Yesterday, PepsiCo (PEP) posted Q1 earnings. Sales growth came in at 6.8%. Earnings-per-share were up 29%. Yet, the price of PEP shares was flat.
As I write this, the price of Dogecoin has risen more than 100% during the past 24 hours alone. To me, this is baffling. It’s astonishing. And frankly, it’s disappointing and worrisome.
This isn’t because I own shares of PepsiCo and I have no position in Dogecoin. Actually, I’d like to take a moment here to congratulate any and all Dogecoin owners on their short-term gains. I never wish anyone ill will in the markets. I hope we can all thrive, reach our financial goals, and live the lives of our dreams. You only live once, right?
But, that doesn’t mean that we have to take unnecessary risks with “YOLO” trades that are based upon nothing more than speculation.
The rampant speculation I’m seeing in certain areas of the market right now is so saddening because it means there are individuals out there who are leaving their financial futures entirely up to chance.
Some of this is due to impatience. Some of it is due to hopelessness when it comes to the traditional paths towards retirement. And some of it is due to a lack of financial literacy and ignorance.
I certainly don’t mean to be demeaning here. It’s my personal belief that the educational system in America has failed generations of students when it comes to the lack of coverage of basic tenets of financial literacy. And, I know that no one enjoys being patronized.
However, the fact of the matter is, blissful ignorance is not a reliable guide along the path towards financial freedom.
As in all things, knowledge is power. And luckily, in the financial world, it doesn’t take a rocket scientist (I’m certainly not one) to understand the power of compound interest and how to use it to your advantage to create significant wealth over time.
More on this in a moment, but first, I want to circle back to the PepsiCo/Dogecoin comparison.
This divergent price action, in my humble opinion, means investors are gambling with their hard earned money (and potentially their financial futures, or worse, their present livelihoods) on a poor quality asset rather than investing in shares of a blue chip company.
When I think about a high quality asset, I think about an entity that generates reliable sales growth, reliable cash flows, maintains market leadership positions, and has built a wide and deep competitive moat around its brand and business.
PepsiCo has done all of these things.
The company has 23 brands that generate at least $1 billion in annual sales.
Source: Pepsi 2021 CAGNY Presentation
In 2020, one of the most volatile years in recent memory in terms of economic and stock market performance, PepsiCo proved the defensive nature of its business, generating more than $70.3 billion in sales, which was up 5%, year-over-year.
The company’s revenue stream is well diversified, with 55% of its sales coming from food and the other 45% coming from its beverage segment. The majority of PepsiCo’s sales are domestic, but the company has broad international exposure to both developed and emerging markets.
Source: PepsiCo 2020 Annual Shareholder Report
And, PepsiCo has the financial wherewithal to continue to invest in fast growing brands as consumer preferences change. And, what’s maybe most important (to me, anyway) is that PepsiCo has proven itself to be extremely generous to its shareholders.
We’re talking about a company that has increased its annual dividend for 48 consecutive years now. Over the last decade, PepsiCo has compounded its dividend at a 7.8% annual rate, meaning that the passive income these shares generate has more than doubled since 2010.
In 2020, PepsiCo returned $7.5 billion to its shareholders in the form of share repurchases and dividend payments. And, management continues to guide for 2021’s shareholder returns to fall in the $5.9 billion range (with the vast majority of these funds coming in the form of a dividend as management pauses buybacks in the short-term).
Moving forward, it seems reasonable to assume that PEP will continue to generate mid to high single digit growth. This implies that someone who re-invests the ~3% yield that PEP shares currently provide will double the passive income that their investment generates every 7-10 years. The exponential curve of this growth trajectory leads to some truly massive results, given enough time.
In terms of sales, cash flows, a defensive moat, and shareholder returns…Dogecoin offers nothing of the sort to speculators who trade/own the asset. However, that hasn’t stopped individuals from filling their digital wallets with Dogecoins.
The way I see it, this comparative move speaks more towards investor psychology than anything else.
The level of volatility that Dogecoin has experienced recently implies that FOMO (the fear of missing out) is at play. This is just another example of greed – a common human emotion that, if left to run wild, has a very bad and persistent habit of leading investors into very common and avoidable pitfalls in the market.
I’ll be the first one to admit that I’m not a crypto-currency expert. Yet, as an accomplished value investor, I’m well versed in the basic economic principles that drive pricing action – the most basic of which is simply supply and demand.
And, while I can understand the supply/demand case that bulls make when it comes to more popular cryptos, such as bitcoin or ethereum, which have supply limits in place with regard to how many coins can theoretically be digitally mined, this argument cannot apply to Dogecoin, which has no current supply limitations in place.
And, as far as the functionality/efficiency argument goes, the same idea holds true. I can be sold on the idea that the future of currency is digital and I can see the rise in practical applications of something like Bitcoin or the Ethereum blockchain. Right now, you can go buy a Tesla with Bitcoin; however, I have a very hard time believing that Dogecoin is going to be accepted as currency by any reputable business anytime soon.
Hey, maybe I’m completely off base. No one has a working crystal ball and you’re free to take my opinion with a grain of salt…but if I had to guess, I’d say Dogecoin is doomed to be nothing other than a meme.
So, why do people appear to like this crypto asset so much?
First of all, because it’s cheap.
Dogecoin trades for about $0.25 each, meaning retail investors an buy thousands for relatively little money. PepsiCo shares, on the other hand, trade for roughly $142 each. In other words, for every 1 share of PEP that you can buy, you could afford 568 Dogecoins. From a psychological standpoint, this can seem attractive.
But, it’s not about how many shares of something you buy. It’s not even about the price per share that you pay. Remember, price is what you pay…value is what you get.
In terms of value, we could argue until the cows come home about whether or not PepsiCo is over, under, or fairly valued at 23.5x forward earnings. However, at least that’s a realistic discussion that we could have.
When it comes to speculative assets like Dogecoin that don’t produce any underlying fundamentals, the price you pay is based solely upon the market’s sentiment. And once again, we return to the idea that someone relying on sentiment to generate wealth is leaving their financial future up to chance.
Another reason that people have flocked into alternative assets like cryptocurrency is because of a mistrust and even a disdain for the stock market.
Wall Street is viewed by many as a foreign land where rich, crooked men wheel and deal. I’ve spoken to countless individuals who believe that the stock market is rigged, making it impossible for the Average Joe to succeed.
Well, as an Average Joe who has done very well in the market, let me be the first to tell you, that’s not the case.
When someone compares the stock market to a casino, it really irks me.
To me, disparaging remarks like this have a very negative impact, not only on the perception of the market by the general populous (because for whatever reason, the notion that the “Wall Street Casino” exists has become fairly mainstream), but more importantly, the financial health of individuals living lower and middle class lives.
Sure, there are trades that can be made akin to gambling. Equities are risk assets, after all. And, no matter how bullish someone like me may be on the long-term prospects of a given stock, that inherent risk cannot be removed.
However, that doesn’t mean everyone has to treat the stock market like a casino.
When making investments, there are ways to reduce risk. Namely, by using the underlying fundamentals of a company to arrive at a fair value estimate and then, using risk management practices to invest with an acceptable margin of safety.
As a value investor, I spend my days performing due diligence on stocks so I can maintain a relatively high level of conviction with regard to the fair value estimates up and down the large list of companies that I either own, or would love to own one day, assuming I’m given an opportunity to accumulate shares at an appropriate price point.
Does this require a lot of time, energy, and passion for the equity markets? Sure it does. However, all of the information I’m using to generate what have proven to be reasonably accurate fair value estimates over the years is publicly available, free of charge.
With this in mind, you don’t have to guess, gamble, or rely on lucky trades to generate wealth. You can use fundamental data, margin of safety, and a disciplined value oriented strategy to make your own luck, as they say.
To this day, I firmly believe the stock market is the best vehicle for individuals to use to generate wealth, climb the social ladder, and ultimately, meet their financial goals and obtain financial freedom.
This isn’t done by speculating on risky assets, but instead, living below one’s means, investing in blue chip companies, partnering with such companies over the long-term, collecting the dividends that they generate, re-investing those dividends, and letting the power of compound interest work in your favor.
Here’s the deal: Dogecoin was up 100% yesterday. That’s great. But, there was no fundamental reason for that rally to occur. With that being said, the asset could give back those gains, falling 50% tomorrow, and it would be equally as justified.
If you want to attempt to time the market, buying and selling those rallies, then be my guest. But, after years in this industry, I’ve yet to meet a person who can do so reliably.
Frankly, if you want to gamble, I’d suggest heading to the nearest casino, heading over to the craps table, and making a pass-line bet.
The odds are 251 to 244, meaning that the house edge is just 1.41%. You’ll have an absolute blast rolling the dice. You’ll probably make some friends at the table. And, that ~48.5% chance of making money is probably on par (if not better) than your chances of consistently timing the Dogecoin market.
Or, you could partner with a blue chip like PepsiCo, lock in a ~3% yield on cost, begin a passive income stream that posts reliable growth year in and year out (regardless of what the broader market is doing), and sleep well at night, knowing that you’re investing your hard earned dollars, as opposed to gambling with them.
If this seems attractive to you, then please, check out The Intelligent Dividend Investor. We own PepsiCo in the IDI portfolio. We’re up 30% on shares since purchasing them last year. And, after seeing the company’s recent quarter results, I believe that over the long-term, this stock has potential to continue to generate double digit gains.
