Barron's Streetwise - Options ETFs, GameStop, Pre-Market Trading

Episode Date: November 15, 2024

Jack shatters his own record for answering listener questions. Learn more about your ad choices. Visit megaphone.fm/adchoices

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We're going to try six. We're skipping right past five. That's called smashing a record, not just breaking it. We're not going to record at super fast chipmunk speed. And we're going to follow the gilligan's island rule which is i always shoot for an episode length of 22 minutes that's in an old-timey sitcom that was like the the amount of programming you had i figure if they did focus groups back then to figure out what kind of attention span people had it's uh they've already done the work for us

sounds like a plan listening in is our audio producer jackson hi jackson hey jack uh gilligan's island uh 10 seconds just tell me as many characters as you can name we do not have time for this kind of shenanigans so we're not gonna gilligan. Yes. Oh man. Oh, I think there's a professor. Uh, of course there is the skipper, right?

Uh, the millionaire and his wife. Sexist. Okay. And, and the rest. That's good enough. Now, who do we have first with a listener question?

We have Shrena from New York. Hey, Jack. This is Shrena from New York. I recently sold a significant portion of my portfolio because it was at an all-time high. It was a leverage position. I just didn't think it was a long-time play. But now I'm sitting on this huge pile of cash in this market where everything seems too expensive to buy. But I truly believe in DCA, the average costing methodology, when it comes to my portfolio.

What would be your recommendation to buy in this market when everything seems too pricey? Thank you. Thank you for the question, Shrena. Everything, as you say, seemed expensive. The S&P 500 trades at 25 times this year's projected earnings. That's up there. Here's a fun fact. Remember, I think it was a couple of weeks ago,

we mentioned Applovin. Jackson, remember that? Applovin? Oh, yeah. I did a little extra digging on that company. You know that company was recently valued at $100 billion? That used to be a big deal. General Electric was the first U.S. company to hit $100 billion in value. That was back in 1995. And today, there are 100 members of the S&P 500 that are valued at over $100 billion. Oh my gosh.

And the median price earnings ratio on those is about 25. Everything out there just seems big and pricey. Jackson, here's a tangent, just the kind that we don't have time for if we're going to get to six questions. But did you know that Applovin as a company has only been around since 2012? It's younger than Siri on the iPhone. Applovin is like a digital marketing platform. They help app makers, especially video game makers, like casual phone game makers. They can help them target new people who are likely to download their games and become paying customers down the road. They can also help game owners to sell advertising, make more money from their games. And here's a not so fun fact for one person out there. The company went public only in 2021, and the stock started falling almost immediately

because there was kind of a pandemic glut of video game companies going public. And the thinking was that we're all going to get back out there after the pandemic. We're not going to be playing all these casual games. Some of the advertising dried up. And so the stock fell to close to single digits by the end of 2022. And near the beginning of last year, one analyst, the only bearer on the stock then and since, initiated coverage when the stock was $11. Shrena, I know this has nothing to do with your question.

I haven't forgotten you. I swear, I'm going right back to it. So the stock's at 11. He initiates coverage with a sell and says it's going to seven. And he writes, we are cautious on Applovin's near-term business fundamentals and long-term competitive positioning. And the stock is recently over $280. That's an oopsie doopsie. Not that any of us aren't capable of them. And the whole reason the stock keeps rocketing higher as near as I can tell is that AI, the newest version of its algorithm,

of its recommendation engine, has gotten it better results. Its customers are getting better results, so more customers are signing on. That's more business for the company. It does generate a ton of free cash. It's growing rapidly, and in the latest earnings call,

management said, we've been tinkering with a new vertical. Beyond video games, we've been tinkering with e-commerce. And it said, and I'm paraphrasing here, it's going very well. It's going like the best of anything we've ever done. And that's going to start to show in our financials by next year. So that has people pretty darn excited about that app love and stock. by next year. So that has people pretty darn excited about that Applovin stock. So you're telling Shrena to YOLO her pile of cash into Applovin?

Definitely not. I am curious to see what happens with the company and the stock. Last I checked, it was trading at a little over 40 times next year's projected free cash flow, which is pricey. And so back to Shrena's question, she views the market as expensive. She's sold. She's sitting on a huge pile of cash. She says, congratulations on that huge pile. Now she wants to dollar cost average back into something. And she'd like that something I would imagine to be less expensive than the market. And so there's a bunch of things you can do there, Serena. Assuming that what you had before is an S&P 500 fund, you could put a portion of the money into shares of smaller companies. The S&P small cap 600 index was recently about 20% cheaper than the 500 index relative to earnings. You could also divert some to develop markets overseas. Again, the case

for doing that is that shares of those companies are cheaper relative to traditional measures of economic heft. The case against doing that, which I hear plenty, is that the stocks here in the U.S. are going up so much because they're great companies making great money. So I wouldn't turn your back on U.S. large caps altogether. And of course, you could also buy a value fund or some type of value-tilted index fund, like, for example, Vanguard Value ETF, VTV. Top holdings there are companies like Berkshire Hathaway,

JP Morgan, UnitedHealth, ExxonMobil, Procter & Gamble. I would just caution you, Sharina, that the thing that you're attempting to do, timing the market, is exceptionally difficult. Sometimes markets that look expensive move much higher. This one has. Sometimes it looks like a rotation into cheaper value stocks or overseas stocks is imminent. It's looked like that for a long time. And yet the same U.S. large caps have just kept charging higher. Generally speaking, the sooner you're going to need to spend the money you've accumulated, the more worried you should be about a sharp downturn in the near term. If

you're not going to spend the money for decades, find an allocation you like, average into it sooner rather than later, and stay put. If you need help finding an allocation that's best for you, of course, you can speak with a financial advisor. Thank you, Sharina. Jackson, who's next? We have Ian from Ireland. Good. I know I got sidetracked in that last one, but I'm feeling speedy now.

Let's hear it. Hi, Jack and Jackson. Love your show back in Ireland. My name is Ian, and the question I have is, is the future of the US dollar as a quasi world reserve currency in risk by foreign disposals of US bonds and debt because of the implications of tariffs? tariffs. I personally am sticking with US stocks, but wonder what would happen if the world starts selling US debt. Thanks for your show, guys. Thank you, Ian. What would happen if the world started selling US debt? Well, the value of US debt, I expect, would fall. Bond yields would rise. The dollar, as you say, could begin to lose its status

as a global reserve currency, but that's already kind of happening. Here's a report from last year from our friend Kathy Jones at Schwab. It says that the dollar represents 60% of global reserves, and that's down from 67% 20 years ago. During that time, you had the introduction of the euro. You had rising allocations to the British pound, the Canadian dollar, the Chinese renminbi. The title of that report was, Will the U.S. Dollar Be Dethroned? And the conclusion was, there's been a long-term trend toward currency diversification and global financial transactions and trade, but we don't see the U.S. dollar losing its dominance anytime soon. The U.S. enjoys a stronger economy than many of its developed market peers.

That has helped push the value of the dollar higher. It recently hit a one-year high versus the value of other major currencies. Ian, you asked specifically about tariffs and about them triggering foreign sales of U.S. assets. There are plans in the U.S. for larger tariffs against China. There are ongoing sanctions against Russia. And there has been talk about a so-called BRICS currency involving Brazil, Russia, India, China, and South Africa. They would create a common currency for trade among themselves,

and that would help to reduce dollar dominance, but that is easier said than done. A common currency sounds like a monetary union, and setting up one of those without a fiscal union gets complicated. For now, the U.S. dollar is still on one side of nearly 90% of global foreign exchange transactions. I guess what I'm saying, Ian, is the dollar could lose its dominance, but I don't see it as very likely in the short or intermediate, probably even the long term. Jackson, how about one more

question before we take a break? Yeah, we have Misha in Colorado. one of the highest tickers in the stock market. And I was just wondering why, since I never see anybody ever in the stores. I'm really a big fan of the show. I learned a lot and your jokes always make me laugh. So thank you. Thank you, Misha. You've seen GameStop stock on the rise again. How much is it up, Jackson?

Yeah, this feels like old times. It's doubled over the past year. And that compares with the S&P 500 has returned a heck of a lot. How much is it up, Jackson? Yeah, this feels like old times. It's doubled over the past year. And that compares with the S&P 500 has returned a heck of a lot, 34%. But you could have done three times as well in GameStop. Amazing. So, Misha, your question makes perfect sense to me. You observed that people are no longer buying as many discs for their video games. And if they were, would they be buying them through brick and mortar stores found largely

in malls? I don't think so. I think that makes GameStop an unlikely stock to be rising like this, but that's part of what turned it into a meme stock originally. We talked about this in the past on this podcast. We talked about this in the past on this podcast. The thing that meme stocks seemed to have in common was irony. Kind of an inside joke.

There was the movie theater stock at a time when movie theaters were doing quite poorly. There was the wrong company named Zoom. That one, I think, jumped more than once. There was, at one point, there was like a shell company that had assets from the old Blockbuster video and not because VHS tape rentals are making a comeback. So I think that the fact that it doesn't make a whole lot of sense on the surface is part of the appeal for these chat room traders who go into stocks like this. Or maybe your question, Misha, is has anything changed for GameStop since it first became a meme stock? It had all that opportunity with a high share price to raise new

money from investors, could have reinvented itself and come up with a whole new business plan. I'm going to read to you from a note from the investment bank Wedbush. This is from back in September, but I think it still applies applies wedbush has an underperformed rating on the stock its price target at the time of this writing was ten dollars the stock's about 26 last i saw it it says while we admire gamestop's ability to manage operating losses we think it would be just as reasonable for management to close all of its stores and operate as a bank gamestStop has roughly $10 per share in cash now, but without a hint of any strategy that would reasonably deploy capital,

we do not see why shares trade at two times cash. That's Wedbush. FactSet, the data service, shows only two investment banks still covering the stocks. They both have sell recommendations. Things are looking kind of meme-y out there lately, right? I mean, I don't want to offend any Bitcoin true believers. I know that thing is on a tear, over $90,000 at one point. Somebody said to me earlier today, well, you were skeptical about Bitcoin. Well, I wasn't really skeptical that it can go up. I mean, that's the thing it's good at doing. I'm skeptical about everything else. I'm skeptical that it will become a currency. I don't see a lot of people making everyday transactions with it. You wouldn't really want something that moves

around that much for a currency. And the same thing applies when people say it'll be a digital store of value. I don't want a digital store of value that doubles or triples in short order, because that makes me think that it could end badly for the value of the thing. So it's good for something. And that's something, in my opinion, is being a speculative vehicle. What I use it for is a sort of rough gauge of speculative excess. When Bitcoin gets hot, I start to worry that people are overdoing some things. Sometimes when I hear these intellectual arguments about Bitcoin and the blockchain and the appeal of a currency that isn't under central bank control and the finite supply and all this and that, it makes me want to just hold up a chart of Dogecoin.

What's that one do it, Jackson? Dogecoin. What's that one doing, Jackson? Dogecoin? It's at 390% over the past year. That one doesn't have any of that stuff. There's no limit on the supply. It is a parody cryptocurrency. So if Bitcoin for me is the early warning system for speculative excess. Dogecoin is like the embarrassing Bitcoin relative that shows up just when Bitcoin is starting to feel cool and respectable.

Anyhow, back to you, Misha. The answer is it doesn't make any kind of sense. And I'm pretty sure that's the whole point. That's three in the can, Jackson. Let's take a quick break. We'll come back with three more. Sounds good. Welcome back, Jackson. Question number four. Who do we have?

Yeah, we have Bruce from Massachusetts. Bruce from Massachusetts. Hello, Jack and Jackson. I love your show. It's my favorite podcast. My elderly mother has a nest egg, which we are trying to extend for as long as possible. She is in assisted care and her social security, her deceased husband's pension do not quite cover the cost. I have recently heard about covered call ETFs, namely JEPI, FEPI, and QQQI, and there are others which pay dividends of between 7% up to 24% per year. Do you think that investing a portion of her nest egg in these ETFs is reasonable? Thanks again, and shout out to Meta. Bye-bye. Thank you, Bruce. I don't love this idea, I must say. In general, when the question is, so-and-so doesn't have quite enough money, should they do this riskier thing to make more money?

My answer is usually no. When someone needs everything they have and then some, they're usually not a good candidate for taking on more risk. And I wouldn't characterize these funds you're talking about as a big gamble. Basically what we're talking about here, covered call writing, amounts to selling someone else a bet that a stock you own is going to move higher. Either way, you collect the price of the bet. If the stock moves up a lot, you miss out on the upside. If the stock stays where it is or moves lower, you don't miss out on the upside. That's an oversimplification, but that's basically how it works. When you see yields that are as large as the ones you're talking about, many times what the stock market pays,

you should think to yourself, either this thing we're talking about is hugely risky, or there's some kind of trick going on that's producing the extra income. In this case, the trick is selling all of those bets, selling those covered calls. It generates a lot of income for the portfolio and also extra taxes for the investor. Those big dividend payments aren't actually getting investors ahead generally. That's especially true in a strong stock market. Over the past year, one of the funds you mentioned, JEPI, JP Morgan, Equity Premium Income ETF, that's returned just under 19%. You would have made a total return of 34% in the S&P 500. If it's a flat market or a down market, you might do better. The only problem there is stocks usually go up. I hope that helps. Bruce, good luck to you and your mom. Jackson, who's our number five? Our number five is Nick from Seattle. Hi, Jack and Jackson. This is Nick calling from

Seattle. I'm a huge fan of your show, which is my favorite podcast. I have a quick question for you today about index investing. I'm a big proponent of index investing and use it for all of our stock in bond fund selection for retirement. However, I recently read some articles about how active bond funds have outperformed index ones over the last 10 years with notes on the greater complexity of the bond market. I'm curious about this performance comparison over a much longer time horizon. And if there's evidence out there beyond a 10-year horizon that suggests I should tilt some of my portfolio mix more towards active for bonds. Thanks for your help. Nick, thanks for the question.

You make an excellent point. I think the case for indexing is very strong when we're talking about large cap U.S. stocks. I think it's maybe not quite as strong if we're talking about small cap stocks or emerging market stocks or bonds. Bonds are a tricky thing to index. What do you use for the weightings? You can weight bonds by the total issuance, but that just means you're going to invest most of the money into issuers that have borrowed the most. I don't know if that's really the best strategy. I saw one recent report that said that roughly two out of three active bond funds have beaten their

average passive peer over the past year and that that was a higher percentage than for other asset classes. I think in general that the idea of paying a higher management fee for an active bond fund stunk when bond yields were near zero, but now the yields have plumped up a bit, paying a somewhat higher fee feels more bearable. Jackson Barron's had a story recently on active bond funds that have consistently outperformed. Tell me some of the names. Yeah, there's the Eaton Vance Total Return Bond Fund. There's Columbia Total Return Bond, Invesco Core Plus Bond, and these seem to be total bond funds with expense ratios of three-tenths of a percent to half a percent. There you have it. Nick from, was it Seattle?

Yeah, he's from Seattle, and he writes in the email with his voice memo that he frequently listens with eight and 11-year-old sons. My guess is probably against their will. We're huge in that demographic. How you doing boys? Thanks again, Nick Jackson. We've made it to number six. Is my math right?

Check my math. Your math is 101% correct. Who do we have? Yeah, we have Dale. He doesn't give a state or a town, but his voice memo is titled Cow Creek Drive. That could either be the road he lives on or it could be the storage device that he's using.

Maybe he saves all his voice memos on his Cow Creek Drive. It's probably the first one. It's probably his road. All right, let's hear the question. Hello, Jack and Jackson. My name is Dale, a longtime listener, first-time caller. My question is, who is able to trade in the pre-market and after-market closed markets? It seems to be a huge advantage as companies report

earnings before the bell and after the bell. Jack probably gets to play in that sandbox, but I know Jackson and I don't. So I'm just curious who is able to play in that sandbox. Thank you. Thank you. Dale, I could play in that sandbox if I wanted to, but so can Jackson and so can you. You just have to have a brokerage account somewhere where they offer pre-market trading. Schwab, E-Trade, Interactive Brokers, Robinhood. There are loads of them. And you can trade most stocks, but the key is someone else out there has to be thinking about roughly the same thing at the same time because you need two sides for the trade to

go off. And the volume on some of these stocks is pretty sparse outside of regular market hours. Usually when you're putting in the trade at your broker, you'll have to specify that it is a pre-market trade as opposed to a regular market trade that you're just putting in early. They'll have instructions on how to do that and I'll tell you about any special rules they have. I'm a buy and hold guy myself, not so much a wheeler dealer early morning flipper, but good luck in the sandbox. Stick with open toe footwear and limit orders. Jackson, we've done it. My water bottle and towel, please.

I'm exhausted over here. Don't try to sneak up behind me with that Gatorade bucket either. Sorry, I got excited about the new record. I want to say thanks again to Shrena from New York, Ian from Ireland, Misha at college in Denver,

Bruce from Berkeley, Mass., Nick from the Emerald City of Seattle, and Dale from, what was it again? Jackson cowboy Boulevard. I think you mean cow Creek road. Of course I do. If you've got a question you'd like answered on the podcast,

just go ahead and tape it on your phone. Use the voice memo app. You can email it to jack. How that's H O U G H at barons.com. How are we doing on time? Jackson way over, right? It's like a Gilligan and a half.ron's dot com. How we doing time, Jackson? Way over, right? It's like a Gilligan and a half. That's on me.

We'll get him next time. See you next week.