Stock Split In Two - InvestingChannel

Stock Split In Two

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Peloton Tells a Tale

Peloton (PTON) halted production of its connected fitness products as warehouses stuffed with bikes and treadmills saw fewer orders…

And they killed Mr. Big!

The company already cut production of its more expensive Bike+ in December and doesn’t plan to start again until June.

What happened?

No one wants their products.

Peloton barely generated positive cash flow from its operations in 2020. Don’t expect that to happen anytime soon.

As we discuss in our main story below, Peloton is a story of niche growth trends that flamed out like Heelys or Crox.

That doesn’t mean it’s dead money forever. But the hype is gone.

Many investors who stepped into the market for the first time in the last two years don’t understand this vicious cycle.

It’s why financial advisors serve an important role in keeping client expectations level and grounded in fact.

Speculation has its place. But it’s those companies that generate positive cash and profits that stand the test of time.


Stock Split In Two

Key Takeaways

  • Money moved out of high growth/momentum names into value stocks
  • With higher interest rates on the horizon, value stocks offer more earnings now, which become more valuable with higher rates, than in the future.
  • Volatility will continue as companies work through Omicron cases and supply chain congestion.

Markets tumbled the last few days only to find a low Friday and begin a face-melting rally.

As we’ve discussed in the last few weeks, stocks are splitting into two categories.

Growth & High Value

The Nasdaq 100 hit ‘correction’ territory, defined by a decline of 10% from the highs.

Other indexes haven’t suffered as badly.

Right now, money is rotating out of momentum and high growth names like Netflix (NFLX), Roblox (RBLX), Rivian (RIVN), and even Gamestop (GME) and AMC Theaters (AMC).

Investors are instead moving towards value names including the banks (XLF), consumer staples (XLP), and the like.

The Root Cause

The expectation for higher interest rates drove the rotation noted above. Higher rates mean future earnings are worth less and current earnings are worth more. That makes ‘value’ stocks that earn more now more desirable than growth stocks.

Additionally, Omicron’s surge jammed up an already fragile work environment, causing folks to call out of work in everything from restaurants to ports.

In fact, the Port of L.A. saw 10% of its workforce out with Covid last Thursday.

This issue, although likely temporary, hadn’t been discounted by the markets. Consequently, volatility is likely to stick around for several weeks at least.

The Bottom Line: As companies report earnings, expect more to discuss the impact of Omicron on operations.

We expect companies that don’t rely on international supply chains with scalable business models to perform best in this environment.

Especially ones geared towards infrastructure like Fluor (FLR), Dycom (DY), and other construction and engineering firms.

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