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Is NVIDIA too expensive?
NVIDIA now trades at 202 times its last 12mth earnings. It’s price-to-sales ratio is almost 53.
That means, it would take 53 repeats of last year’s sales with a profit margin of 100% to recoup an investment made today. While this doesn’t consider potential revenue growth, it also doesn’t account for a more realistic profit margin.
NVIDIA is expensive.
Want to know how to make it suddenly look cheap again? Just change the forward estimates! With the recent upward analyst revisions to NVIDIA’s expected forward earnings, the stock’s forward P/E ratio has declined significantly. Like magic! (That’s sarcasm.)
NVIDIA is expensive, but perhaps it is justified? NVIDIA is selling the picks and shovels (aka chips) needed for the AI revolution, but this doesn’t necessarily support a price-to-sales ratio of 53. During the Internet bubble of the late 1990s shares of companies that supplied the critical hardware used to run the internet also skyrocketed to astronomical valuations. However, once the bust occurred it took years for the shares of those companies to recover.
NVIDIA could continue to rise - expensive stocks can get more expensive. Or maybe it doesn’t continue to rise. I don’t know. But a reasonable analysis suggests its shares are priced for perfection.
Is China actually a threat to US economic dominance?
Because of China’s weak demographic structure (i.e. aging population that could turn into a declining population) its rise as an economic power may falter later in the century. Ultimately, it’s possible China’s economy never gets larger than the US.
This could create significant political problems, as rapid growth is needed to continue to lift its citizens from poverty. The Chinese government’s biggest threat is the unhappiness of its own citizens.
Is David Rosenberg still predicting a big recession?
Podcast: David Rosenberg is always worth the listen
Does the 60/40 portfolio still work?
The 60/40 balanced portfolio has been a staple asset allocation for investors since the early 1980s. The premise behind this simple stocks-bond split - and its many derivations - is that the two asset classes have a low or negative correlation. In other words, when stocks are doing badly bonds perform well providing ‘balance’ to the overall portfolio.
This strategy has worked well over the past 40 years. It has worked especially well since the dot-com bust. Most investors around today have only known the 60/40 portfolio to work.
During 2022, however, the relationship between stocks and bonds changed. Rising interest rates - an important component to both stock and bond pricing - caused both asset classes to suffer at the same time. Correlations spiked and investors proclaimed the death of the 60/40 portfolio.
While the strategy might not work as consistently as in the past, it is unlikely dead. Coming out of the pandemic the strategy was especially vulnerable, as bond yields were pulled sharply upward from record lows because inflation far exceeded post-1980 norms. That is an unusual situation.
Today, with rates close to a plateau, the worst is likely over for bonds. There are already signs that the balanced portfolio is making a comeback in 2023.
Is US real estate collapsing?
Nationwide, property prices have declined 10% on average year-over-year. Economic uncertainty, high prices and high carrying costs are keeping buyers away.
This trend could continue as the rent vs buy decision generally favors renting - by a wide margin.