Anatomy of a Bubble Stock

If you were to ask a random stock market analyst today if they could name any stocks that are in a bubble, you would probably get a very short list. They would almost certainly cite stocks like Palantir (NASDAQ: PLTR) or Nvidia (NASDAQ: NVDA) or just about any AI stock.

Chances are however they won’t name a 118-year-old company like United Parcel Service (NYSE: UPS). And yet, if you pay attention to how its stock price has behaved during the last five years, it shows all the classic hallmarks of being a stock in a bubble!

What are those classic hallmarks? For that, we have to turn to our working definition of what a bubble is in the first place:

An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from owning or holding the asset.

For stocks, the price of a share of stock represents the price of an asset and dividends represent the income that might be realized from owning or holding an asset. By our working definition, a bubble will consist of two parts: an inflation phase, where the stock price soars at a rate that’s decoupled from the growth rate of its underlying dividends per share, and a deflation phase, where the stock prices falls at a rate that’s independent of how its dividends are changing.

We can show UPS’ stock has been in a bubble during the past five years. The following chart tracks how UPS’ share price has changed with respect to its projected forward-year dividends per share from August 2018 through August 2025.

Here, we see UPS’ stock underwent an inflation phase from 5 May 2020 through 1 February 2022, coinciding with its boom in business during the coronavirus pandemic as lockdowns by state and local governments prevented consumers from shopping and buying from brick and mortar stores. After which, the company’s stock price entered into a deflation phase as the coronavirus pandemic emergency ended.

The three most recent data points in the chart assume UPS won’t change the amount of its future dividends over the next year. But in reality, with the stock price having fallen below its 2020 coronavirus pandemic lows, the company may well need to cut its dividend in the near future. If it does, we think a dividend cut on the order of 40-50% would be likely.

How much it will actually cut its dividend depends on how well the company’s strategic decision to stop delivering packages for Amazon (NASDAQ: AMZN) in favor of other customers whose business is more profitable for the company goes. It also hinges on shrinking the number of employees it has and closing facilities.

In any case, it appears UPS is nearing the end of the deflation phase of the bubble it has been in. All that remains to close the books on its five-year-long bubble is how it addresses its now outsize dividend for its share price.

Disclaimer: We hold no position of any kind in UPS. We’re only analyzing the company and its stock because we were surprised to discover it has been behaving like a stock in a bubble!

Image credit: Multicolored soap bubble image by Alexa from Pixabay.