Stephen Gandel's Gadfly Hits (and a Few Misses) for 2017
(Bloomberg Gadfly) -- Stocks climbed and bitcoin soared. The most hyped initial public offerings flopped even as the IPO market in general stealthily recovered. The stock that was the biggest favorite of active professional investors turned out to be a dud. And hedge funds were an overpriced disappointment once again.
I anticipated some of these market moves, but certainly not all of them. When it came to predicting individual stocks, I had far more hits than misses. But the bigger market calls -- the direction of stocks and whether the bitcoin bubble would pop -- I, like many others, mostly got wrong. Let's start with my biggest whiffs.
In my first Gadfly column (I started at Bloomberg in mid-April) I argued that stocks were rising too fast on the belief that "Good Donald Trump will be great for the market and that Bad Trump won’t be all that horrible." Investors, I thought, were placing too much faith in tax cuts, which were still just a possibility, and were not wary enough of President Trump's other policies, like limiting immigration and free trade, which could hurt the market. And it wasn't the only time I was skeptical about Trump and the market. In July, I argued once again against putting too much faith in the great Trump tax trade. And as recently as last month, I said that the trading of hedge fund investors suggested the rest of us should have less faith in a tax cut.
Clearly, my skepticism was misplaced. Betting on Donald Trump, or at least on the fact that he wouldn't derail the momentum in the economy that he inherited, was the right call. The tax cut passed, and stocks are now 12 percent higher than when I wrote that first column. The S&P 500 Index is on track to be up more than 20 percent this year, including dividends.
The rise in bitcoin set off my antenna for potential danger for investors as well. The fact that even bitcoin bulls were saying it was bubble -- but still buying -- seemed to signify the type of hubris that was on display during the dot-com bubble, and even the South Sea Company one. I began saying bitcoin appeared to be due for a fall in September, when the granddaddy of digital currencies was trading at about $4,000. Bitcoin, I pointed out, was four times as expensive as dot-com stocks were at the height of their bubble. My warnings, so far, have mostly been unwarranted. Bitcoin, even after pulling back recently, is up nearly 300 percent since I began warning about it. I still think bitcoin's price is based more on hype than its actual value as a currency, but what that value is and when bitcoin starts trading it line with it appears beyond my current powers of prognostication.
I did better when it came to predicting the moves in share prices of individual companies but still didn't have a perfect record. In July, I warned that the parent of furniture chain Restoration Hardware, RH Corp., had gone on a misguided stock buyback spree -- repurchasing $700 million of its own stock, or nearly 20 times what it earned in its most recently completed fiscal year -- when it needed money desperately to combat online competitors and revamp its stores. Shares of the company, which were at $75 when I wrote my column, fell as low as $45 by late August. But in early September, the company announced that its newly introduced membership plans and rewards were paying off and that sales were rising faster than expected. Its shares rebounded and then some. The stock was recently trading at $91.
The initial success of Snapchat's early 2017 IPO set the stage for other hotly anticipated stock sales. But I correctly pointed out that the prospects of the most eagerly anticipated of these deals would make their stocks disappointments. I began warning about meal-kit delivery company Blue Apron Holdings Inc.'s troubling business metrics in early June, nearly a month before its IPO, highlighting that it was doing a poor jump of managing expenses and inventory. The company planned to price its shares as high as $17 in its IPO. I said that was too high. They eventually priced at $10 and have recently plunged below $4.
When everyone thinks the only direction for a stock is to soar, it's probably time to prepare for a crash landing. That's what happened with online travel booking company Priceline Group Inc. In September I noted that mutual funds were betting more heavily on the rise in Priceline than any other stock in the market. Worse, Priceline's recent returns on the money it spends on marketing, which had been the highest among its rivals, were plummeting. The stock, which was at $1,850 when I wrote the column, has fallen nearly $100.
After seeing a number of hedge funds mangers at the prominent Sohn Conference in May basically recycling old ideas, I pointed out there was a problem in hedge land. In an effort to land pension fund assets, hedge funds bowed to consultants who demanded low turnover and diversified portfolios. I argued that this would lead to continued mediocre returns. That has turned out to be a good call. The average hedge fund was up just 6.2 percent in the first 11 months of 2017, compared with a total return of 20 percent for the S&P 500 in the same period.
As for 2018, the best prediction I can make is that the market will continue to humble soothsayers like myself.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
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