Whitney Tilson Supports My EPS/Stock Price Thesis

An excerpt from Whitney Tilson’s “Huge earnings growth doesn’t mean a huge rise in stocks“:

My friend Doug Kass of Seabreeze Partners Management agrees that strong earnings per share (“EPS”) doesn’t equate to strong price gains. In a recent missive (subscription required), he notes:

First-level thinking is lazy, simplistic and superficial – it looks for simple formulas and easy answers. To paraphrase Howard Marks: 

  • First-level thinking says, “S&P EPS growth will be strong, let’s buy the market.”
  • Second-level thinking says, “S&P EPS growth will be strong, but everyone knows it. Stocks are fairly or overpriced, let’s sell the market.”

Most recent examples of when S&P EPS was better than expected and strong were in 2018 (+20.5% EPS growth, -6.6% decline in the S&P), 2006 (+16.7% EPS growth, +11.3% rise in the S&P), 2005 (+19.3% EPS growth, +8.8% rise in the S&P) and 2004 (+20.1% EPS growth, +4.2% rise in the S&P).

Going back, during the last 50 years, other 12-month periods with robust EPS growth and less-than-stellar to down S&P price include the years 1993, 1992, 1987, 1984, 1979, and others.

He argues that this year offers a combination of unique market challenges compared with prior periods:

  • High and rising inflation and interest rates.
  • A burgeoning deficit and U.S. debt load may be a permanent condition giving the general lack of discipline from both parties in Washington DC.
  • Improvisational geopolitical and fiscal policies that present threats to political and economic stability.
  • Both parties are moving to extremes – the Republican party more to the right and the Democratic party to the left. With a possible Democratic congressional majority win in November, anti-corporate policy (higher corporate taxes, etc.) may be in the offing.
  • Traditional valuation metrics in the 98th percentile, two standard deviations above the average.
  • The AI capital spending spree and gains from investments have inflated S&P profit reports… an earnings reckoning may lie in the not too distant future.

I think Doug is right that huge corporate earnings growth likely won’t translate into a comparable huge rise in stocks.

Unlike Doug, I’m not bearish on stocks in general – with the exception of the AI bubble. When it bursts, stocks that have soared during this boom – such as CoreWeave (CRWV), which I analyzed on Monday – will undoubtedly crash.

Position: None

Recommended Viewing

Rubenstein interviews Einhorn:

Position: None

The Consumer Is Spent Up, Not Pent Up

* The cumulative or “stacked” inflation (since 2000) is weighing on the consumer sector

* This, coupled with the shrinking savings rate, is critical to the outlook for equities given the role of consumer spending and the large swath of stocks dependent on the consumer...

Combine the flatlining in real disposable income:

With the dwindling savings rate:

And the outlook for consumer spending over the next 12 months is poor. The shares of Costco ($COST), Walmart ($WMT), Dick’s Sporting Goods ($DKS) and other consumer-related equities already “know this.”

Position: None

Tweet of the Day

Position: None

Things I Did Yesterday

Here are yesterday’s things:

* I covered $NVDA at $206.60 and re-shorted at $218.50.

* I added to my $CRVW short at $90.79.

* I added to two ETF shorts — $GRNY at $27.88 and $JOET at $46.19.

* I added to my $JPM short at $356.80.

* I shorted $SPY at $769.29 and covered at $768.53.

* I shorted $QQQ at $716.73 and covered at $715.02.

Position: Short NVDA (VS), CRVW (VS), GRNY (M), JOET (S)