The Power Of Three

Even though I don’t drink, I thought catching up at a local boozer was the perfect lunch spot.

And it was, until I saw the look on Sarah’s face when she walked in.

She’s wearing a beautiful long black dress with matching heels but her lips are pursed.

My unflappable friend of twenty years might have looked a million dollars but she wasn’t feeling it.

She felt like a failure.

Today her house goes to auction because rate fatigue got the better of her.

Her business has been on the slide for about eighteen months and she was desperately hoping for a rate cut, but the clock wore her down.

“I don’t get it. Why are places like this crushing it while I’m struggling?” she asked

“How do you know they’re crushing it?”

“Because every table is full!” she quipped

So I gently reminded her that revenue doesn’t equal profit.

Plus, like most businesses right now, I’ll bet you they’re surviving on a bank over-draft and little sleep.

But then she pushed back, “…so why’s the stock market so strong?”

Because of three stocks – Nvidia, Amazon and Apple.

The S&P 500 consists of 500 stocks. Yet, 20% of the S&P index is currently made up of these three stocks alone because they’re so inflated.

To put this into perspective, more than half of the S&P 500 stocks are down, yet the S&P index is being pulled up thanks to a couple of AI based stocks.

Let me give you an example…

Nvidia is trading with a price earnings (P/E) multiple of 90 (ninety) times.

Meaning, if you bought the stock at these levels, it would take ninety years to pay it off based on current earnings! (profits).

To put this into perspective, the ‘goldilocks’ P/E multiple for buying stocks is about 15 (fifteen).

Buying a stock with a P/E of 15 is analogous with setting the temperature of your air-conditioner at 22 in summer. It’s just right.

Therefore, when you see stocks trading at six times the market average, you know it won’t last. It’s white hot.

But that’s the power of the big three right now – Nvidia, Apple, Amazon.

The markets look really strong but they’re not. Only a handful of stocks are holding it up.

Looks can be deceptive.

Just ask the pretty smile sitting in front of me.

Have a great weekend!

Adam

p.s. Sarah is not her real name but she gave permission to share her story.

Back paddock – when someone drives slower than you they’re an idiot, but when they drive faster than you they’re a maniac – Jerry Seinfeld.