SpaceX on track for third straight day of losses

Key Concepts

• Return on Invested Capital (ROIC): A measure of how well a company uses its capital to generate profits.
• Shiller PE Ratio (CAPE): A valuation measure that uses real earnings per share over a 10-year period, adjusted for inflation, to assess market valuation.
• Lockup Periods: A contractual provision preventing insiders from selling their shares for a specified period after an IPO or share release.
• High-Quality Business: Defined by Hillside Wealth Management as founder-run/owned companies with a consistent history of >20% ROIC.
• Market Dislocation: A temporary period where asset prices deviate from their intrinsic value, often due to market sentiment or sector rotation.

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1. Investment Philosophy and SpaceX Analysis

Jason Del Vicario, Portfolio Manager at Hillside Wealth Management, emphasizes that long-term stock value is strictly a function of future cash flows. Regarding SpaceX, he notes:

• Valuation Concerns: While the market is currently "giddy" over SpaceX, the company lacks a demonstrated history of consistent positive free cash flow or strong returns on capital.
• Supply Dynamics: Only about 4% of SpaceX shares have been released. Del Vicario warns that as lockup periods expire, the increased supply of shares could significantly impact valuation and price.
• Investment Criteria: Hillside requires a minimum of five years of >20% Return on Equity (ROE) before considering an investment. SpaceX currently does not meet this threshold.

2. Market Trends and Sector Rotation

Del Vicario observes a significant shift in capital as investors chase "shiny objects" like AI (e.g., Anthropic, OpenAI, semiconductors).

• The "Bathwater" Effect: As money flows into high-growth tech, other high-quality sectors—specifically software, consulting, and consumer discretionary—have been sold off.
• Valuation Opportunities: This rotation has created "unfathomable" entry points for high-quality businesses. For example, he noted that one of their holdings, Constellation, saw its P/E ratio compress from 50 to 20, providing a rare opportunity to acquire quality assets at favorable prices.

3. Macroeconomic Indicators: The Shiller PE Ratio

Del Vicario highlights the Shiller PE (Case-Shiller PE) as a critical warning sign for the broader market:

• Current Status: The ratio is currently at 42, the second-highest level in history, trailing only the 2000 peak (44) and surpassing the 1929 level.
• Implications: Historically, when the Shiller PE reaches these levels, the forward 10-year return for the broad market index is typically "anemic, if not slightly negative." He argues against "blindly buying the index" in the current environment.

4. Geographic Focus: The Japanese Market

Despite the Nikkei index hitting record highs, Del Vicario identifies specific value in Japan:

• Small-Cap Focus: He is specifically targeting small-cap Japanese companies that are "well-moated" (possessing strong competitive advantages).
• Valuation: These companies are currently trading at P/E ratios between 10 and 15, which he considers undervalued compared to the broader market.
• Methodology: His firm conducts direct, on-the-ground research, including recent site visits to Japan, to identify companies with strong alignment of interests and consistent capital returns.

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Notable Quotes

• "In the short term, the stock market is a voting machine; in the long term, it is a weighing machine." — Benjamin Graham (cited by Del Vicario).
• "We need these types of short-term dislocations in the market to be able to [acquire high-quality businesses at favorable prices]." — Jason Del Vicario.

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Synthesis and Conclusion

The core takeaway from the discussion is a disciplined, value-oriented approach to investing. Del Vicario argues that investors should look past the hype surrounding high-profile, speculative companies like SpaceX and instead focus on businesses with proven, long-term track records of high returns on capital. He warns that the current broad market valuation, as indicated by the near-record Shiller PE, suggests poor future returns for passive index investors. Consequently, his firm is actively rotating capital into overlooked, high-quality sectors and specific small-cap opportunities in Japan that offer better risk-adjusted value.