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Investors still don’t think
This can be tied in a bit to the greed comment above, but in some areas of the market it is very clear that investors are not putting much thought into things, either. The absolute best example in the crisis is Hertz Global Holdings (HTZ on NYSE). Hertz is bankrupt. It has filed the regulatory papers as such. Everyone knows this. But then, due to somehow overwhelming investor demand for its stock, it decided to sell new shares, up to US$1 billion worth. The deal looked like it would be an easy sell. It didn’t matter that the company warned more than 12 times in the prospectus that, “the shares are likely worthless.” It mattered not. Investors wanted in on the action. The SEC, knowing that sometimes investors are their own worst enemy, had to put a stop to the share sale. This one just makes me shake my head. The whole idea of investment should be to make money, not buy securities that are already labelled “worthless.”
Stocks can keep going up, even when you think they are expensive
If we go back to March, investors were looking around for stocks that might actually do well in a COVID world. E-commerce companies, stay-at-home tech stocks, and tele-medicine were big themes as investors looked for something — anything — that might go up to offset the giant losses they were experiencing in the market. Many of these traded in March at ridiculous valuations. And guess what? They just kept going higher. Companies such as Shopify, Zoom, Docusign, Teledoc and Spotify surged as investors looked for some “at home” plays, and then more or less just kept on going. Frustrated investors have sold a stock such as Zoom at US$150 a share, considering it overpriced at the time, to only then see it go to US$258 just a few weeks later. The lesson here: In a slow growth world, investors will pay up — and keep paying up — for those companies that can achieve outsized growth while everyone else is faltering.
Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals.