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2021: A Year Valuations Mattered

By January 4, 2022September 16th, 2023No Comments

Happy New Year!

It’s hard to believe 2022 is already here!  The past two years were undoubtedly challenging, but we do enter the new year with some cautious optimism.  The past year produced above average gains for the financial markets overall, and our client portfolios, based on risk levels, enjoyed a very good year as well.

Some reminders for 2021 tax reporting forms and dates:

For investment accounts that were active prior to August 2, 2021 through year-end, there will be TWO different 1099’s this year.  With the acquisition of E*Trade Advisor Services by AXOS Advisor Services, 2021 will require two separate 1099’s from each company. Accounts opened AFTER August 2, 2021 will only have one 1099 for the year from AXOS Advisor Services.

For retirement accounts (IRA’s, SEP’s, Simple IRA’s etc.), if a distribution was received from the account during the calendar year, a 1099-R form will be sent to the account owners by January 31st.

For TAXABLE accounts, forms 1099-Div, 1099-B, etc. will be sent out by February 15th to the account owner(s).

As always, we will have access to the tax reporting information and can send it to your tax preparer when available for you. We can also send a CSV (Excel) file to them with all the year’s tax information that can be downloaded and make their job easier.  Just let us know if you want us to send the information for you. We will need the name and email address of your tax preparer.

For those of you that are required to take a minimum distribution from your retirement account (RMD) in 2022, AXOS Advisor Services will send out a letter by February 1st to each of you with the amount required in 2022.  We also will have access to that information sometime in mid-January.

As always, if you have any questions please don’t hesitate to call or email us at any time.

2021: A Rational Return to Valuations

As value investors, valuations are one of the primary drivers to begin exploring potential investments. In the chaos of 2020, we witnessed some stock valuations get so out of line, it drastically skewed perspectives of the market. Take a look at the graphic below. Companies like Peloton and Zoom saw unprecedented jumps in value to unrealistic levels. Peloton became priced as if everyone already had one of their products sitting in their home, and Zoom was priced as if no competition would ever exist, and every business had already become a subscriber. The “SPAC” (Special Purpose Acquisition Company) market, which allows investment managers to raise capital for an unknown near-term acquisition or merger, saw mind numbing valuations on businesses that only had good ideas or stories, not yet proven as viable businesses. For example, pictured in the price chart below, QuantumScape (QS) was a SPAC merger of a business that was plans to make more stable batteries but not for several years. At its peak, QS witnessed valuations north of $50 billion with no intentions of making revenue soon. In 2020, stories were all the market cared for with complete ignorance of reality of what price or valuation was being paid for that business (story).

As value investors, these environments can be difficult, as prices continue to rise for these types of investments and do not have much rationale behind the increasing price. Investors point to the ever-rising price with the fear of missing out which can leave us unable to explain, but we also hold to the belief these large divergences of valuation and reality should not be able to continue. Our preference for a business typically includes an inverse relationship to price. All else equal, we like a company less as the price rises and more as its price falls and it becomes cheaper, all things being equal. Fortunately, last year was one that saw many stock valuations coming back to reality, especially for the stocks illustrated in the above chart. In 2021, Peloton’s stock fell 76%, Zoom 45% and QS 73%. And ironically, we are now closely watching both Peloton and Zoom as valuations have come more in line and could eventually become an attractive investment for clients. As of writing this, we do not have an investment in either stock.

Wild valuations undoubtedly still exist however, and they probably always will somewhere within the markets. For example, a new auto manufacturer, Rivian, peaked at a value of $160 billion November 2021 following its Initial Public Offering and still sits around $100 billion. Rivian does not have any revenues yet. Contrast this with a business like GM that has $130 billion in revenue and a total enterprise value of $180 billion. We personally believe Rivian will be extremely successful far into the future and may even be future buyers of their product. But investors are already paying for a valuation today that assumes Rivian to be an overwhelming success and are not receiving any risk/reward compensation. It seems to be predicated from Tesla’s valuation, which is north of $1 trillion with roughly $46 billion in revenues. While either of these two stocks could continue to gain in value, we choose to avoid investments like these as they pose, in our opinion, dramatic risk to investors at present.

The Year Ahead

Opportunities Continue to Exist

As we previously wrote, markets making “all-time highs” do not factor into the equation for us nor are we ever trying to determine when a “good time” is to invest. Even with market prices moving higher, we continue finding stocks that we are comfortable buying and feel clients are fairly compensated for the future. It has undoubtedly gotten more difficult, and we do not believe fire sale prices that were seen in 2020 will come again soon. However, we continue being encouraged with businesses we’re still able to buy at fair prices and attractive valuations.

One area that we’ve been combing through lately is the SPAC market as mentioned above. It has begun presenting many opportunities. Where in 2020 investors did not care what price they purchased these stocks for, investors made a turnaround and were not willing to pay any price for them by the end of 2021, allowing for valuations to crater. We’ve been able to find businesses with extremely exciting long-term growth potential trading at valuations that compensate investors for the amount of risk involved and allow them to be rewarded in the future for the businesses’ successes.

The Economy

The economy continues to appear extremely strong, the labor market insanely tight, and the US consumer financially healthy. It would not be a surprise however, to see some percentage slow- downs in economic terms for 2022. Businesses halted operations in 2020 and economic numbers saw a government mandated collapse due to the shutdowns. In 2021, these numbers saw unusually strong growth in percentage gains due to such a low comparative base coming out of 2020. We would not expect to see this same kind of surge in 2022, but instead a potential “slow down” from this surge and eventually continuing to return to a more normal environment by the end of this year and 2023 forward.

Markets are volatile, and we would never list this as a reason not to invest for the long term. While markets may (will) pull back eventually, we would continue to look at these moments as opportunity. And as usual, we believe the future is indeed bright, no matter what potholes lay ahead for us. Our clients have chosen us to help navigate their financial plan and allow us in most cases to drive the majority of their investment vehicle. We were blessed last year with unusually strong returns coming out of what could be described as chaos, and we continue focusing only on the road ahead.

We wish you all an incredibly happy new year and pray for peace and continued blessings on you and all your families for 2022! We are looking forward to the privilege of serving all of you in the years to come.  Please don’t hesitate to call or email if we can ever be of further service or if you have any questions or concerns.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.


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