Snap and Bend

Hi, my name is Landon, and I don’t understand the frenzy about the Snapchat app. Whew, that was tough for me to admit publicly. I hate to sound like the old curmudgeon who yells at kids to stay off his lawn, but I just don’t get it.

It’s an app that lets you add cute animal features to photos of your face, and encourages you to send the kind of texts you don’t want anyone to see for longer than 10 seconds. What could possibly go wrong?!

Don’t get me wrong—there are a few late night, bourbon-fueled texts I’d like to have back. But c’mon, what good is a text that disappears if the screen shot capability of the phone you sent it to is still active?

More importantly, I don’t understand the feverish response to the Snapchat IPO. Maybe it’s because I took some lumps during the dot-com bubble (damn you, Mercury Interactive), or maybe it’s because I’m a nerdy guy who loves the daily grind of striving to earn exceptional risk-adjusted returns for my shareholders. Either way, I don’t get it.

To quote my boy Dennis Gartman, “Is there anything in the investment world less investable than SNAP? This is not a business … this is a time-sapping hobby.”

Spring the Trap

On March 2, 2017, there was a bum rush by millennials and others (you know who you are) into the Snapchat IPO. They stumbled over each other for shares of SNAP like sales-frenzied shoppers storming a Best Buy on Black Friday.

They found out the hard way what happens when publicly traded companies disappoint their Wall Street counterparts, rainbow tongues be damned. Last week SNAP got the woodshed treatment, dropping as much as 24% before closing Thursday at $18.05, down 21% from the prior closing price.

They Cheer and Clap

Gordon Gekko said it best: “Their analysts don’t know preferred stock from livestock.” This nicely sums up Wall Street analysts. The coverage of SNAP after it reported its feeble earnings and torpedoed towards the earth tells the story:

Goldman Sachs reiterated its “buy” rating, stating that it believes “its audience and engagement represent a unique asset.”

Morgan Stanley kept its “overweight” rating, citing the “monetization potential of its user base.” It went on to say “We are buyers on weakness …,” and reiterated a $28 price target.

Barclays stayed with their “equal weight” stock rating, and lowered their price target from $24 to $18.

Wait, what?! Before SNAP announced earnings, it was trading at $23.00, and Barclays had a price target of $24. Twenty-four hours later, SNAP gets the band geek treatment, drops to $18.50 and Barclays follows suit?

Talk about hooking your clients up with timely research and helping them manage risk.

Oppenheimer actually upgraded their stock rating during Thursday’s rout from a “perform” to an “outperform.” Apparently, Oppenheimer’s research process is “We liked it at $23, we love it at $18.”

I thought we got rid of investment banking conflicts of interest commingling with Wall Street research after Henry Blodget put lipstick on a pig? I guess not.

That Ain’t How I Play

Now that I’ve completely shunned the chasing of the latest app company IPOs as an investment strategy, let me offer a more reliable investment approach.

For the last ten months, and counting, the Fundamental Gravity in the U.S. has been super bullish for U.S. technology stocks. An economic environment characterized by accelerating U.S. growth is prime for tech stocks to outperform. Indeed, since last June, the Technology Select Sector SPDR ETF (XLK) has returned nearly double the S&P’s 15% return, gaining 29%. More importantly, it’s done so with less downside, experiencing a drawdown of 4.1% versus a 4.3% drawdown in the S&P.

Behaviorally, investors have been increasing their long exposure to tech for the last month. However, despite tech’s massive outperformance over the last ten months, it’s still a long way from being a crowded, consensus trade.

Quantitatively, the 30% rally has been characterized by increasing volume and falling volatility. From a quantitative perspective, it doesn’t get more bullish than “price up, volume up, volatility down.”

Despite the narratives being thrown around, the U.S. economy continues to improve in Q2, and the Fundamental Gravity remains bullish for U.S. tech stocks. Don’t be Captain Stock Picker or blindly follow your friends into the latest and greatest IPO; consider investing via an instrument like XLK. This approach allows you to take advantage of the current economic environment without worrying about Wall Street or whether SNAP’s DAUs disappoint.

You can have your cake by intelligently positioning yourself for potential profit with the odds stacked in your favor, and Snapchat a story about it, too.

This Wouldn’t Work if I Tried All Day

While I have no idea if Snapchat is the next Apple or the next, there are two things I do know.

First, IPO stock prices are typically under pressure for the first year. This is especially so from the six-month mark going forward because it’s the first opportunity insiders have to liquidate shares. Second, your DNA-level desire to get rich quick or to be the investor that bought Apple for $2 a share can only hinder your investing returns.

Successful investing is counterintuitive to everything we are as human beings because we are innately flawed decision makers. You cannot earn exceptional returns by chasing the latest investing fad or piling into IPOs of every app company that comes along. Generally speaking, the only folks getting wealthy from IPOs are the pre-IPO investors.

It’s Not the Time to Overthink

Investing shouldn’t be exciting. In fact, if you’re doing it right, it should be downright boring. Develop a process that is consistently profitable in all market conditions and then wash, rinse, repeat.

If you want excitement, hit the Wynn in Macau and try your luck at Sic Bo. If you want the opportunity to earn exceptional returns on a consistent basis, then stay data dependent, process driven and risk conscious.