The Phoenix Market

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Even if someone is only vaguely aware of or interested in stocks and investing, it is hard to not have seen the news or heard from a friend about a lot of the craziness that is going on in markets right now. Some of this excitement is not being seen in what we might consider the ‘core’ areas like the TSX 60 and S&P 500 but more prevalent in small-caps and specific niches. You probably know the areas we are referencing:

  • Anything ‘green’
  • Anything that is or will be a Special Purpose Acquisition Company (SPAC)
  • And anything EV or hydrogen

All three of these areas are seeing intense interest from investors and the share price moves of many of these companies, regardless of any news, are a great example of this interest.

We are not here to talk about what is or isn’t in a bubble or even what is and is not overvalued. We want to examine what is starting to feel like what we are calling a phoenix market: A subset of the market that is going through a bit of a renewal or birth, will turn to ashes and then be reborn again, stronger and better. Let us explain…

You might be surprised to read that given all of the moves there have been in stocks, the TSX is ‘only’ up 2.9% for 2021 year-to-date and the S&P 500 is up 2.2%. The past fan favorites typically summarized as the FANG stocks have for the most part had a flat year. Meanwhile, smaller and left-behind names have been seeing aggressive rallies for right or wrong over the last three months or so. This is what feels like the phoenix market. We are almost watching a new cohort of companies flood into the market via SPACs or be rewarded with premium valuations as long as they touch on a theme that is typically focused on a brighter future (genetics, renewable technologies, innovative technology, etc.). Unfortunately, a lot of the companies seeing gains are also more than likely not deserving of them. Some are. Many are not. This is where the ashes come in. Investors can and might continue to do well in some of these niche and new areas, but at some point, there will likely be pain. From this pain though, the phoenix will likely rise again with the surviving companies emerging with more cash than before, stronger, leaner, and smarter. These surviving companies could very well be those that comprise the next set of ‘FANG’ stocks. Further, the company of the future may not yet exist but could be born from a failed company that has had a more intense fire lit after the first failure. 

While not an exhaustive list, we see about 122 companies that have been brought public in the US via SPAC since 2019. Not all of these will be a success but some likely will. Markets seem to be looking for these companies of the future by rewarding them with attention and the funds to help them fill those shoes as the torch passes on to new industries of the future. The market might not be right in doing so and nothing says it will, should, or needs to be a smooth transition but it feels a lot like there are transitions going on in niches of the market where investors are trying to find that next ‘trillion-dollar’ company.

We saw a similar pattern with the marijuana market where all companies are given the same benefit of the doubt and rewarded with high valuations. Some survived, many did not and many used the opportunity to secure the future of the company through deals or capitalizing the balance sheet. Some of the trends in EV, SPACs and green/renewables feels similar. There will be winners and losers and odds are the losers will outnumber the winners.

So What? 

Again, we are not really here to yell ‘bubble’. Everyone else seems to be doing that already. What those warnings miss is that markets might also be trying to signal that there is some sort of shift or transition underway and capital is positioning itself accordingly. Will the shift or chosen industries be correct? Maybe. Will it take years to see true, fundamental traction? Probably. But all of this capital is also giving companies the funds and a chance they may have never had otherwise to build and invest in their company and future technologies. Periods like this create options for opportunities in the future, for example, bringing numerous private companies public that may not have ever been public otherwise. The trick of course is whether capital is being allocated responsibly, but we can only answer that in hindsight.

What we are here to say is to just be careful. There is froth out there, some justified and some not. As an investor, know what you own and understand the volatility and risks inherent in high-flying names if that is a path one chooses to go down. Finally, try not to get caught up in the media posts out there talking about how well the neighbor next door just did on stock X, Y, Z. Markets are full of opportunities and an investor does not need to swim in the crowded pool if they don’t want to. If you feel like you maybe have missed some stocks, have no fear, because the Phoenix will likely rise again.

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Disclosure: Please note that the author does not hold a financial or other interest in stocks or funds mentioned.