🔬The Stock Market's Identity Crisis
Plus: Elon's pay package explained; DeepF***ingValue converted his call options; and much more!
"Time is your friend; impulse is your enemy"
- John Bogle
"Value investing is at its core the marriage of a contrarian streak and a calculator"
- Seth Klarman
Another day in the win column for the big US markets, with the S&P 500 +0.2% and Nasdaq +0.34%. Yesterday’s result makes the 40th new all-time high for the S&P 500 this year.
4 of 11 sectors closed higher as Tech (+1.4%) pulled the market up again. Communication Services (-1.0%) was the worst showing.
Initial jobless claims came in at 242K (highest since August 2023) vs. Wall Street’s estimate of 225K.
May’s Producer Price Index showed a decline of 0.2% m/m vs. consensus for a rise of 0.1%. YoY the figure was +2.2% vs. Street’s consensus of +2.5%.
Notable companies:
Broadcom (AVGO) [+12.3%]: Fiscal Q2 revenue and EPS beat consensus and raised FY24 guidance; takeaways on AI strength, improved AI guidance.
Tesla (TSLA) [+2.9%]: Shareholders voted to re-ratify his pay package and move Tesla's headquarters to Texas by "wide margins"; passage removes risk of Musk leaving the company.
Dave & Buster's Entertainment (PLAY) [-10.9%]: Q1 EPS and revenue missed; impacted by higher labor and marketing costs and challenging consumer spending.
More below in ‘Market Movers’.
Street Stories
The S&P 500’s Identity Crisis
I’ve written a decent amount about how the S&P has become top heavy (The S&P 500 Has Gotten Twice As Top Heavy Over The Last 10 Years) and how the biggest names on the Index are really the ones pulling returns higher (Are The 7 Still Magnificent?)
One of the clearest ways to see that shift has been to look at the performance of the S&P 500 (which is market cap weighted) and the S&P 500 Equal Weight (which is…erm, equal weighted).
Back in the day, the relationship between the two indices was highly correlated: when S&P 500 did well, that usually meant that most of the companies in the index did well also. Samesies for when it did poorly.
With the rise of the mega-cap tech companies, like Apple, Microsoft, Nvidia, Amazon, etc., the market performance has become bifurcated and now the correlation between the S&P 500 and its equal weight buddy are at near record low correlations.
This shift can also be seen when looking at the Nasdaq 100 - which most of the big tech names reside in also. The Nasdaq 100 historically had relatively low correlation with the S&P 500, but the new ‘top heavy’ S&P 500 has a significantly higher correlation with the S&P 500 than does the equal weight index.
One of the ways this shift can also be seen is in the breadth of the market’s performance: The S&P 500 has pounded home all-time high after all-time high this year, but currently only 48% of companies are actually above their 100-day moving average. Basically, there’s a few mega-caps doing all the work, while all the rest have been sitting on their hands.
Interestingly this hasn’t always been the case. In fact, the bigger companies were historically a drag on the index: As you can see above, between the years of 2000 and 2014 the S&P Equal Weight outperformed the main index in all but three years, and in the instances that they didn’t it was pretty tight.
Since then it has gone the other way, with the main market outperforming the equal weight index in 7 out of the last 10 years - often by a definitive margin.
Elon Gets His Way (Probably)
Tesla shareholders ratified CEO Elon Musk's controversial 2018 pay plan at the annual meeting, despite a Delaware court ruling it was improperly granted. Musk’s compensation package is valued at $56 billion - the highest ever in corporate history.
Elon published the below (ugly) graph on X, highlighting the huge margin by which the vote passed.
Whether you are a fan of Elon’s or not, you have to admit that the milestone’s set out in the 2018 package (link) were extremely ambitious. He was given ten years for the company to reach the defined corporate milestones, and all but a few revenue milestones remain with years to spare.
Milestones:
Market Capitalization: Part of Musk’s compensation was based on the company reaching 12 specific milestones for market capitalization. When issued in 2018, Tesla had a market capitalization of $59 billion. The final milestone was for the company to reach $650 billion in size - which it did back in 2020.
Adjusted EBITDA: There were 8 tranches for EBITDA milestones, with the last one being for $14 billion. Tesla reached this milestone in 2022, which was 21x the size of 2017 EBITDA
Revenue: Another 8 tranches, with the last hurdle being reaching a revenue level of $175 billion - 15x Tesla’s 2017 levels. Tesla has yet to reach this threshold, with 2024 revenue hitting $95 billion.
The total option package for the plan would represent 303 million options - 12% of Tesla shares at the time of issuance. The remaining Revenue milestone’s Tesla has yet to hit represent around 25 million options.
Also important for Musk is that the shareholders also voted to redomicile the company in Texas as opposed to Delaware. Recall that it was a Delaware judge that moved to invalidate Musk’s pay package. Musk isn’t necessarily out of the water yet, as there are some additional legal hurdles and risks to approving his pay package. That said, it’s looking very solid for him now that he has received the blessing of the shareholders - or at least most of them. Some are pretty pissed.
Some other snippets from the 2018 compensation package:
Roaring Kitty Converts GameStop Options to Shares
Legendary meme-stock figure Keith Gill posted on Reddit yesterday afternoon that he had converted his 120k call options into 5.001 million shares in the company.
Many suspected he might cash out and disappear again but true to his word he doubled down on GameStop for (presumably) the long haul.
This move makes him the the fourth largest shareholder behind only the CEO and index funds Vanguard and BlackRock. Pretty good for a $50k punt out of his E*Trade account.
Joke Of The Day
Four professionals are interviewing for a math-intensive position in a company. The shortlist of applicants includes a mathematician, a physicist, an engineer, and an accountant.
To begin each interview, the representative from HR poses a simple math problem to warm up the candidates: “What is 45+18?” The mathematician immediately responds “63”. The physicist responds “63, plus or minus 5%”. The engineer thinks for a moment and responds “63, but for safety, let’s call it 70”.
The accountant shuts the door, checks over his shoulder, leans in close to the desk, and whispers “How much do you want it to be?”
Hot Headlines
Barron’s / How Elon Musk’s $56 billion stacks up to other big pay packages.
New York Times / Supreme Court Justice Clarence Thomas took additional trips on billionaires Harlan Crow’s private jet without disclosing them. The revelation further highlights his relationships and potential impropriety from wealthy Republican donors.
CNCB / In comical meme-stock fashion, GameStop’s annual shareholder meeting started 48 minutes late and was immediately cancelled due to server crashes due to overwhelming interest. Meeting rescheduled to this Monday at 10:00AM. #powertothepatient
Yahoo Finance / Virgin Galactic shares collapse 14% as company announces plans for a 1-for-20 reverse stock split. The cash strapped company made the move presumably to avoid being delisted from the New York Stock Exchange, as stocks typically need to maintain an average closing price of at least a dollar a share over 30 days to avoid being delisted. Shares closed at $0.73. 👎✌️
CNBC / Ford ends EV dealership program that required hefty investment to sell electric models. The company will now let all dealers sell their EVs.
Yahoo Finance / Tyson Foods suspends CFO after (another) arrest for intoxicated driving. Don’t worry about him, he’s the great-grandson of the company's founder. I’m sure he’s not going anywhere.
CNBC / Trump floats eliminating U.S. income tax and replacing it with tariffs on imports.
Trivia
Today’s trivia is on Tesla.
In which year was Tesla founded?
A) 2000B) 2003
C) 2005
D) 2008
What was the name of Tesla's first car model?
A) Model S
B) Roadster
C) Model X
D) Model 3
Tesla’s market cap peaked in $1.2 trillion in 2021, what is it currently?
A) $951 billion
B) $297 billion
C) $721 billion
D) $566 billionHow much revenue did Tesla make in 2023?
A) $97 billion
B) $115 billion
C) $85 billion
D) $69 billion
(answers at bottom)
Market Movers
Winners!
Broadcom (AVGO) [+12.3%]: Fiscal Q2 revenue and EPS beat consensus and raised FY24 guidance; takeaways on AI strength, improved AI guidance, better-than-feared VMware performance, modest recovery in non-AI semi segments, and good cost synergies execution.
Wiley (WLY) [+12.1%]: FQ4 earnings and revenue beat; strong Learnings results from GenAI projects, academic content, and courseware; significant interest in leveraging content for AI/ML models; FY25 guidance ahead of the Street.
Korn Ferry (KFY) [+10.8%]: FQ4 earnings and revenue beat; next-Q EPS guidance above the Street; moderation in fee revenue from talent acquisition somewhat offset by strength in Consulting and Digital; boosted quarterly dividend by ~12%.
Kimberly-Clark (KMB) [+3.1%]: Upgraded to buy from underperform at Bank of America; improvements in price/mix offsetting volume declines, premiumization opportunity in China, margin tailwinds amid cost-cutting and supply chain improvements.
Tesla (TSLA) [+2.9%]: Elon Musk said key proposals to re-ratify his pay package and move Tesla's headquarters to Texas are winning by "wide margins"; passage removes risk of Musk leaving the company.
Losers!
Signet Jewelers (SIG) [-14.9%]: FQ1 EPS beat though revenue slightly missed; FQ2 EBITDA guidance below consensus; FY25 guidance reaffirmed; sales down 9.6% y/y; SSS down 8.9% y/y; customers responding well to new product offerings and loyalty program.
Repligen Corp. (RGEN) [-11.9%]: Board approved planned transition of CEO Tony Hunt to Executive Chair; Olivier Loeillot to succeed Hunt as President and CEO, effective 1-Sep-24.
Dave & Buster's Entertainment (PLAY) [-10.9%]: Q1 EPS and revenue missed; impacted by higher labor and marketing costs and challenging consumer spending; same-store sales also missed expectations; expects to open 15 new stores in FY24.
Market Update
Trivia Answers
B) Tesla was founded in 2003.
B) The first car was the Roadster.
D) Tesla’s current market cap is $566 billion.
A) Tesla made $97 billion in 2023 revenue.
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Great piece! Real interesting chart of the equal weighted S&P’s since 1994 outperforming too. I would have never guess that.