Powell Speech, New Home Sales: Daily Contrarian, May 24
Good morning contrarians! Stocks are dropping again after disconcerting news for online advertisers after the close…
Today we look to a speech by Fed chair Jerome Powell and new home sales at 1000.
Also earnings from $BBY $RL $ANF and $JWN to perhaps provide some more intel on retailers, their margins, and the state of consumers.
What to expect from this whole smorgasbord is discussed in today’s briefing and podcast:
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In Bear market or not ?
With bear market news around the corner, I dipped into the charts of S&P 500 'Top 10' stocks to check on their current levels. Here are the insights :
- Current Top 10 S&P stocks by weight (in the order )
- 8 out of 10 stocks are under 50SMA and 200SMA on daily charts except for $BRK.B and $UNH which are just touching 200MA.
- However, on weekly charts, I see 6 out of 10 stocks between 50SMA and 200SMA. 2 stocks above 50SMA and 200SMA. And the last 2 , $AMZN and $FB crossed below 200SMA.
With looming food shortage , spiked gas prices , ongoing war , inflation , housing market potentially entering correction , hiring freeze from companies etc.. more drawdown of S&P 500 index expected ?
I am trying to find information to see if i have to rebalance some of the funds to have more bond exposure. I am planning to go 100% SPY index when we flatten out and start showing some strengths in the months to come.
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Once a higher-low comes in, that's when it might be time to alleviate fear.
What is the bull and bear case for Zoom Video Communications $ZM?
- Valuation appears reasonable with the stock trading at pre pandemic levels even though $ZM managed to increase sales by 558% from FY’2020 to FY’2022. EV/EBITDA is c. 18x and EV/Sales is 5.3.
- Net dollar expansion rate of enterprise customers per latest quarter was 130%, which shows that large customers are spending more with Zoom every year.
- The Company is highly profitable with operating margin and free cash flow margin for FY’2022 of 26% and 36% respectively.
- Leader in meeting solutions and UCaaS (Gartner Magic Quadrant). Top ratings in G2 reviews and leader in G2 Grid for UCaaS and video conferencing.
- Hybrid/work from home is here to stay.
- Management executed very well during the pandemic scaling the company and coping with demand as well as dealing with security issues which arose at the start of the pandemic.
- Organic growth and continuous development of products as well as entrance into new markets in the last years is a sign that management is delivering (Zoom phone, contact center, zoom rooms, zoom events).
- Managed to build a brand and stand out as leader despite the fierce competition from giants like Microsoft, Google, Cisco.
- Founder leading the business with skin in the game.
- Video conferencing allowed the company to land into large number of enterprise customers. The opportunity now is to expand within those customers and cross sell additional products (zoom phone, zoom rooms, etc.). Expanding within a customer increases switching cost.
- Company has plenty of financial resources with $5.4B of cash and marketable securities and no debt on its balance sheet.
What are the main risks for Zoom?
- As of Q4, 33% of revenue was from customers with less than 10 employees. Potentially, those customers could churn over time as employees return back to office.
- Video conferencing might be seen as a complementary product like Microsoft Teams with Office 365, thus Zoom could lose customers to competitors. For the time being this does not seem to be the case as Zoom has continuously been adding new enterprise customers.
We will monitor those risks and we look forward to tomorrow’s earnings release.
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Those 3 names have been here the whole time, Zoom hasn’t even noticed by the looks of it🤣
Crazy talk from Cathie Wood again 🙄
One thing that bugs me: IMO, AGI will most likely come from one of the big tech companies. Why? Because you need:
- the best AI researchers
- high AI R&D funding
- lots of data
- lots of computing
- billions to burn without going bankrupt
If ARK Invest believes in AGI and wants its investors to profit from it, they should be positioned in all of these companies. However, they are not. Seems counterproductive to me.
Adtech legislation in progress
Below is a link to NY Posts article on adtech scrutiny of companies like $GOOG $GOOGL. In short, if you participate in buying and selling ads, AND have them displayed on your own properties on which you get user data, this law will force a breakup of some parts of that business.
FYI WSJ also has an article about this, but it’s behind a paywall.
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A great monthly update as always with insightful personal notes :) I've added Modern Monopolies and The Almanack of Naval Ravikant to my reading list. Also really cool that you found the free version of the book on the web. Thanks for sharing Yegor
Shared Research Screens:
Value Line Top 100 Highest Growth
I’ve always seen excerpts in books touting Value Line as a valuable source of research analysis, but had never looked at subscribing. They’d always mentioned it was available at local public libraries free of charge. I don’t pay for investment advice like I don’t pay for women, so off to the library I went. I was shocked when the librarian showed me the giant binders of already crunched numbers of everything I’d ever wanted and more!
I said I was going to start sharing research screens weekly, but due to the backlog, I need to spit a few out a little quicker while valuations are still accurate & relatively attractive.
This first list started with a list of Value Line growth companies, 100 of them. I had to narrow the list somewhat, without my bias, so I used their provided statistics to cull the best investable options from the original list of their Top 100 Highest Growth Stocks.
The reason this quality growth screen jumped out at me in the first place was the qualifying criteria, eliminating most of the risk of making a bad decision (based on emotion or hype).
Value Line quote: “To be included, a company’s annual growth of sales, cash flow, earnings, dividends, and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years.”
That says a lot about the stability, strength, & trajectory of a company and that’s the type of near zero risk, sleep well at night (SWAN) stocks I like to own. Especially when they’re undervalued or out of favor, just reported a bad quarter, or trading at historically low valuation multiples for any other myriad reasons.
Statistical categories included in this Value Line table include 1) Timeliness Rank, 1 being best time to buy, 5 being the worst, 2) Safety Rank, 1 being safest, 5 being the riskiest, 3) current P/E ratio, 4) estimated 3-5 year price appreciation, and 5) the company’s industry rank. I’ve chosen to personally eliminate all fortune telling/future predictions/economic forecasts, etc. from my analysis, therefore will exclude forward looking estimates whenever possible. To narrow the list from the top 100 to a more manageable list of the cream of the crop, I chose to look for company’s with a Timeliness & Safety rank of 1-2 to ensure highest quality & fair value/positive outlook, a P/E ratio below 30 to ensure I’m not paying too high a price, and top 10 rank in their industry to hopefully provide additional quality/moat/competitive advantage strength to the final contestants on #INVESTWITHDEEBO. Ensuring quality first, and value second, hasn’t failed me yet.
Turns out, only 2 companies met such high standards, so I had to relax criteria just a tad. Those two companies were Google and Microsoft ($MSFT just barely, with a P/E of 30.xx) Google was the sole company with an absolutely perfect score; 1 on Timeliness & Safety, P/E ~20, ranked #3 in their industry. And had +100% 3-5 year estimated price appreciation to boot.
So, relaxing the standards, I was able to get almost 25 company’s I think provide higher probability of outperformance going forward, although I don’t believe there’s a bad company on the list.
Value Line Top 100 Highest Growth Stocks; additionally screened for my 4 additional quality & valuation hurdles (timeliness, safety, P/E, industry rank) produced the following:
Hitting a perfect 4/4 parameters:
An exceptional 3/4 Parameters:
Still great 2/4 Parameters:
Couple Honorable Mentions that narrowly missed the expanded standards:
The reason I love screens like this is because every one of these 100 companies is a strong company. Starting with a high quality list, then further screening for quality & valuation from there, has drastically reduced the probability of making a bad investment. Unless I get my emotions involved, then I take an L occasionally. So I try to keep it as near 100% mechanical as possible. I understand the voting machine vs the weighing machine; price will always follow performance, may just take a bit for the herd to catch up😉
Sorry again for the forward looking estimates, I’m keeping them at a minimum, promise.
After doing this for hours today, I wanted to score them to give more of an idea on which I thought might provide the most upside. So I spent hours today developing a point system based on the quality & valuation metrics already discussed, plus quality, profitability, valuation metrics & margin of safety estimates from 3 of my most trusted & accurate data sources. The primary reason I wanted to do this, was because to take advantage of the most irrationally priced stocks, doesn’t always require us buying the best companies. So this scoring system gives points ranging from 5-25 per category, for 6 additional categories of quality, value, & MoS. Higher quality rank= more points, larger margin of safety=more points. This scale (admittedly with 100% personal emotion and bias) was intended to reward the companies that 1) hit the most parameters, and 2) had the largest margin of safety, therefore minimizing downside risk to an absolute minimum, while simultaneously increasing the probability of outperformance. So here is the same list, in order of points scored, on my totally made up point scale, to hopefully provide some context as to the level of undervaluation.
The points for all criteria equaled a possible total of 165 points. This would be a dream stock at a dream price. Google is the ONLY company to pass every single criteria every single step of my analysis today. Taiwan Semiconductor only scored slightly higher because the estimates for MoS were much deeper for $TSM than $GOOG. So even though they got 0 points on one indicator, they made up for it with more points for MoS. Google scored points as a top ranked candidate (top 25% of companies at time of comparison) in every single category. I’d have to dig through an entire notebook to count the data points that went into this 10 hour waste of a day, but Google scored perfect at every step. But with MoS estimates of only 6%-16%, this is a classic Buffet, “wonderful company at a fair price”. So here is my totally biased list of quality companies trading at fair or below fair value.
Remember, this is not a quality ranking. This list weights margin of safety equally with other metrics. The companies at the bottom of this list are great, just not as much probability of upside compared to more undervalued/out of favor stocks at the top of the list.
Hope this provides some SWAN stocks for other value, or growth at value, investor’s out there🤙
PS: Craziest part of seeing the results of this list, since it was just made today, is that I have actually opened positions in $TSM, $GOOG, $NFLX, $MSFT, $AVGO, $NVDA, $KLAC, & $LRCX in the last 30 days, based on my own analysis of what’s important. I don’t feel 100% confident just because any specific source agrees; but I feel comfortable trusting my outside data sources as 2nd opinions based on the experience I’ve had using them over the last few years. Never hurts to find more reasons to want to buy, or maybe avoid, a specific company.
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This is one impressive post! Really appreciate all the time and effort you put in. Nice to see $GOOG make it to the top list but also there any a few companies that I need to check out since I never seen this tickers and maybe there some hidden gems for myself to explore more on!
Appreciate all the work you put into this
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