Dear Partners,
As Delphi concludes its first year of operations, we would like to share our current perspective on the investment landscape as we head into 2021. In order to look ahead meaningfully, we must first revisit the events that brought us to where we are today—and consider the lasting effects we expect them to have going forward.
The Market’s Paradox
Despite the global pandemic, U.S. equity markets are at all-time highs. Even real estate prices have risen in key areas like New York, despite record-high vacancy rates. How does this all add up?
Governments around the world, led by the U.S., responded to the economic crisis with massive stimulus efforts, both by injecting direct payments to individuals and businesses, and through extensive bond-purchasing programs by central banks. These actions aimed to combat contracting GDP and skyrocketing unemployment by making capital cheaper and more accessible.
However, the scale and direction of this stimulus have introduced new risks. In some cases, support reached people and companies that didn’t truly need it. Stimulus money was used for home renovations or luxury purchases like backyard swimming pools, inflating the prices of building materials and benefiting companies such as Maytronics, whose pool-cleaning robots saw a 30% sales boost—despite the broader economy contracting more than it did in 2008.
Bubble Trouble: The Risks of Overstimulated Markets
A key concern is that stimulus funds, when not properly targeted, can distort economic behavior. Instead of addressing financial distress, they may lead to speculative asset bubbles. A striking example is the surge in retail trading: platforms like eToro reportedly opened 5 million new accounts in one year alone, nearly half of all accounts opened since the company’s founding.
Couple this speculative energy with a central bank that increased its balance sheet by $3 trillion in a single year (compared to $1 trillion during the 2008 crisis), and the result is an environment ripe for inflated valuations and disconnection from fundamentals. Many unprofitable companies saw their valuations multiply within months, evoking parallels with the dot-com bubble.
Today’s version of “dot-com mania” centers around so-called “dream companies”, those with captivating narratives but no profitability, facing tough competition, and burning cash. As Peter Lynch famously said, the main reason people invest in such stocks is “because it’s going up.”
Gravity Always Wins
In physics class, we learned that everything thrown up must come down. The same holds in capital markets. While it’s hard to time these reversals precisely, history reminds us that speculative surges often end in correction. Cannabis stocks in 2017–2018 are a recent example, they soared, only to collapse back to earth within two years.
A similar dynamic is unfolding with some high-growth tech companies. Take Lemonade, an insurance-tech firm. Despite rapid sales growth, the company continues to post significant operating losses. Valuations are being driven more by sentiment and hype than by financial results, a hallmark of unsustainable investing.
Real Value Still Exists
Fortunately, not all sectors are caught up in the speculative frenzy. More traditional industries like banking and energy still trade below their pre-pandemic levels. While not automatically attractive, their pricing suggests the market hasn’t completely lost touch with reality.
At Delphi, we continue to focus on fundamentally strong companies with clear competitive advantages. Businesses that provide real value to their customers and command strong margins are best positioned to deliver long-term returns. Apple’s philosophy, as stated by CEO Tim Cook, is not to sell the most phones, but to sell the best phones. That kind of focus on quality justifies premium pricing and results in extraordinary profitability.
Case Study: Callaway Golf (ELY)
One example from our portfolio is Callaway Golf, a market leader in golf equipment. Despite
COVID-related disruptions, the company has shown resilience and strategic foresight. In particular, its acquisition of TopGolf, a chain of urban golf entertainment venues, represents a compelling growth story. Once pandemic restrictions ease, we expect TopGolf to return to its former valuation, adding substantial value to Callaway shareholders.
Final Thoughts
Roughly every two years, markets experience a 10%+ correction, and every few years, we see speculative bubbles form and burst. In the late 1990s, U.S. monetary policy—rate cuts and tax incentives, helped fuel the dot-com bubble. Today, we’re seeing something similar: expansive fiscal and monetary policy driving speculative excess, particularly in “hot” sectors like cloud computing and electric vehicles.
That said, not everything is overpriced. Some cloud companies demonstrate solid profitability and sustainable business models. Meanwhile, sectors still recovering from COVID, like energy, aviation, banking, and real estate, offer investment opportunities that are more grounded in fundamentals, albeit with some risks.
At Delphi, our role is to stay rational—identifying undervalued opportunities in times of panic and avoiding overhyped assets during speculative booms. This disciplined approach has served us well, and we believe it will continue to do so in the years ahead.