Shesa's MAY - JUNE 2021 Investment Blog

  

MAY - JUNE 2021 INVESTMENT BLOG

By Shesa Nayak

 

WISHING ALL MY READERS a VERY HAPPY MEMORIAL DAY!!

U.S. Stock Market Update   

First quarter Earnings season is almost over. So far, 95% of the S&P 500 companies have reported earnings with an earnings growth of whooping 51.9%, making it the best quarter since 2010. Last Friday, the White House sent Congress a $6 trillion budget plan that would ramp up spending on infrastructure, education and combating climate change, arguing it makes good fiscal sense to invest now, when the cost of borrowing is cheap, and reduce deficits later. On infrastructure front, senate Majority Leader Chuck Schumer said that Democrats will work to craft an infrastructure bill in June, with or without Republican support. The Biden administration had first put forward a $2.3 trillion infrastructure plan, but republican came back with a $928 billion counteroffer. Subsequently, Democrats have proposed a revised plan with $1.7 trillion. In the stock market front, we saw some pullbacks in last few weeks, but market is bouncing back. It’s normal after the earnings season, so I am not too much concerned at this time. However, there will be a time when most of the good news will be behind us. But I do not think that time has come as yet! Second quarter earnings are still expected to be at par or better than Q1 earnings.  The infrastructure bill may also provide support to few sectors of the stock market. Furthermore, if history is any evidence then stock market tends to go up when there is moderate inflation. So far, 134 million Americans have been fully vaccinated and 294 million have got at least one dose. One noise that I keep hearing around this time of the year from the Wall Street strategists and gurus who keeps ringing the bell to be cautious about stock market. They advise investors to "sell in May and go away”. How good is this advice? Should we sell and go on vacation? Well, I will share my view on this philosophy as there could be immense opportunity for next couple of months. But before I do that let’s look at the stock market indexes. 

 

Indexes	1/2/21	Close FRI 5/28/21	Change in 2021	% Change in 2021	All Time High	% from All Time High	From LOW (3/16/20)
DOW	30,606.48	34,043.49	3,437.01	11.23	35,091.56	-2.99%	18213.65
S&P 500	3,756.07	4,238.04	481.97	12.83	4,194.17	1.05%	2191.26
NASDAQ	12,888.28	13,748.74	860.46	6.68	14,175.12	-3.01%	6631.42
BTK	5,739.02	5,572.71	-166.31	-2.90	6376.77	-12.61%	3985.72
NBI	4,759.14	4,766.77	7.63	0.16	5466.79	-12.80%	2947.85

S&P 500 Earnings

Earnings: For Q1 2021, 95% of the S&P 500 companies have reported actual results, 86% of companies reported positive earnings surprises and 76% of the companies reported positive revenue surprises. The earnings growth rate of 51.9%. If 51.9% remains the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q1 2010 which was 55.4%.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 21.2 which is above the 5-year average (18.0) and above the 10-year average of 16.0.

Economy News

• GDP: Q1 GDP growth was 6.4% quarter over quarter and annual growth of 0.4%  
• According to Atlanta FED, GDP growth for second quarter is estimated to go up to 10.4%
• U.S Coronavirus Cases: 33.3 million, Death: 594K 
• COVID Vaccination: 134 million or 40.7% of the U.S population have been fully vaccinated and 167 million or 51% people have taken at least first dose 
• Retail Sales: April retail sales was unchanged 0% vs. 1.0% expected
• Savings: U.S households have accumulated at least $2.3 trillion in excess savings during the coronavirus pandemic
• Unemployment rate: 6.1% vs. 6.1% in March 
• US Total GDP/Economy: $21.433 trillion 
• Interest Rate: 0.25%
• Inflation rate: 4.2% vs. 2.6% in March. This is highest since 2008. Lumber prices are up more than 60% this year, and they’re 340% higher than a year ago. The price rise is adding about $35,000 to the cost of the average newly built home in the U.S., according to the National Association of Home Builders.
• Consumer Confidence: 82.9 in May vs. 86.5 in the previous month
• In May, the consumer-price index (CPI) soared 0.8% equalizing the biggest monthly increase since 2009. The rate of inflation over the past year jumped to 4.2% from 2.6% in the prior month — the highest level since 2008.

Current Economy Scenario

Positives

• COVID Stimulus in 2021: $1.9T (Last year $6.5T). TOTAL Stimulus after COIVD: $8.4T.
• Infrastructure Bill:  Proposed $1.7 trillion by Biden administration, down from $2.3 trillion earlier
• Expected GDP growth in 2021: 6.5 to 8% projected by Federal Reserve. Q1 GDP: 6.4%.
• Earnings Growth: For Q1FY21 the S&P 500 earnings growth so far is 51.9%, highest since 2010
• Strong Consumer Spending: Economy bounced back in Q1 and rest of the year due to business re-opening, higher employment, pent-up customer demand/spending. It should continue further. 
• Easy year over year comparison of revenue/profit for some sectors
• Money sitting on Sidelines: Still about $5 trillion still sitting on the sideline. U.S household savings accumulated about $2.3 trillion during the pandemic. Thanks to all the government stimuluses!
• Interest rate is still very low @0.25%

 

Negatives

• Unemployment Rate is still high at 6.1%
• Better Economy does not necessarily mean better Stock Market Return
• Inflation has picked up to 4.2% highest since 2008
• Volatility: Market could get volatile particularly around AUG – OCT timeframe

 

Global Climate Change Budget

President Biden has allocated $36 billion to fight global climate change in his 2022 budget proposal. That’s an increase of more than $14 billion or 63% compared to 2021. The major new investments focused on clean energy, climate and sustainability research and improved water infrastructure. It can be note that, separately  Infrastructure bill is being worked.

 

In the infrastructure bill front, Republicans sent a $928 billion infrastructure counteroffer to President Biden. It can be noted that Bident administration had proposed for $2.3 trillion infrastructure package and subsequently reduced it to $1.7 trillion as a counteroffer to republicans. It unknown how long this negotiation will continue. However, Senate Majority Leader Chuck Schumer said last Friday that Democrats have to pass comprehensive jobs and infrastructure legislation this summer with or without the support of republican party. We will see how the politics will play out, but I am very hopeful that infrastructure bill would get pass this summer. It’s only a matter time and figure, in other words how much! Democrats are planning to craft a massive infrastructure package next month (June) regardless of whether Republicans get on board or not. I guess we can rely on this administration to get the job done!

 

What’s happening in the Stock Market?

U.S. economic accelerating in the second quarter due to huge stimulus and businesses reopening. The Atlanta Fed estimates second-quarter GDP growth of 10.4%. We saw fantastic retail sales in March, but April was neutral. We will see how it plays out in May and June. I expect retail sales will continue to rise due to stimulus. All stock indexes have pulled back a little bit. 

This year we have seen rotation into energy, financials, materials, real estate, industrials etc. These were the sectors who lagged are leading thus far. I do feel that energy sector bounce may not last too long. The oil demand will come down after summer. Other sectors may also pull back sooner than later because those are up significantly. Probably after Q2 earnings, the good news will be behind these sectors. IT sector which happens to be the leader is lagging this year. Off late, it’s good to see some rotation to the small cap sector and see bounce in the beaten down growth tech stocks, renewable sector and cannabis sector. However, Biotech sector is still lagging, we may see some action in the second half of the year. 

 

Sell in May and Go Away??

One noise that I keep hearing around this time of the year from Wall Street strategists and gurus wherein they keep ringing the bell to be cautious on stock market returns. They expect investors to "sell in May and go away", that’s the old saying goes in the Wall Street. After the Q1 earnings season usually the market takes a little pullback which is natural phenomena that happens after each earnings season.  So, there is nothing new about it. However, the problem is, too many investors get caught up in the "sell in May and go away” theory. Go away is OK but when to come back? As per their theory, comeback in September. 

 

Why I do not buy this theory is because if we miss May, June, and July then we are missing a good part of the market return, please see the numbers below since 1928. 

Month	ROI
Jan	1.5
Feb	-0.1
Mar	0.5
Apr	1.5
May	-0.1
Jun	0.8
July	1.6
Aug	0.7
Sep	-1
Oct	0.4
Nov	0.9
Dec	1.3

 

This above table shows the average gain in stocks month over history. The first thing you'll probably notice is that stocks do tend to fractionally in May (-0.1%). But let’s remember that we are just entering to June and that’s the best three-month stretch in any calendar year for the index, that 3.1% since 1928. November through January's 3.4% average gain stand to be the best. As a matter of fact, instead of selling in May, we need to wait with little patience and get out in late August ahead of September's -1% decline. That’s when most of the smart money gets out! If you observe, these sell in May idea is given by the so-called expert money managers when they are being interviewed in T.V. But why do they do that? First, to scare the retail investors, second they plan to go on vacation and spend some lively time an Island! In the whole process many of these money managers misses some great opportunity during this time. These folks care more about their own gain rather than worrying about their clients. I believe that all these indexes may make new highs during the summer. Having said all these, I see some pullback in the stock market around AUG-SEP timeframe as most of the good news could be behind us..

 

Share Buybacks

One good sign is that numerous companies are buying back their shares. This year more than $504 billion in stock buybacks have been authorized till May 7 according to Wall Street Journal. It could be even more as of date. That’s the fastest pace for stock buybacks in 22 years! As we know, companies see values in their stock and buy it visualizing their future potential. When companies buy stock, other investors follow the suite resulting in higher share prices. It’s the normal economics theory of “Demand and Supply”. However, I have seen many companies buy their shares, but stock prices go south. It happens when investors realize that it was a hype rather than real substance. 

 

Is Market Correction bad?

We all know that stock market never goes up on a straight line. Corrections happens and will always happen. These corrections bring better opportunity for investors to buy good stocks at reasonable valuations. Furthermore, it brings new investors who sits on the sideline and waiting for the market to come down. But ultimately the market goes higher over time. That has happened since the emergence of stock market. Sometimes it needs patience and perseverance to find good stock, keep accumulating over time and take some profit whenever right opportunity comes. Having this discipline is incredibly important because many investors get derailed here. If we look back to the past whether it was dot com bust, or great financial crisis of 2008 or Coronavirus pandemic, the stock market always bounced back strong.  Last year people were saying that it’s a disaster because emergence of Coronavirus was not only an economy problem but also a health crisis and nobody knew how the market would behave. The stock market crashed and went to bear market in just 19 days, the fastest pace ever. It seemed like the financial world was coming to an end! Now we are just one year away, and all stock indexes have made new all-time highs. When you're bullish, pullbacks and corrections are great buying opportunities. That’s what history has taught us. Because when market tanks most of the stock goes on sale and almost every stock gets cheaper. At that time, it makes difficult to determine which stock to buy. Under such circumstances, if we have some cash on the sidelines then that’s the best time to deploy. But if we get scared and remain on the sidelines then another golden opportunity could be missed!!

 

A quick glance to U.S. Cannabis Sales

U.S. Cannabis Sales hit record $17.5 Billion in 2020 as Americans consumed more marijuana than ever before. Here is the list of top-selling cannabis states in 2020:

 

California: $3.8 billion (recreational and medical mix)

Colorado: $1.7 billion ($1.4 billion recreational, $0.3 billion medical)

Michigan: $1.21 billion ($299 million recreational, $909 million medical)

Florida: $1.2 billion (all medical)

Washington: $1.1 billion (recreational and medical mix)

Nevada: $960 million ($900 million recreational, $60 million medical)

Oregon: $831 million ($796 million recreational, $35 million medical)

Arizona: $804 million (all medical)

Massachusetts: $682 million ($451 million recreational, $231 million medical)

Illinois: $543 million ($270 million recreational, $273 million medical)

Source: Motley Fool

 

Sectorial Performances 

Please click below link to view sectorial performances:

https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_performance.jhtml?tab=siperformance

Source: Fidelity.com

Now let me discuss this month’s inclusion to my blog portfolio.

GrowGeneration Corp (GRWG)

GrowGeneration is one of the fastest-growing commercial cultivation retailer in the U.S, with more than 53 stores across the U.S., including 2 stores in Oregon and 23 stores in other states such as California, Nevada, and Washington. It engages in the marketing and distribution of horticultural, organics, lighting and hydroponics products, including lighting fixtures, nutrients, seeds and growing media, systems, trays, fans, filters, humidifiers and dehumidifiers, timers, instruments, water pumps, irrigation supplies, and hand tools. Many of its products are used in cannabis cultivation. The company also operates an online e-commerce store. 

 

Why do I like GRWG?

This company is on a tremendous growth path. The company has seen massive revenue growth of 142% last year and 89% average revenue growth of 89% in last 5 years. There are many experts who says this is the Home Depot of Cannabis cultivation. It’s the largest chain of specialty hydroponic and organic garden centers in U.S. The company is its early stage of growth. As the Cannabis sector grow this company will have huge potential for years to come. A few weeks ago, the company announced its first location in the state of Mississippi, with 40,000 square feet of warehouse and showroom space, and will feature indoor vertical farming and controlled environment agriculture. A few days ago on 5/25, it acquired “The Harvest Company”, a northern California-based hydroponic supply center and cultivation design innovator. Just to let the readers know that California is the largest Cannabis revenue generator in U.S. Last year California generated $3.8 billion in sales for recreational and medical marijuana. In 2020 GRWG was named the "Best Cannabis of 2020" by Bloomberg though it’s actually not a pure cannabis company. We will talk more about it. First let’s take a quick look at the last quarter numbers which was very impressive. 

 

Financials

First Quarter Revenue increased by 173%, to $90 million vs. $33 million last year

Comparable Store Sales for the Quarter increased 51% from last year

Record Earnings of $6.1 million or $0.10 Per Share in the Quarter vs. 0.3 cents in the previous quarter

Gross profit margin for first quarter 2021 was 28.2% vs. 27.1% in the same quarter last year

 

The company raised its financial outlook for the year and expect 2021 revenues to be between $450 million and $470 million, more than double the Company's sales in 2020. For the year so far, the company closed 9 acquisitions, adding 15 hydroponic retail locations, bringing their total store count to 53. Some of the acquisitions made in the earlier quarters, are now positively impacting margins.

 

Insider Ownership: It’s good to see that GRWG insiders have a significant amount of capital invested in the stock, currently valued at more than $150m. What it means is that leadership would be mindful of shareholders' interests when making decisions! Here are the company’s fundamentals:

 

Fundamentals

Market Capitalization	2.49B	Institutional Holding	51.57%
Revenue	250.41M	52 Week High	67.75
Trailing P/E	156.74	52 Week Low	6.01
Forward P/E	86.21	Dividend	N/A
Quarterly Revenue Growth	172.9%	Total Cash	133.12M
Earnings Growth QoQ	230%	Total Debt	14.91M
EPS	0.26	Return on Equity	6.66%
Price/Sales	8.80	Float	51.52M

 

My View and Strategy

I have already taken some positions around $10 and still keep accumulating at various price levels. I view this company has a tremendous growth potential for years to come. The stock has pulled back and currently trading at $44.41, which is 34% below its 52-weeks high. However, it can also be noted that the stock went up from $6 to $67 (about 1000%) in just one year. The stock has gone up about 20% in last one week. It may pullback if the stock market comes down but that could provide further buying opportunity. As I say, I do not buy everything at once, rather I prefer to buy in a phased manner and trim some position when the stock goes up. If things change, it needs to be re-evaluated based on the market situation. It’s imperative to do due diligence before buying any equity because nothing is bullet proof. That’s part of my long-term strategy. 

 

Risks: Every stock has its own risk, something could be company specific, and something could relate to macro-economy factor which is beyond the control of the company. Any investment on equities depends on how the stock market behaves. GRWG is a growth stock, so volatility is also high but for patient long-term investors this stock seems to have great future potential. Nobody is always right, and all investment carry risks. Every investor must do their due diligence before taking a decision. 

 

My final thoughts

GRWG is the Home Depot for Cannabis grower. It’s not a pure Cannabis play as its business is well diversified. Having said that, the Cannabis sector is poised to grow substantially for years to come. And that would be one of the major catalysts for this company’s exceptional future growth. When that happens long term investors would be handsomely rewarded. I may be wrong but I am not looking for days, weeks or months rather years down the line. If I see any red spot then I can revisit my strategy but at this time I visualize this stock as a good long-term opportunity.

 

Shesa’s Blog Portfolio (As of MAY 31, 2021)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	124.61	1/25/13	866%	HOLD
FB	47	328.73	11/13/13	599%	BUY on Dip
MA	77.18	360.58	12/12/13	367%	HOLD
AMZN	311.73	3223.07	4/12/14	934%	HOLD
BABA	67.28	213.96	2/21/16	218%	HOLD (Trimmed)
EDIT	36.53	33.95	5/28/18	-7%	HOLD
SHOP	134.81	1242.87	11/25/18	822%	HOLD
NFLX	297.57	502.81	1/6/19	69%	HOLD (Trimmed)
CGC	20.16	26.09	12/10/19	29%	Accumulate
GH	87.53	124.12	9/1/19	42%	HOLD
NIO	4.27	38.62	1/29/20	804%	HOLD
CCL	12	29.46	3/22/20	146%	HOLD (Trimmed)
BYND	76.91	145.42	4/19/20	89%	Accumulate
SPG	54.59	128.49	5/25/20	135%	HOLD
ENPH	45.3	143.05	6/28/20	216%	BUY - long term
TGTX	19.58	34.87	8/2/20	78%	Accumulate
BBBY	12.03	27.99	9/13/20	133%	HOLD
MU	51.61	84.14	10/18/20	63%	HOLD
JKS	62.71	36.61	11/21/20	-42%	HOLD (Trimmed)
SRNE	14.39	7.52	2/14/21	-48%	Accumulate
GBTC	52.96	30.22	3/21/21	-43%	HOLD (Trimmed)
PLUG	27.98	30.7	4/25/21	10%	Good Long-term BUY
GRWG	44.41	44.41	5/31/21	0%	NEW ADDITON
ETF
IHF	139.1	271.38	8/16/15	95%	HOLD
QCLN	70.23	62.49	1/3/21	-11%	Accumulate
MUTUAL FUND
FBIOX	11.46	21.26	3/1/13	86%	HOLD
PRMTX	59.45	190.5	12/20/14	220%	HOLD
FSRPX	9.05	23.99	1/15/16	165%	HOLD
FBSOX	37.32	93.92	3/20/16	152%	HOLD
FSMEX	43.66	74.44	9/24/17	70%	HOLD

 

 

Positions CLOSED since last Blog

AMRN	17.66	4.51	5/6/21	-74%	SOLD
SDC	8.74	9.81	4/20/21	12%	SOLD

 

That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time. 

 

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do NOT provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions on what I do. Please contact a professional money manager to buy/sell any security. I do not charge any fees or commission by writing the blog except anything from Google AdSense. I have position(s) on whatever security I put on my blog portfolio and avoid including any security that I do not own or follow. Anybody buying or selling the equities mentioned here is their own risk.

 

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