If this is your first time reading these posts, thank you for reading. I have a passion for the markets and people. In writing this weekly post I am able to keep myself accountable by diving deeper into topics than just headlines and hopefully provide you some value in your own research or interests. None of the following should be considered financial advice.
I believe money is a tool, given from God, to accomplish his purposes. The Bible has 2,350 verses about money. How should we handle our money knowing it is a topic of upmost importance to God? Did you know that investing is Biblical? The Bible calls us to be both stewards and multipliers of money (Matthew 25), as well as generously open handed with our money (Proverbs 11), but ultimately the Bible calls us to be on guard against this tool attempting to fill a hole in our heart that only Jesus can fill (James 3 - Exodus 20 - Matthew 6).
Regarding my passion for people, I believe we live in a time period that will be looked back on as an information and entertainment glut. While entertainment in itself is not bad, entertainment in subjects like economics, politics, and public information (news/MSM) it’s slowly eroding a generations ability to think critically for themselves, me included. Gen Z is now nicknamed “the anxious” generation, due to 6/10 people in this age range reporting significant stress and social anxiety. How can we combat this? My opinion is continuing to tackle topics that are challenging and come up with opinions on our own, then comparing and sharpening with each other. This newsletter is an attempt for me to think and act.
Stocks Sell Off
Yikes… rough week for the markets, again.
Why: The Federal Reserve dropped interest rates another 0.25% bring the target rate to 4.25%-4.50%. On the surface, this is a good thing. Lower rates mean cheaper lending (lower rate) which means more opportunities for businesses to grow and valuations to rise. What was concerning what Fed Chair Powell’s outlook. Where analysts and investors were expecting further rate cuts in 2025, Powell said not so fast, we are going to make decisions on the data.
Result: The S&P 500 sunk almost 2,000 points or about 3.5% and the DOW continued its 10th day of losses which is the longest since 1974.
The good news is, this is more of a correction in expectations than a leak in the water system. The market is still up 24% year to date, which is an amazing year. We have been talking for the last few weeks that the markets have been overvalued, and although it shouldn’t affect whether or not to invest, it is something to keep in mind.
Today was a great example, in a market that is expecting large growth rates and is paying up for earnings, a little revision in expectations will create a shock.
Amazon Stock
This week a few of the mag 7 stocks got hit pretty good. Amazon tumbled from 233 down to 219, reflecting a 6.4% loss. I went ahead and tried to see what AMZN 0.00%↑ could be worth and see if this would be a good place to add onto my investment or if it was still too pricey.
Warren Buffett is one of many who have stated simply how to find what the value per share of a company SHOULD be, relative to what it is selling for in the market. He states the value of any business, or asset for that matter, is the present value of all the cash flow you would receive between now and judgement day (eternity).
So, that’s what I did, below you will see the projected future cash flow, discounted at a rate to reflect risk and opportunity cost, then a decision on whether it is overvalued or undervalued.
Some thoughts:
Amazon is still overvalued based on a growth rate of 22% a year. This is a massive growth rate, but it is conservative given the 32% growth rate year over year from 2014-2023. Free cash flow is calculated as cash flow from operations - capital expenditures (investments back into the business).
What I noticed was amazon has literally invested every single dollar from operations over the last three years, back into capital investments. These investments have been data centers and fulfillment centers and networks for both the cloud computing and AI race but also the normal logistics and package delivery business.
Therefore, the length of time and the surety of when these investments will pay off will affect the value of AMZN 0.00%↑ by a large margin. Earlier this year you could have paid $160 for Amazon which was baking in about 18% growth instead of the 25% today.
I am not a buyer right now, but I do love holding this business. This method of calculating value is very back of the napkin, and just a gauge to get a quick idea. If all the data centers don’t turn out exactly as planned and AI becomes the next fiber optics (2001 bubble) it would cause a rocky path forward and lots of free cash flow lost. Luckily, they are a very diversified business that would make the cash flow up from one of the other businesses.
I am continuing to look at DHI 0.00%↑ though :)
Thank you for tuning in this week. I hope you have a restful weekend, and go buckeyes!