing being able to survive. Yeah, that’s right. That’s why I can’t hold the cruise lines and stuff right now. That’s why I couldn’t hold airlines. I’m just not convinced that at an 80% economy and call it 80% load factors, I mean, what, you’re in between 60 and 70% of your normal operating capacity, you’re not making money.

Jake Taylor:
That’s 100% of your profit.

Bill Brewster:
It’s probably more than that. I don’t know that you’re running, and yeah, they got the credit card relationships, I get it, but people are spending less. I don’t know, these are tough right now.

Tobias Carlisle:
So I’ve got a question here. This is calling out Mike Green’s theory, “No one’s saying it but maybe the stock market’s going up because of 401(k) contributions and automated buying of ETFs.” What do you think about that?

Jake Taylor:
I don’t know. Maybe.

Bill Brewster:
I think it’s pathetic that I was afraid to say eight times eight is 64 in my head because we’re on a podcast, but I just double checked on a calculator, I was right. I was like, “It’s 64. Just say it.” Then I was like, “But if I’m wrong everyone’s going to think I’m an idiot.”

Bill Brewster:
Anyway, I don’t know about Mike Green’s theory. I have no idea what’s going on right now with the market. The thing that’s tough about it is why would Mike Green’s theory be valid when the market’s puking like 32% in three weeks, and also be valid now? I haven’t seen the numbers. I don’t know him from Adam. He would be the one to ask, but I don’t think that that’s the incremental part of demand that’s driving the market up. That’s hard for me to understand.

Jake Taylor:
How about, let’s frame it this way: What odds would you assign to a new high being made from here in 2020?

Bill Brewster:
In 2020?

Jake Taylor:
Yeah.

Bill Brewster:
Like 17%.

Jake Taylor:
Toby?

Bill Brewster:
I can see that one out of seven times.

Tobias Carlisle:
I’ll take one out of six times just to slightly undercut Bill and I’ll have all the under.

Jake Taylor:
So I got to take one cut below you.

Tobias Carlisle:
You can take the over.

Jake Taylor:
Yeah.

Tobias Carlisle:
Oh, don’t take the under. I should have got yours first. Smart.

Jake Taylor:
One dollar.

Tobias Carlisle:
That’s smart.

Bill Brewster:
I only took 15% anyway. Once you said that I was like, “Oh, I think that’s…” Yeah, my math is pretty crappy today. My apologies to everybody.

Tobias Carlisle:
So I’m just thinking through this now, but what if the reason that value bounces so hard is just because value tends to be filled up with the junkier companies? It’s stuff that’s at real risk of going to zero. And maybe this bounce is not so much a value bounce, it’s just stuff that was down the most bounce.

Bill Brewster:
That’s what I think it is. I mean, I think one of the reasons you don’t see FANG-M participate in the rally is they just didn’t sell off very much.

Tobias Carlisle:
And they’re still relatively expensive. Oh, now you get hate mail for that.

Bill Brewster:
How dare you. Yeah, I think that’s what’s going on. If you just sort of look at some of the big names that are rebounding. They’ve been punished.

Tobias Carlisle:
There’s a comment here that the 401(k) and ETF buying’s pretty insignificant. Sorry it slipped past. I missed it.

Bill Brewster:
It’s all good. Thank you for the comment. An important 10% of our community right there.

Tobias Carlisle:
Take two.

Bill Brewster:
You know, Hilton-

Tobias Carlisle:
Sorry.

Bill Brewster:
No, I was just going to say Hilton, that’s one I may have missed, but they got destroyed here for a while. I was off 50%. That should bounce at some point, you’d think.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts