This is 40 in a Snapchat World

By Shannon Sands, Publisher, Dent Research

What a week. On Wednesday, the Dow crossed the 21,000 mark. And as I write this, Snapchat (NYSE: SNAP) shares opened up 41% at $24 in its market debut on Thursday, 40% above its IPO price.

The big question on Wall Street is: will it go the way of Facebook (FB), Twitter (TWTR) or Go Pro (GPRO)? SNAP considers itself a “camera company,” after all, even though it’s really an app for smartphones.

I’m not going to lie. In the run up to Thursday, I was trying to figure out what the hell the app even does.

At 40, I’m by no means a dinosaur. I consider myself an early adopter of technology, and pretty good with it to boot. But it never even occurred to me to use this particular app.

Evidently, Snapchat is a household name for those younger than me.

According to SNAP’s S-1 (IPO documents), 85% of Snapchat’s 158 million daily users are between the ages of 18 and 34. Just 15% of users are 35-and-up.

So, I decided to do a little hands-on research.

I downloaded the app to my iPhone. On setting up my new account, it accessed the contacts on my phone to pair me with other friends on Snapchat. With maybe one exception, most of the people with accounts were in fact under 35.

I’m embarrassed to admit, but I spent the next 45 minutes (45!) trying to figure out how it works (45 minutes I’ll never get back, mind you)! And I still don’t really have a clue.

This could explain their claim that users spend 25-30 minutes a day on the app. Or maybe you just have to be 13-24 (their REAL core demographic) for it to be “intuitive.”

An hour in, I finally figured out how to “snap” a picture of my son.

It’s cute – if not a little creepy. The facial manipulation technology is interesting. At five, the little guy thinks it’s pretty awesome… and is hooked (of course!).

I, on the other hand, feel fairly certain that my life won’t change for the worse if I never use this app again.

And after all of that research, I still have no idea what makes SNAP a $33 billion company.

According to Forbes:

In the past six years, Snap’s popular messaging app Snapchat evolved from an app for sending disappearing photos to a full-fledged messaging app with range of content, from articles by traditional publishers to short-form TV-like episodes. Users can take playful selfies in the app and add photo and video to chains to 24-hour personal “Stories,” a feature Facebook-owned Instagram recently copied.

Snapchat, which makes money primarily by advertising, has emphasized that it’s different from social networks like Facebook and Twitter. Snapchat has said it is geared toward more personal communication with close friends, and Snap calls itself a “camera company.”

At a $33 billion valuation, Snap is worth about 35 times its projected 2017 revenue. (Research firm eMarketer expects Snap to generate $936 million in revenue this year.) This makes Snap much more expensive than Facebook, which is worth about 10.5 times its estimated 2017 revenue.

In its IPO registration filings last month, Snap said it had a net loss in 2016 of $515 million, which widened from a net loss of $373 million a year earlier. Revenue increased six-fold from $58.7 million in 2014 to $404.5 million last year.

 

Analysts at the venture equity firm Goodwater Capital said in a report that the company has positioned itself “as the most significant competitor to Facebook in social networking.”

“Snapchat is well-positioned to scale rapidly and take market share in the $652 billion global advertising market,” the report said.

For now, I’ll keep my hard-earned cash invested in companies that make sense to me.

And I’ll stick with phone calls, text messaging, and my beloved Facebook. I know more people there. It’s faster… and easier. Less creepy too… kind of.

With all the craziness out there, here’s what else happened this week.

Harry started us off on Monday, February 27, with a note to 5 Day Forecast readers warning about an imminent 40% crash in small cap stocks. As he explained, we have a potential megaphone within a megaphone pattern on the Russell 2000! If this smaller megaphone pattern since 2013 plays out, the projection for the downside in a matter of months would be 40% to 42%. The ultimate projection would be a loss of more than 74% by early 2020.

Harry’s watching the Russell 2000 (the leading small-cap index) closely because one of the classic signs of a major top comes when large caps continue to make new highs – without small caps. It’s like the generals advancing without the troops.

In the January Leading Edge, he looked at the Commitments of Traders Report, which showed that the small caps were the most overbought by the dumb money and most short by the smart money of any of the major stock indices. That makes it vulnerable to a divergence between small-cap and large-cap stocks.

In other words, small caps could easily peak ahead of the large caps given their more extreme run since early November. Harry will keep you posted as this situation unfolds over the summer.

In the meantime, on Tuesday, February 28, Adam provided Cycle 9 Alert subscribers a bull market “health check,” noting this market has some room to run As a group, the Dent Research team believes the long-term economic future is dim, mostly due to the drag of declining demographics, deflation and ever-increasing geopolitical tensions. But we also believe in helping our readers make and protect their money in ANY environment. That’s why we have people like Adam, Charles, Rodney, Lance, and John, who each run some incredible trading services. From a pragmatic standpoint, we’ve got to make hay while the sun shines.

On Ash Wednesday, the markets popped higher and the Dow closed above 21,000 for the first time ever. So, Adam asked an important question: who’s doing the heavy lifting?

As it turns out, it’s all of them! The Dow, the S&P 500, the small-cap Russell 2000, and even the Nasdaq 100, which made its second monthly close above its March 2000, dot-com-era peak.

The fact that all flavors of the stock index are hitting new highs together is a convincing sign of strength, suggesting the bull market is healthy and has legs to run higher… for at least a little while longer.

That’s why, for now, we continue to take advantage.

Later that day, Charles wrote to you about finding yields in any market. He follows income stocks pretty religiously. Marlboro-maker Altria’s stock prices have gone nearly straight up for several years now, and the yield has shrunk to just 3.4%. The stock trades at 27-times earnings… which is a significant premium to the broader market.

Now, Charles isn’t the biggest fan of bubbly tech stocks like Facebook or Amazon. But he’d much rather pay the current multiple of 38-times earnings for Facebook or even 171-times earnings for Amazon… even though he considers those valuations to be excessive… because he believes there’s at least a chance they could grow into those valuations.

But tobacco stocks? Not so much. Big Tobacco operates in an industry in terminal decline. Volumes for cigarette sales fall with every passing year, and the regulatory noose just keeps getting tighter.

As Charles wrote:

Now, there’s nothing wrong with buying a stock in a declining industry, particularly if you’re playing it as a short-term trade. And even as a long-term holding, it can make sense so long as you’re buying them as deep-value stocks, and realizing a decent current return via an outsized dividend. But there’s no scenario under the sun in which tobacco stocks should trade at a premium to the broader market.

None. Nada. Zip.

This goes to show how desperate investors are for yield these days. They’re willing to accept a sub-4% yield on a no-growth company in a dying industry because they can’t find a better yield elsewhere.

Well, the fact is, they’re not looking hard enough.

Well, Charles has looked hard enough, and found a way for you to essentially get “automatic checks.”You can check out the details here.

Also on Wednesday, March 1, Rodney sent his Triple Play Strategy readers their monthly update. He said:

I’m having a Warren Beatty moment. I’m not delusional, thinking I’m a movie icon from the 1970s. Instead, I’m confused by what I see on the card, much like Mr. Beatty during the Oscars last Sunday.

When he opened the card for Best Picture and it read “Emma Stone, La La Land,” plus the names of producers, he hesitated. Warren knew that something was terribly wrong. Instead of reading of the name, he handed it to Faye Dunaway, who immediately announced the movie on the card.

The La La Land producers took the stage and started their acceptance speeches, only to be interrupted by the producers of the Oscars, who grabbed the microphone and announced the mistake. That, as they say, is when the fight started.

Everyone looked dumbfounded, except for Warren Beatty, who held up the incorrect card, trying to prove he wasn’t responsible. In the end, they blamed the accountant.

I’m looking at the card for the markets, which reflect umpteen consecutive record closes for the Dow and a record close for the S&P 500. But when I consider everything else, it doesn’t make sense.

GDP growth sat at 2% for all of 2016, and productivity growth remains at about half of what it was in the late 20th century. Durable goods orders for core capital goods, which is a decent proxy for business investment, rose 0.5% since January 2016 and were down 0.4% last month. That doesn’t sound like an economy that’s exploding with growth and new opportunities. It sounds, and feels, like an economy that’s muddling through.

But unlike the Oscars, so far there’s no one running out from the wings to declare the whole thing a horrible mistake. There’s no accountant from Price Waterhouse Coopers standing around to take the fall. No matter what I think of the market, or where I think it will go in the months ahead, right now the darn thing keeps marching higher.

Thank goodness for an investment process!

And on Thursday, March 2, John told Forensic Investor subscribers that “patience is the name of the game right now.”

“Stock market sentiment and valuations continue to push the envelope of acceptable risk,” he said. “Actually, we are way beyond what I consider acceptable risk levels to be buying stocks right now. This Trump-fueled market rally has really put a different kind of spin on the markets than what almost anyone was expecting.”

In short, we’ll help you make hay while the sun shines, but watch out for those dark clouds rolling in.

Thursday afternoon, Harry and Charles explained why we’re adding a Mexican Coke dealer to the Boom & Bust portfolio this month.

And finally, on Friday, March 3, John wrote to you about retirement, sharing four simple steps you can take to get there with more money than you’ll need. There’s a fifth step that’s even simpler and more powerful.

That’s it for this week.

Sincerely,

Shannon