THE BOTTOM LINE: Chipotle vs. Qdoba, the bear case on Apple, and diagnosing a bitcoin bubble

This week:

  • Business Insider editor-at-largeSara Silverstein discusses Mexican food chain Qdoba’s sale to private equity firm Apollo for $US305 million, and breaks down what it might mean for Chipotle‘s valuation. She notes that Qdoba is valued at under $US1 million per store, while Chipotle is currently trading at about $US3.5 million per store.
  • Business Insider CEO and noted Chipotle enthusiast Henry Blodget joins the discussion, admitting that he’s never eaten at Qdoba, and that he’ll continue to favour Chipotle. Silverstein outlines some of Qdoba’s positives: it’s always had queso dip, its queso and guacamole are free, and it has a bigger menu, including quesadillas. Blodget concludes that the comparison between the two is worrisome for Chipotle.
  • Blodget discusses Apple, whose stock is up more than 90% over the past five years. He references a research report from Nomura Instinet analyst Jeffrey Kvaal, who lowered his rating on the company to neutral. Kvaal argues that Apple’s shares have historically contracted after a product supercycle, and that the iPhone X cycle is nearing an end. He notes that the company’s 15x valuation matches past supercycle highs, after which it’s dropped to 8x-9x. Blodget mentions rumours around another iPhone X that will supposedly be even bigger than the current model, and says that could lead to another product cycle.
  • Blodget and Silverstein talk bitcoin, which has dipped below 16,000 after almost reaching 20,000. Silverstein says that could be because the cryptocurrency’s counterpart, bitcoin cash, was somewhat legitimized when it was added to Coinbase. Blodget notes the large number of cryptocurrency offshoots, and says it reminds him of the late 90s dotcom bubble. He then highlights a recent report from investment manager and former Merrill Lynch chief investment strategist Richard Bernstein, which says that bitcoin meets all five criteria of a bubble. Blodget also says that bitcoin can be both a bubble and a profound new technology, stressing that those two things don’t have to be mutually exclusive.
  • Silverstein sits down with Jeffrey Kleintop, chief investment strategist at Charles Schwab, who outlines his equity outlook for 2018. He’s optimistic and cites what should be back-to-back years of broad global economic growth. He also mentions that earnings growth will continue to be strong after a banner year in 2017. On the downside, he notes that yield curves have flattened, which could be a negative for stocks with high valuations.
  • Kleintop outlines his biggest stock market risks for 2018, which include a Chinese economic growth slowdown, natural disasters, and geopolitics. He says that these possible risks could come into play in the second half of the year, if economic growth starts to slow. Kleintop doesn’t express any worry around the Federal Reserve or inflation, saying that we’re starting to see a clearer path for inflation, which will make the central bank more data dependent again. He also says the market is already braced for the Fed’s rate hikes in 2018.
  • In terms of a geographical preference, Kleintop says that he favours international stocks, which are more cyclical, inflation-sensitive and attractively priced. He notes that the correlation between stocks around the world is at the lowest in 20 years, which improves the market for global diversification.
  • Silverstein asks Kleintop about tech stocks, which are carrying high valuations. He says Schwab still likes tech, which will benefit from increased business spending. Kleintop says that corporate tax cuts are not just exclusive to the US, and notes that they’re happening all around the world. He argues that this will continue to help profit growth, which is what many investors are looking for right now. He also says that the full effect of tax reform is not being priced in.
  • Kleintop discusses a possible bubble in bitcoin. He says a crash will be different than the type of downturns that have historically occurred in markets, because it’s not yet embedded in the financial system. He urges investors not to worry about a bitcoin crash – unless they own it.
  • In the Fidelity Insight of the week, Silverstein speaks with Denise Chisholm, a sector strategist for Fidelity Investments. Chisholm talks about earnings growth, noting that the US market was in a corporate profit recession from 2013 to 2016, which she attributes to a defensive rotation. She says that cyclical sector outperformance will remain a key theme in 2018. Chisholm highlights a continued decline in the dollar, which she says will boost corporate profit growth and lead to accelerated inflation. She also notes that economically sensitive sectors tend to outperform with higher rates, even though a lot of investors think higher rates are bad for growth. Chisholm goes on to say that, based on past instances of tax reform, it will be good for cyclical stocks, like tech, consumer discretionary, energy, industrials, financials, materials, and REITs.

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