Shesa's AUG/SEPT Investment Blog

 

AUG/SEPT 2021 - INVESTMENT BLOG

By Shesa Nayak

 

U.S. Stock Market Commentary   

Last week S&P 500 and NASDAQ had another all-time record high. The DOW made all-time record high on August 16. Historically, August is not a great month for stock market, but September happens to be the worst month for the market. Still, we saw new records for the stock indexes in August. The main reason could be attributed to exceptional second quarter earnings,  infrastructure bill and Federal reserve. As we know, President Biden's $1.2 trillion infrastructure plan was passed in Senate this month followed by $3.5 trillion democrats’ human infrastructure reconciliation bill which was passed in the house. Last Friday, Federal Reserve Chairman Jerome Powell indicated that the central bank is likely to begin tapering asset buying program before the end of the year. However, he also reiterated that rate hikes are not imminent as there is still “much ground to cover” before the economy hits full employment. After Powell’s statement the stock market rejuvenated. 

 

On other key news, the re-emergence of COVID with many different variants have increased the Coronavirus cases and deaths in most of the states, particularly those states who did not emphasize on vaccination. Meanwhile, we see problems to in Afghanistan to vacate Americans and those people who helped U.S troops in last two decades. Frankly, Afghanistan issue has not impacted the stock market. As we enter the worst month of stock market i.e. September, one important question that comes in my mind, , can we expect some pullback or correction? Or this year it could be different than what history has shown? Well, I will provide my perspective but before that let’s take a quick look at the stock market indexes. 

 

Indexes	1/2/21	Close FRI 8/27/21	Change in 2021	% Change in 2021	All Time High	% from All Time High	From LOW (3/16/20)
DOW	30,606.48	35,455.80	4,849.32	15.84	35,479.18	-0.07%	18213.65
S&P 500	3,756.07	4,509.37	753.30	20.06	4,513.33	-0.09%	2191.26
NASDAQ	12,888.28	15,129.50	2,241.22	17.39	15,144.48	-0.10%	6631.42
BTK	5,739.02	5,939.27	200.25	3.49	6376.77	-6.86%	3985.72
NBI	4,759.14	5,326.92	567.78	11.93	5517.77	-3.46%	2947.85

 

S&P 500 Earnings

Earnings: For Q2 2021, 91% of the S&P 500 companies have reported actual results, 87% of companies reported positive earnings surprises and 87% of the companies reported positive revenue surprises. The earnings growth rate of 89.3%. If 89.3% remains the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2009 which was 109.1%.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 21.1 which is above the 5-year average (18.2) and above the 10-year average of 16.3.

Source: Factset.com

 

Economy News

• GDP: Economic grew at 6.6% in the second quarter, according to the Commerce Department. That was a slight better than earlier estimate but sigh than Dow Jones estimate of 6.7%. Annual GDP growth stands at 12.2%.
• U.S Coronavirus Cases: 38.8 million, Death: 637K 
• COVID Vaccination: 173 million or 52.7% of the U.S population have been fully vaccinated and 61.6% people have taken at least first dose 
• Retail Sales: Retail sales was down -1.1% in July
• Unemployment rate: Down to 5.4%  in July comparing to 5.9% in previous month 
• US Total GDP/Economy: $20.93 trillion almost unchanged comparing to my last blog
• Interest Rate: 0.25%
• Inflation rate: 5.4% in July vs. 5.6% during last blog. This is highest since 2008. 
• Consumer Confidence: 70.3 vs. 80.8 in the previous month. Consumer seems to be less confident on future economy
• Business Confidence: 59.5 in July vs. 60.6 in June

Current Economy Scenario

Positives

• COVID Stimulus in 2021: $1.9T (Last year $6.5T)
• Infrastructure Bill:  U.S house approved $1.2 trillion planned
• American Jobs plan (Human Infrastructure): Climate Change, elderly care, childcare $3.5 trillion planned
• Q2 GDP growth in 2021: We saw nice growth in 6.6%
• Economy bounced substantially in Q2 due to stimulus effect, more Business Re-opening, higher Employment, Consumer Spending
• Best Earnings Growth expected since 2008: For Q3FY21 the S&P 500 earnings growth of 89.3%. revenue growth 19.7%
• FED has kept Interest Rates low at 0.25%,  and QE is still in place 

Negatives

• Inflation has picked up significantly, highest since 2008, Inflation rate 5.4% in July. August numbers awaited
• Still high Unemployment Rate at 5.4%
• A tightening Fed could be seen as an impediment for the stock market
• The earnings and revenue growth for next few quarters and 2022 are expected to be much below Q2
• Corona Virus cases are rising again and so also deaths due to new COVID variants
• Market valuations have gone up significantly for some stocks and sectors
• I see RISK in the stock market in September. I am also little suspicious about the performance of stock market in the later part of this year due to significant deceleration of U.S earnings and revenue in 2022 

Federal Reserve Updates

On 8/15, Wednesday, Federal Reserve released its minutes from the July meeting. Fed indicated a willingness to start reducing asset purchases before the end of the year. However, the officials also emphasized that there is no link between tapering and potential interest rate hikes. In other words, even if they taper the bond buying or reduce the bond buying, it does not necessarily mean that they will start raising interest rate in the near future. Some of the Fed members also suggested that it’s sensible to wait until early in 2022 to start tapering. Per Fed minutes, it also stated that the economy had reached its goal on inflation and was “close to being satisfied” with the progress of job growth. 

 

On 8/28, Fed’s annual Jackson Hole, symposium, Fed chairman J. Powell said the economy has reached a point where it no longer needs as much policy support. He also said that the central bank is likely to begin withdrawing some of its stimulus program before the end of the year, though he still sees interest rate hikes off in the distance. The readers may be aware that Fed is still buying $120 billion worth of assets (Bonds & treasury bills). In my view, unless there is any major unprecedented event(s), Fed would start reducing the stimulus in a phased manner. However, I do not think Fed will raise interest rate before mid or end of next year, unless economy booms, and inflation goes out of control. Another important point to note, as I said earlier, there will be significant deceleration of revenue and earnings growth next year, so I doubt that Fed will raise rate even next year. Time will tell. It all depends on inflation and how economy behaves. We can expect to see further updates from Fed in their September meeting scheduled for 9/21 and 9/22.

 

What's happening in the Stock Market?

In the first part of August, we saw that all stock indexes hit new all-time high. However, since then the stock market had started pulling back, particularly after the Fed minutes were released. The market is little apprehensive that Fed will start tapering asset buying program soon visualizing a recent uptick in inflation and employment data. Since last year, after the emergence of COVID-19, the stock market saw fastest bear market in the history and Fed decided to start buying assets (Treasury bonds and mortgage-backed securities). These purchases are part of the Fed’s “quantitative easing” program to stimulate the economy by lowering the costs to borrow money, lowering long-term yields on government bonds to spur investment in the market, and lowering rates for mortgages.

 

Now the market seems to be driven by a few factors as indicated below

• We saw spectacular earnings in Q2: Earnings of S&P 500 increased by 89.3%, which is highest since Q4 2009. The revenue also increased substantially 19.4%. This provided momentum for many large cap stocks which pulled the indexes. The top three sectors were Healthcare, Communications service and IT.
• Another factor that favored the market was Federal Reserve. I already wrote it above 
• Third important factor is the infrastructure bill, so far so good! So, what’s happening in the infrastructure bill? Let me elaborate..

Infrastructure Bill – what’s happening?

There are two parts to the infrastructure bill. 

• First, the $1.2 trillion bipartition infrastructure bill which was approved by Dems & Republicans. President Biden's $1.2 trillion plan to rebuild the nation's crumbling infrastructure which is expected create close to one million new jobs over the next decade. The measure includes $110 billion for roads, $73 billion for power infrastructure, $66 billion for passenger and freight rail, $65 billion to expand broadband access, $55 billion for clean drinking water, $39 billion for public transit, $25 billion for airports, $21 billion for environmental remediation, $17 billion for ports, $11 billion for transportation safety, $7.5 billion for electric vehicle infrastructure, $5 billion for zero or low-emission busses and $1 billion to demolish or reconstruct infrastructure that divided communities.
• The second part Democrats only $3.5 trillion reconciliation bill, so called spending plan or human infrastructure. This proposal cleared a major hurdle last week, after House Democrats overcame an interparty dispute by approving 50-49 in the house. If it goes through, the money will be primarily spent on climate initiatives, paid leave, child care, education and health care.

Both the bills have been set for a deadline of Sept. 27 for vote. The first one needs to be passed in the house and second one needs to be passed in Senate. It can be noted that, these were the major Democrats election agenda.

 

What can we expect in September?

As I have said before, if past performance is any evidence, September is the worst month for the stock market. In last 40 years it has returned -0.70% and -1% since 1928. So, will this year be any different? Nobody can predict what is going to happen and I am no fortune teller. But I think we may see some pullbacks in early-mid September before the deadline to vote for infrastructure bill. If investors feel positive that the infrastructure bills will pass then we may see further new high for the stock indexes. However, stock market may keep fluctuating like a pendulum until there are further clarities. Also, I will watch climate related renewable energy stocks because those were beaten very hard. With any positive news on the infrastructure bills, these stocks may zoom before people realize. It has been a painful time for green energy stocks as we saw so much euphoria after Joe Biden was elected as the President of USA. In my view, it certainly makes sense to put some money into this sector ahead of the final votes on infrastructure bill. But it’s unto each investor to decide diligently what’s best for them. However, keeping that in view, I have added a stock to my blog portfolio this month which fits the bill. Whatever it is, it’s very sensible to be watchful in September. It’s worth having some money on the sideline which can be deployed if market turns south. Sometimes, we only think about better time but it’s a good idea to have a Plan B in place.

 

What Strategy works in Investing?

In my more than two decades of investing experience, one thing that works is buying good stock when they are beaten hard. In terms of Warren Buffet, buy when there is blood on the street or when a stock is really hated. There may be companies which are beaten hard and fast despite their terrific growth potential, but investors do not like because the stocks keep falling further and further. There could be many reasons why it happens, viz. institutional selling to scare retail investors so that they can buy cheap, or short sellers shorting the stock to make money, bad news coverages by media and so on. Many times, retail investors get emotional, panicked and sell the stocks at a wrong time. Well, if we have done proper due diligence and identified a good stock, one should keep accumulating under such circumstance rather than being panicked and sell. Our portfolio may show red and terrible at times, but my friends buying the stock at such times pays of more than 90% of the time. And the largest gains are made when we buy/accumulate the stock at such times. Let’s take a moment to think about .com burst, the financial crisis of 2008-2009, the housing market collapse of 2009-2010, the fastest bear market of 2020. Well, in all these cases the stock market bounced back really hard. Agreed, some of the hyped stock might have gone from the market for ever but if we look back then what a turnaround of the stock market and most of the stocks!! However, if we pull out of the market and stay on the sidelines then possibly hard earned money is lost forever and ZERO return on investment. Stock pull backs, corrections and bear markets keep coming now and then but in the long run stock market always goes up.. We MUST remember this as an investor. Being panicked is not the solution, particularly if we do not need the money in the near future. But investment should be made only with those money which are not immediately needed. For such needs, we should have some savings to take care for a few months or possibly year. 

Having said that, finding the right stock which are cheap and has good potential is KEY. As most of us do not know, how far and how long the stock will fall. Usually, the stock falls more than what we anticipated. So, what do we do under such circumstances? First of all, if I do not have any position then it’s better to wait for the correction then once it stabilizes and start up taking , that may be the right time to buy. But it’s not as easy as it’s said. One has to do a good analysis of fundamental, charts, organizational accumulation and keep monitoring the stock and have a good understanding of its business, forthcoming catalyst and growth potential. But as I have said in several of my blogs, investing needs patience. We need to control our emotions. We have to evaluate our cash position, risk taking capability, age, job security, macro and micro economy environment and so on. But how many of us do all these? And even if we do, how many times do we get it right? So, making money in the stock market may not be as easy as it’s perceived. But with all these constraints what works?? As I said before and I am repeating again, “Buying good stock with potential for long term and especially when those are hated..”, the probability of success could be more than 80-90%. Also, those are the time we can expect best possible return on investment (ROI).

 

A quick glance at Revenue & Profit growth for 2021, Forecast for 20202

Quarter	Earnings %	Revenue %
Q1 (reported)	52.5	10.9
Q2 (underway)	89.3	19.7
Q3 (projected)	27.8	14.5
Q4 (projected)	21.3	11.0
FY21 (projected)	41.9	14.5
FY22 (projected)	9.4%	6.5

 

U.S corporations had a terrific second quarter with huge earnings and revenue growth. However, going forward both earnings and revenues are going to decelerate. That’s a concern for the economy and stock market as well. Next year 2022 is going to be a top year as earnings and revenue growth will decelerate significantly. As a matter of fact, the stocks will be very expensive comparing to their earnings, hence the stock prices have to come down to justify the valuations. So, should we and sit on the sidelines? Well, I will discuss more during my next investment meet or in my next blog.

 

Sectorial Stock Market Performances

Financials have been top performer in last one year with humongous 57.25% return. 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.

Clean Energy Fuels Corp. (CLNE)

Clean Energy Fuels Corp. is the country’s largest provider of the cleanest fuel for the transportation market. The company helps decarbonize transportation through the development and delivery of renewable natural gas (RNG), a sustainable fuel derived from organic waste. Clean Energy allows thousands of vehicles, from airport shuttles to city buses to waste and heavy-duty trucks, to reduce their amount of climate-harming greenhouse gas. It operates a vast network of fueling stations across the U.S. and Canada.

 

A brief look at Clean Energy Sector

As I wrote in my blogs before the U.S election, if democrats come to power then the clean energy stocks will have sunny days. When Joe Biden was declared as winner of U.S. election on Nov. 7, 2020, the clean energy stocks became too hot in the green wave. The wave continued till January 18, 2021, and then for last 7-8 months most of the stocks have been beaten down significantly. Some of the stocks have been decimated and lost 40, 50, 60 or 70% of their values. Probably, we are somewhere near a depression phase. So, what is in store for the future? In my view, clean energy’s future has never looked brighter despite all these depressions. Now let me come back to CLNE which went through same cycle. The company’s business is focused on natural gas for the transportation sector. But as we are aware, natural gas is one of the polluting fossil fuels which is NOT clean energy that the Biden administration is trying to reduce. So, how does Clean Energy (CLNE) get benefited? Well, the company produces renewable natural gas (RNG), which is NOT a fossil fuel. There’s no drilling or fracking involved. Instead, RNG isproduced using organic waste through processes like capturing the methane emitted by the waste. This fuel happens to be carbon negative and certified as a zero emissions solution by the Environment Protection Agency (EPA). As such, RNG replaces gasoline or diesel in transportation fleets and vehicles become greener because there is no carbon. RNG represents more than 74% of 26 million gallons of fuel Clean Energy expects to provide through these recent signed agreements. 

 

CLNE Deals in the pipeline

• In April, CLNE signed a deal to provide Amazon with up to 46 renewable natural gas fueling stations.
• RoadEX, a large California drayage company, is adding 16 new natural gas trucks to their fleet through the Chevron and Clean Energy partnership. RoadEx has committed to buy an approximate 960,000 gallons of RNG over the contract term.
• CLNE signed a multi-year agreement with the City of Pasadena for an anticipated 1.5 million gallons of RNG to fuel 53 vehicles
• It signed a contract with Big Blue Bus, the transit agency in Santa Monica, CA, to extend its RNG fueling contract for five additional years for an anticipated 10 million gallons of RNG to fill its 189-bus fleet.
• It signed a multi-year contract with Gold Coast Transit, CA for an expected 4.2 million gallons of RNG to fuel 56 buses and 25 paratransit buses and vans.
• It entered into a long-term agreement with Cedar Bus Company, New York, to provide an estimated two million gallons of fuel to power 60 shuttle buses 
• The City of Sacramento, and the City of Redlands have all extended their RNG supply agreements with Clean Energy for an anticipated 1.5 million gallons to fuel refuse trucks and other vehicles.
• KALM Energy of Nebraska has contracted with Clean Energy to take over operations of its three CNG stations that fuel transportation vehicles with about 1 million gallons. 
• The City of Fort Smith, Arkansas has contracted CLNE to build a $1.8 million station for the city’s sanitation department to fuel refuse trucks and provide maintenance services at the site and it has also signed an agreement to provide $380,000 in facility modifications.
• It has signed a contract with the Olathe School District in Kansas to provide about 75,000 gallons of CNG per year for its DS Bus Line buses. 
• The company is facilitating station expansions in two additional California locations, allowing it to double the number of RNG-fueled trucks in Sun Valley. Currently, the company provides Clean Energy RNG for Republic Services trucks in 22 states. 

Financials and other Key Metrics

• Q2 Revenue was $79 million, up 29% from second quarter of 2020 
• The GAAP net loss for the second quarter of 2021 was $79.7 million
• Company maintained its adjusted EBITDA guidance for 2021 of $60 million to $62 million. The fuel total volumes projection was increased to 101.4 million gallons compared to 89.5 million gallons a year ago. The company saw big increase from airport fleets and transit sectors, which have been the most impacted by the pandemic. 
• Effective price per gallon in the second quarter of 2021 was $0.67 per gallon compared to $0.58 a gallon a year ago 

My View

Before the U.S election, the stock was trading around $2.40. Once it was clear that Democrats won the election suddenly the stock caught fire. The stock rocketed to an all-time high of $19.79 on Feb. 9, when Amazon reported that it’s converting 700 transport trucks in its fleet to run on natural gas. Thus, the stock gained a humongous 700% (approx.) in just three months. However, since then the stock was again dragged down by the short sellers before recovering since last couple of weeks.. Currently, the stock is trading at $8.11, which is 59% down from its 52 weeks high. Last week House passed a blueprint of a $3.5 trillion infrastructure bill in addition to $1 trillion bill passed by the Senate. The infrastructure bill was the main agenda of President Joe Biden’s election campaign. If these bills go through then we can expect some sort of storm in the area of clean energy. It’s not that only government(s) will invest, rather we will see huge investment from private sectors, banks, financial institutions, oil companies. It just won’t happen within U.S but all over the world. The phenomena have already started but passing of these bills would ignite the fire.

 

Risks:

Any investment in the stock market is a risk. Off late, the clean energy sector has been beaten down heavily, but we are seeing some sign of revival with the emphasis given to infrastructure bill. All the green energy stocks have become very volatile. Furthermore, it depends on the stock market performance and of course the performance of individual company. Nobody knows the complete bottom of a stock, so the stock could fall further. Risk averse investors have to be very careful and act diligently.

 

My final thoughts:

As I have said time and again, the Biden administration is putting significant emphasis on climate change and taking all steps needed to emphasize on clean energy. The administration has a goal to cut U.S. greenhouse gas emissions between 50 – 52% by 2030. Moreover, it’s not only U.S but also many other countries are determined to focus on reducing the gas emission. The World climate summit is going to take place on November 7-8. There are many other investment summits before that, so I believe we would start seeing some momentum in this sector in not so distant future. I do not know what could happen in short term but as I have said before, I always keep a long-term vision for the promising companies and sector. Keeping that in perspective, I do take a calculated risk and invest in the growth sector for long term. If and when situation changes, I always take the proactive measures and reevaluate my strategy. If situation warrant, then I take quick decision to buy/sell an equity.

 

Shesa’s Blog Portfolio (As of AUG 29, 2021)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	148.6	1/25/13	1052%	HOLD
FB	47	372.63	11/13/13	693%	Buy on Dip
MA	77.18	355.73	12/12/13	361%	HOLD
AMZN	311.73	3349.63	4/12/14	975%	HOLD
BABA	67.28	153.86	2/21/16	129%	SOLD on 8/23 @153.86
EDIT	36.53	65.53	5/28/18	79%	Accumulate
SHOP	134.81	1531.42	11/25/18	1036%	HOLD
NFLX	297.57	558.92	1/6/19	88%	HOLD
CGC	20.16	17.19	12/10/19	-15%	HOLD (Trimmed)
GH	87.53	120.35	9/1/19	37%	HOLD
NIO	4.27	38.05	1/29/20	791%	HOLD
CCL	12	24.35	3/22/20	103%	HOLD (Trimmed)
BYND	76.91	121.5	4/19/20	58%	Accumulate
SPG	54.59	133.69	5/25/20	145%	HOLD
ENPH	45.3	174.99	6/28/20	286%	BUY - long term
TGTX	19.58	27.07	8/2/20	38%	Accumulate
BBBY	12.03	28.33	9/13/20	135%	HOLD (Trimmed)
MU	51.61	74	10/18/20	43%	HOLD
JKS	62.71	44.45	11/21/20	-29%	HOLD
SRNE	14.39	9.15	2/14/21	-36%	Good Long term BUY
GBTC	52.96	24.23	3/21/21	-54%	SOLD @24.23 on 7/20
PLUG	27.98	26.6	4/25/21	-5%	Good Long term BUY
GRWG	44.41	31.16	5/31/21	-30%	Accumulate
AGEN	5.39	6.26	7/18/21	16%	Good Long term BUY
CLNE	8.11	8.11	8/27/21	0%	NEW ADDITION
ETF
IHF	139.1	266.78	8/16/15	92%	HOLD
QCLN	70.23	66.51	1/3/21	-5%	Accumulate
MUTUAL FUND
FBIOX	11.46	23.38	3/1/13	104%	HOLD
PRMTX	59.45	210.21	12/20/14	254%	HOLD
FSRPX	9.05	25.2	1/15/16	178%	HOLD
FBSOX	37.32	100.9	3/20/16	170%	HOLD
FSMEX	43.66	86.52	9/24/17	98%	HOLD
Note: Dividends are not adjusted on the price.

 

 

Positions CLOSED since last Blog

BABA, GBTC

 

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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