Reporting by Greg Debski, CFA
No recent occurrence within the markets better exemplifies that madness than the recent run on “meme” stocks. GameStop, a bricks and mortar seller and buyer of new and used video games and gaming consoles, is a company that, alongside its stock GME, had essentially been left for dead for the better part of a decade. Revenues peaked in 2012 just shy of $10 billion annually and have since embarked on an unrelenting march lower, brought on by the shift to streaming games, web-based licensing, mobile and smartphone gaming, and of course Amazon and internet retailing. Even with a recent explosion in gaming connected directly to COVID stay-at-home orders, GME could not seem to get their act together and grow. The company ended 2020 with annual revenues of $5 billion, and a third year in a row reporting a net loss for earnings. Then for a few short days at the end of January, there was almost no other news except for the stunning rise of the stock. On the heels of a short-seller report about the company (arguing that the stock was basically worthless), the stock rocketed from $44 per share to a high of nearly $500 per share over the course of 5 trading days, a spectacular gain of over 1,000%. At its peak, the company was valued at nearly $35 billion, when mere weeks earlier the market cap was under $500 million. Revenues hadn’t improved, profitability hadn’t magically appeared, and the business hadn’t managed to turn around years of decline. Yet, the price of the stock went mad. Not to spoil the surprise, but in about the same amount of time, the stock slid back below $50 per share.
Returning to more timely items, there have been reports of surging interest rates in the face of expectations for inflation exploding higher. Yes, rates have moved higher recently, but we have found that a dose of perspective helps cut through the overly colorful language used to describe the move. The surge is coming from an environment where 10-year Treasury bonds were yielding 0.50%, a low point set in the depths of a global pandemic about a year ago. Frankly, we should all be hoping that the economy has started to improve from where we were then, so as a result of that improvement yields should be rising. Perhaps we should be asking: “what is normal, and where are we in relation to that?” The nearby chart displays where we are compared to historical levels, with a bright red line depicting the average interest rate, a point that could be considered normal relative to the last 60 years. If interest rates continue to normalize, there are implications from a portfolio management perspective. However, with NGA client portfolios currently positioned with very short bond durations, and equity holdings of companies with growing revenues and responsible levels of debt, higher yields should not be a calamitous event. Candidly, it sure would make investing in bonds more interesting than it has been for the last several months.
Finally, focusing in on our own fundamentals and long-term time horizon, we have some internal investments we are delighted to share. First, many have had the pleasure of speaking with Kelly Walker, our intern-turned Client Services Specialist. We have recently promoted Kelly further, now into an analyst role. This new position puts her on a path to contribute to our portfolio management efforts. We are eager to witness Kelly continue to exceed expectations. Second, in our continued quest for a high level of service as we grow, we are also excited to introduce our newest addition to the Client Service team – Ashley Dale. Ashley recently graduated from FGCU with a degree in Communications, and we are looking forward to Ashley showing us her marketing, communications, and PR savvy. Ashley brings a new skillset to the team, helping to diversify our efforts. We look forward to introducing you to Ashley during your next visit. We are confident that both investments are no-brainers!