The False Comfort of Safety: When Icons Fall

Nike and Starbucks have fallen from favor and may never recover.

Author

Travis Hoium
October 27, 2024

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One of the reasons Asymmetric Investing favors smaller, more disruptive companies is that it’s hard to gauge how long an established company will remain in power. If you buy a stock for a 30 P/E ratio and the company only grows earnings at 3% it’ll take 23 years to “earn” your money back.

Last week, I talked about the four reasons stocks go up — revenue growth, margin expansion, multiple expansion, and buybacks — and older, highly valued companies can drop dramatically if revenue growth stalls (or goes negative) and multiples drop. Ironically, buying “safe” stocks is a higher risk for investors. I’ll explain more below.

As for this week, markets were down overall, especially the big industrial stocks.

It was the calm before the storm for the Asymmetric Portfolio this week. GM reported earnings, but most companies in the portfolio report in the next two weeks. These two weeks will likely determine whether the portfolio continues to outperform this year or falls back to the market.

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In Case You Missed It

Here’s some of the content I put out this week.

The Fall of Icons

Over the past five years, the S&P 500 has generated a total return of 108.2%. Short-term government bonds would have generated positive returns no matter the duration.

Nike would have lost you money!

Starbucks would have lost a similar amount if it wasn’t for the recent bounce when former Chipotle CEO Brian Niccol was announced as CEO.

What went wrong at these companies? There were operational problems, but let’s start with what investors were paying. You can see below that shares of both Nike and Starbucks were trading for over 30x earnings for much of the past five years. Even today, they’re trading for over 22x earnings.

What are you getting for that price? Companies growing in the mid-single digits…until recently.

Earlier this month, Nike announced that revenue dropped 10% in the fiscal first quarter of 2025. This week, Starbucks said same-store sales fell 7% in the most recent quarter and revenue would be down 3% overall.

Investing is all about risk (downside) and opportunity (upside). If you’re paying 30x earnings and a company is only growing in the mid-single digits, any hiccup could send shares lower (slow/negative revenue growth and collapsing multiples).

What appears to be safety from a big brand becomes a risk of brands being disrupted.

To give an idea of where I think a lot of risk lies today, here are companies trading for over 30x earnings and growing revenue a 5% or less over the past year:

  • Apple (0.4% growth, 36 P/E)

  • Tesla (1.4% growth, 61 P/E)

  • Abbott Labs (3.1% growth, 35 P/E)

  • Texas Instruments (-14.5% growth, 34 P/E)

  • American Tower (3.9% growth, 42 P/E)

These are just a few of the companies worth over $100 billion trading at high multiples and growing slowly. Are they the next Nike or Starbucks?

Maybe.

It may sound crazy, but even more highly valued companies can be “cheaper” if they’re growing faster. Or, investors can get similar growth for a much lower price. Here are some of the growth rates and multiples in the Asymmetric Portfolio:

  • Coinbase (74.2% growth, 39 P/E)

  • MGM Resorts (15.1% growth, 15 P/E)

  • Airbnb (15.6% growth, 18 P/E)

  • General Motors (6.3% growth, 6 P/E)

  • Portillo’s (13.4% growth, 32 P/E)

These companies may not be household names and none are worth over $100 billion. However, the opportunity for future growth, margin expansion, multiple expansion, and buybacks outweigh the risk.

With this view on valuation, as a portfolio, I don’t need every stock to wildly outperform the market. I can be completely wrong on two or three of these stocks as long as I’m VERY right on one of them.

The same can’t be said about buying slow-growth stocks for high multiples. You better be right on all of them or you’ll underperform the market.

Sometimes, the riskiest investments may seem the safest. That’s a lesson it took decades for me to understand.

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Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please do your own research before acquiring stocks.

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