Market Insights & Analysis from Kramer Capital Research

Don’t Expect A Market Rewind In 2021 (Wall Street Already Got One)

A lot of investors are looking forward to winding back the market clock by 12 months to capture the opportunities that looked so enticing before the pandemic shut the world down. I wish I could say the same.

After all, the COVID-19 outbreak was a one-time shock to the global system. As it recedes, the world should pick up roughly where it paused, right?

Back in January, when the virus was barely a rumor out of China, Wall Street felt pretty good about 2020. It was going to be a growth year, with S&P 500 earnings tracking close to 10% above what we saw in 2019.

Valuations were already a little stretched at 18X anticipated earnings. So, while that growth trend gave the bulls room to run, we weren’t counting on them to go far or fast without at least a course correction or two.

Admittedly, the Fed was gradually relaxing interest rates in the absence of real inflation. Every rate cut raised the ceiling another 2-3% into record territory.

The Old Year Looked Promising Once

All the pieces for a quiet, but productive, 2020 were in place. Maybe the market would have climbed 10% to keep up with rising earnings. This would have left stocks richly valued without raising too many bubble flags.

That would have taken the S&P 500 above 3,500, and the Dow to what then looked like a lofty 23,000.

And then, the pandemic changed the world. Instead of earnings climbing by 10% in 2020, it now looks like we’ll see them crater 13% before the year is out.

With the vaccines coming, 2021 looks like we’ve got a fresh chance to capture the original 2020 growth proposition. If anything, 22% anticipated growth will take earnings earnings right back to where they should’ve been.

But, there’s a problem. As I told Reuters this week (click to see the video), the lion’s share of that recovery has already been priced into stocks before 2021 even gets started.

It’s just a matter of math. If it looks like earnings are going back to where we expected them to be a year ago, the S&P 500 was on track to clear 3,500 without much strain.

Here, we are 170 points beyond that reasonable target, and the same earnings forecast translates into a market that can rally but bends statistics a little more with every nudge to the upside.

The Fed can’t help this time. Chairman Jerome Powell and company are already doing everything they can to support the market and the economy.

Interest rates are zeroed out. And while the market as a whole is primed to pick up the pandemic pieces, there will be corporate casualties.

The credit rating agencies have said that about 10% of high-yield bonds are going to default in 2021. Sooner or later, stressed companies will run out of room to maneuver. When they can’t pay their creditors, feedback follows.

The Sector View Has Shifted

This is why I’ve stayed on the sidelines where oil stocks are concerned, by the way. While the year-over-year flip from sector-wide losses back to profits is superficially compelling, more than a few of these companies are looking at liquidation, or, at best, forced mergers.

Consolidation is rarely a fun time in any industry. In the oil patch, the struggle for survival can get savage. We might trade a few names in special situations, but I think the knives haven’t even started falling here yet.

And let’s be honest. Crude prices simply aren’t coming back in the foreseeable future. A year ago, Wall Street thought we’d be seeing $57 a barrel right about now.

Reality came in below $40. Even now, the outlook has deteriorated to the point where Big Oil will make $47 a barrel, if everything goes perfectly. As the pandemic taught us, perfection is rarely encountered in the real world.

A year ago, Wall Street thought that energy would be the best growth sector, as operating efficiencies would squeeze profit out of a relatively stagnant pool of revenue. What we saw instead was a disaster.

Instead of thriving, world-class companies like Occidental Petroleum Corp. (NYSE:OXY) cut everything they could simply to survive. Dividends disappeared. Long-term exploration plans stalled.

They dodged a bullet. And the oil patch is rarely quiet for long. Avoid it until I tell you differently.

What about technology, the darling of the pandemic era? I wasn’t thrilled with Big Tech a year ago, when the sector as a whole was struggling to deliver 10% growth. The story hasn’t brightened much.

Even if technology stocks collectively give us 15% more profit in the new year, that’s a long way from the dynamism that builds a trillion-dollar giant before your eyes. And compared to other slices of the market, it’s going to feel like molasses.

Don’t get me wrong. I love the right technology company that’s at the right phase in its life cycle. Early is good. Several of my IPO Edge positions have what it takes to join the trillion-dollar club over time.

And that’s the story of every year on Wall Street: When the years roll into decades, you can make serious money.

I’m always talking about initial public offerings (IPOs) on my Millionaire Makers radio show. Now there’s a podcast (Spotify)(Apple) as well to keep you focused on opportunities to build real wealth while avoiding obvious threats.

Cannabis Corner: The Turning Point

Cannabis stocks finally got back to work in the past year. You just needed to be diversified and take a broader view of what kinds of companies really belong in this space.

Once again, the pure cultivators that most people talk about suffered significantly, only coming back up for air after the presidential election lit a new fire of hope under the group.

Canopy Growth Corp. (NYSE:CGC) managed to beat the S&P 500 this year. But Tilray Corp. (NASDAQ:TLRY) and Aurora Cannabis Inc. (NYSE:ACB) fell at least 50% from their already depressed 2018 levels.

And this was the year that CannTrust Holdings (OTCMKTS:CNTTQ) lost its Nasdaq listing and skirted dangerously close to ceasing all operations. Big or small, the growers are still facing a lot of pressure.

There are simply too many growers chasing slices of the fragmented consumer market. That doesn’t mean that the market itself is in trouble.

After all, companies that serve that market in ways that don’t revolve around growing the actual plant are doing really well on Wall Street.

Think of a classic gold rush. While lucky prospectors can dig enough nuggets to pay the bills, the real wealth goes to the people who sell picks and shovels.

If your long-term cannabis portfolio doesn’t include hydroponic supply companies like GrowGeneration Corp. (NASDAQ:GRWG) and Scotts Miracle-Gro Co. (NYSE:SMG), you’ve probably had another bad year in this space.

That’s the point of thematic diversification. You need to make sure your list is big enough to include the ultimate winners of any competitive race to the finish line.

For years, everyone thought it was all about the big cultivators. Now, it’s clear that the heat is elsewhere.

The business-to-business suppliers have that heat on their side. And so do the consumer products packagers.

Green Thumb Industries Inc. (OTCMKTS:GTBIF) singlehandedly makes up for all the pain the cultivators have suffered. An all-cultivator portfolio would have missed it completely.

You’ve got to keep your eyes open. In my IPO Edge, a tiny cannabis stock has earned us 50% so far this month. I’d rather be in that company than all of Big Cannabis put together.

Which company is at the forefront of “The Final Human Frontier”?
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