AMA Again

You have questions. And I haven’t answered them since March. So, time to do this again.

But first, I need to tell you about an opportunity to discuss finance and investing with some really smart people. I’ll be there too. Details below. There is limited seating, so reserve your spot ASAP by clicking here. And come say “hi.”

Ok, now on to the questions…

The worst thing about typing words is they can later be used against you. But yes, I came into this year believing that the pain felt in 2022 was far from over. I could cry “early!” But fact is, I was wrong.

My theory going into this year was that with supply chains still scrambled, input costs high, and rates rising, profits would not keep pace with expectations. We’ve seen some choppiness in certain areas (retail) that I think is because of just those factors, but overall companies have held up better than I ever imagined.

There’s a virtuous cycle that has helped.

Earnings have remained strong because of excess savings and a strong job market. The strong job market has sustained because, in part, earnings have remained strong. Yes, we’ve had some high-profile layoffs, especially in tech land, but employment is robust. All in, employers believe they can make their numbers without cuts. By in large, employers are more focused on long-term growth than near-term hiccups and don’t want to have to rebuild again so soon after the pandemic.

It has all worked pretty well so far. And it might continue into 2024. But I don’t think that is a guarantee. The excess savings from the pandemic is depleted, both on the consumer and corporate balance sheet. That’s an important leg of the post-pandemic rally that is disappearing. We also have the return of student loan payments in October. That’s something like $1.1 trillion owed by 27 million borrowers. That’s going to be a drag on the consumer side.

But the bigger issue is, as we have discussed before, I believe a lot of the euphoria of 2023 has been fueled by the idea that all of this is temporary. That soon we will be back to the Goldilocks economy of years past. It is in part why employers are holding on to so many workers.

I don’t think we’re going back to anything near 0% interest rates any time in the foreseeable future. I don’t think this will be the first time in history that the biggest winners from the last wave were also the biggest winners of the next wave.

I think a decent chunk of the 2023 rally comes down to investors being in denial that things have changed. That won’t last forever. But admittedly, it can last a lot longer than I would ever think it will.

I was wondering if anyone even read the disclosure. Thanks for being you. But yes, great movie. And don’t call me Shirley.

Not sure this exactly answers your question, but I would say my biggest mistake in my investing career was Tesla.

I don’t mean modern Tesla. With Elon Musk constantly demonstrating who he is. I take great pride in not buying into that and can retroactively take pride in never buying in the first place. But, dear reader, that would be spin. I got Tesla very wrong.

I had to do an analysis of Tesla in 2010, at the time of its initial public offering. In my defense, automotive IPOs didn’t come along very often. Partially because it is really hard to build an automaker. There are massive startup costs, significant labor needs and constraints, and complex global supply chains that need to be worked out. Then factor in that Tesla was selling an unproven product in a category that the U.S. consumer had previously yawned at. And we were just coming out of the 2008-2009 Great Recession that almost destroyed the auto industry, and which led to questions about whether we had too many automakers as it was.

I concluded the Tesla IPO was a hard pass.

You know the rest of the story. $1,000 invested that day would be worth $238,035 (or so) today.

The good news is I can today stand on the moral high ground. And indeed, while I am not a Puritan, I do like to back companies with management teams I don’t need to apologize for. I’m pretty glad I never owned Tesla and wouldn’t dream of touching it today.

But I didn’t know all of that back in 2010. At least not to the extent we know it now. And I was dead wrong on the basis on which I made my decision. Who knows, I could still be wrong about the company today…

And now a brief (paid) endorsement:

To the extent that this content is intelligent, it is so because I use tools like Koyfin to make sure I have the best charts, data, analysis, and transcripts available. Koyfin provides a lot of the same tools you get with a Bloomberg terminal or Capital IQ at a fraction of the price.

Interested? Click the button below to get 10% off your first year using Koyfin.

I did know that! Because I am a fan of his and I have listened to the new album. I would assume he isn’t a subscriber, but hey, I have no idea! So, let’s assume that yes, he does. Hi Ben!

Fun fact: For about 5 minutes or so, Ben Folds Five was “booked” to play at my wedding. It was the late 1990s. Philadelphia. On a really cold night. My bride-to-be and my friend’s wife were stuck outside in the cold, while said friend and I took advantage of backstage passes that fell into our laps. (Almost literally. That is a separate bizarre story.) There was friendly interaction. I believe significant alcohol (consumed by the band). My friend suggested they play my wedding. The band laughed but were taken by the idea. There were discussions about when, where, etc.

Eventually the person who I assume was their manager, or tour manager at least, a friendly but stern man with a Santa Clause-like beard, and who was sober, put an end to it all. But for a brief few seconds…

And we were given pity tickets to a show in Washington, D.C., a few days later, so that was a win.

The kicker of the story: The bride-to-be didn’t accompany me to the DC show, due to the cold she had gotten waiting outside during the initial encounter. And yes, I went anyway. Giving another friend her ticket. It is a wonder why she ever married me!

We should preface this with the same three words I try to start off every conversation about space, or aerospace in general, with:

Space is hard.

It can’t be said enough. There is a reason why for most of our history human beings have been stuck on Earth. The physics is very difficult, and uncompromising. It is a world of trial and error, where every error creates a massive explosion and is carried on the news. Good luck, startup warriors.

There is a real chance Rocket Lab, and all of the space startups that have gone public in the last few years, will collectively amount to nothing. Real nothing. As in zeros. Every single one of them. Even the good ones.

All of that said, Rocket Lab is the one pure-play space stock I have in my portfolio. I’ll say again it is a speculative piece of the portfolio, and not a foundational stock. It could easily end up a zero. But to my eye this company has a better chance than most to make it. For a lot of reasons:

1. The company is focused on small- to mid-sized launches. I believe this is the most lucrative and highest-growth segment of space. SpaceX gets all of the attention for its Mars ambition, and the tourism stocks get a lot of press, but the money is to be made launching small- to mid-sized satellites for corporate and government customers. This is Rocket Lab’s sweet spot. Because…

2. The company’s engineering talent is substantial. I’d refer you to this podcast to learn more about founder Peter Beck, his unique backstory, and the way he has built this company. In rocketry bigger is relatively straight forward, but smaller and more efficient is devilishly hard. That’s Rocket Lab’s specialty, and their engineering efficiency allows them to be a low-cost provider even compared to SpaceX.

3. They were a SPAC (cringe, I know), but they used the offering to amass a substantial war chest. They have nearly $400 million worth of cash at their disposal for expansion, and untimely setbacks. The sort of things that are inevitable when dealing with space. Yet…

4. They have an amazing track record. Yes, setbacks are inevitable. But unlike most of these PowerPoint warriors that are now space companies Rocket Labs is actually routinely launching payloads from all over the world for paying customers. This isn’t a theoretical business.

5. They are turning into a one-stop shop.

Point 5 really needs to be understood if you want to invest in space. You wouldn’t know this from hearing Elon Musk talk, but since the dawn of the space era demand for lift (launches) has been pretty consistent. Not a lot of growth. The last few years have brought a lot of new capacity online, but the question is where the demand will come from to support this capacity.

For all the talk of Mars missions and space-based telecommunications (separate post, but physics dictates that Starlink will never be a good option for most of us who have good terrestrial coverage), the best business case for the new space era is it becomes affordable enough for not just the government and a few select corporations to launch satellites, but for everyone to launch satellites.

Disney wants to monitor their parks? Satellite! Truckers want to watch their fleet? Goldman wants a heads up on the corn crop? Satellite! Satellite! WalMart wants to know what parking lots are filled? Satellite! You get the picture.

Thing is, there is a near-zero chance that Disney and WalMart and Goldman (well, maybe Goldman) are going to hire rocket scientists to build this stuff. The only way this happens is if it is all fabless: You tell us what you want, we design it, build it, launch it, and maintain/communicate with it.

Rocket Lab’s real value proposition is they will do all of that, from design to maintenance and everything in between. That has the potential to be the game-changer that creates all of this new demand. It is hyperbole to say they are the only ones who can get there. But they do appear to be well out in front.

So, will they make it? Who knows. But if there really is a second space era, and if all of the projections for growth and total addressable market materialize, I do believe there is a decent shot that Rocket Lab will be among the beneficiaries. Just understand it could go to zero, and you don’t want this to be anything close to your biggest holding.

(By the way, if you like space but not risk could I interest you in about a half dozen diversified Pentagon contractors who are better at this than anyone? Definitely a separate post.)

Ok, that’s enough for now. Thanks to all who reached out.

Have another question? Didn’t get yours answered? Meet me in Virginia at the end of the month and we can hash it out there.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.