Shesa's FEBRUARY 2022 Investment Blog
FEBRUARY 2022 - INVESTMENT BLOG
By Shesa Nayak
U.S. Stock Market Commentary
It has not been a great start for the stock market in 2022. The first trading day of the year went positive but subsequently we have experienced wild swings in the stock market. Historically, the stock market goes up about 1.2% in the month of January, but we saw a major divergence this year. All the major indexes posted sharp losses for the month of January marked by brutal price swings. The DOW slid 3.3% for the month, S&P 500 and Nasdaq suffered their worst monthly declines since March 2020, falling 5.3% and 8.98% respectively. The S&P 500 recorded its biggest January decline since 2009. We saw blood on the street as Nasdaq had come as low as 13,094 points marking a decline of 19.2% (near bear market) from its all-time high on January 24.
The fourth quarter earnings season is underway, most of the technology titans have reported their earnings. Apple, Microsoft, Google, Amazon came with solid earnings and their shares zoomed after the results. However, Netflix and Facebook tanked as they had a lackluster quarter. This year, stock is market is rewarding to those stocks who comes with solid earnings and smashing those who fails. This is a very challenging environment embodies with higher inflation, Fed interest rate hike, chip shortage, supply chain constraints, Omicron and moreover the increasing geopolitical tension between Russia and Ukraine. In addition, consumer sentiment falling to its lowest level in more than a decade in early February
In the economy front, U.S economy expanded an annualized 6.9% in Q4 2021, much higher than 5.5% for the year, the strongest pace since 1984. But the first quarter GDP projected by Atlanta Fed shows a grim picture! They are just expecting 0.7% GDP growth in Q1. That’s not good! The stock market may remain very volatile this year, particularly in the first half. As an investor, we should be mentally and emotionally ready to deal with it. It’s very likely that interest rate will be hiked in March, inflation will remain for a foreseeable future, Omicron, geopolitical issues, supply chain constraints, and slow global growth will be the headwinds for this year. So how will the market behave? It has got very volatile, and it may remain volatile. So, is the bull market “dead”? I will share my views, but before that let’s take a quick look at the stock market indexes.
| Indexes | 1/31/2021 (Close) | Close FRI 1/21/22 | Change in 2021 | % Change in 2022 | All Time High | From All Time High | % from All Time High |
| DOW | 36,338.30 | 34,738.06 | -1,600.24 | -4.40 | 36,952.65 | -2,214.59 | -5.99% |
| S&P 500 | 4,766.18 | 4,418.64 | -347.54 | -7.29 | 4,818.62 | -399.98 | -8.30% |
| NASDAQ | 15,644.97 | 13,791.15 | -1,853.82 | -11.85 | 16,212.23 | -2,421.08 | -14.93% |
| BTK | 5,518.45 | 5,111.76 | -406.69 | -7.37 | 6,376.77 | -1,265.01 | -19.84% |
| NBI | 4,728.94 | 4,114.68 | -614.26 | -12.99 | 5,517.77 | -1,403.09 | -25.43% |
S&P 500 Q3 Earnings
Earnings: For Q4 2021, 72% of S&P 500 companies reporting actual results so far with a earnings growth of 30.3%. If 30.3% is the actual growth rate for the quarter, it will mark the fourth straight quarter of earnings growth above 30%. On another metrics, 77% of those companies have reported a positive EPS surprise and 77% of S&P 500 companies have reported a positive revenue surprise.
Valuation: The forward 12-month P/E ratio for the S&P 500 is 19.7 (last blog it was: 21.2) which is above the 5-year average of 18.6 and above the 10-year average of 16.7.
Source: Factset.com
Economy News
Interest Rate: Fed has indicated 3 rate hikes in 2022, many Wall Street experts says 4, 5, 6, 7, 8 times. That’s absurd prediction!! I will share my view later.
GDP: Economic grew at 6.9% in Q4 2021. For the whole year 2021 GDP grew at 5.5%, the strongest pace since 1984. Atlanta Fed has projected 0.7% GDP growth for Q1 2022. This number do not look good!
U.S Coronavirus Cases: 77.6 million, Death: 918,000
COVID Vaccination: 213 million or 69.7% of the U.S population have been fully vaccinated
Retail Sales: US retail sales was -1.9% in December, the biggest decline since Feb 2021, ending 4 straight months of strong growth amid rising omicron infections. January sales number will be released this week.
Unemployment rate: 4%
US Total GDP/Economy: $20.937 trillion (last blog: 22.94 trillion)
Interest Rate: 0.25%
Inflation rate: 7.5% highest since 1982
Consumer Confidence: 61.7% hits 10 year low
Business Confidence: 57.6%
U.S Crude Oil price hits $93.90 a barrel
Nonfarm payrolls: Increased 467,000 in January, well ahead of the 150,000 Wall Street estimate
Fed minutes of the January meeting will be released this week
What’s impacting the Stock Market?
What a start to the year!! The stock market has been extremely volatile, and it may remain volatile for a foreseeable future. All these are happening because the stock market is confronting with several critical headwinds as indicated below:
Higher Inflation: We are seeing higher inflation. Currently it’s 7.5%, the highest in 40 years. The major contributor of the inflation is higher car prices resulting out of chip shortage, gas price and higher food prices. I do not see a short term solution for these macro factors during the first half of the year.
Interest Rate: Federal Reserve is expected to raise interest rates next month. Lot of Wall Street pundits says the minim interest rate hike will be 0.5% in March. They also suggest that Fed is going to increase interest rate at lease 6-7 times this year! That’s absolutely absurd!! I do not want to take those institutions name but please remember that their objective is to scare the retail investors. I am writing on this blog, please note, Fed may increase rate 3 times or worst case 4 times this year. It’s highly likely that they will raise 0.25% each time. Fed won’t go very aggressive from the beginning and collapse the recovering economy. Please note that we are still in pandemic, still no full employment, U.S. consumer sentiment falling to its lowest level in more than a decade, diminishing retails sales which is about 70% of the U.S GDP. The U.S. has about $30T budget deficit and higher interest will kill them. I don’t go with what analysts are saying because they never see the interest of the retail investors, rather always use a scary tactic for their own good.
Chip shortage, supply chain constraints and Omicron: Chip shortage has been a major problem for past one year and I do not see quick solution to this crisis. This coupled with supply chain constraints to manufacture and supply goods due to Omicron virus are major cause of inflation which in-turn trigger the interest rate hikes. So, all in all it’s a spiral effect. This will also impact the corporate sector for their future earnings. Lower earnings lower the stock price. Those companies will thrive who can overcome these entanglements and still produce good results, others will suffer.
Increasing geopolitical tension: On Friday, the U.S. announced that all Americans in Ukraine should leave the country in the next 48 hours — Russia’s building military presence at Ukraine’s border is making it look like Russia could invade at any time. There were many questions asked during my last investment meet “how is this geopolitical situation going to impact the stock market”? Frankly, speaking even if it happens then it may impact the stock market only for short term unless there is a full-fledged bigger scale war. So, I am not too much concerned about it.
Earnings: The corporates who are missing earnings are severely being punished and rewarding those who are coming with better results. In my view, this trend is going to continue during 2022.
Climate Change: nobody talks much about it. But please note that all these disasters of snow, cyclone and fire are severely impacting the economy by impacting transportation, employment and retail sales. U.S is losing more than $100 billion per year on these crises.
Growth stocks are decimated: Hedge funds, short sellers and many financial institutions are taking this opportunity and selling stocks at faster pace. Majority of equity sales seems to be happening at fund level as designed in the algorithm bringing the whole sector down significantly. Most of the growth stocks cloud, renewable energy, biotech stocks have been decimated and trading at their lowest. These stocks are down anywhere from 25-80% though S&P went up 27% last year!!
A fact: Out of 800 biotech public companies about 700+ companies had negative return in 2021!
So, is it doom and gloom all around?
Absolutely not! The business fundamentals still appeared to be solid, and the economy is still on the upswing. Many companies are coming with outstanding earnings. There is employment growth, wage growth and more importantly consumers are still spending.
Will the interest rate hike end the Bull Market and Growth Stock?
We keep hearing from the Wall Street experts, TV news and other media that when Federal Reserve increase interest rate the growth stock perform terribly bad! How far are these so called experts right?
Please allow me a moment and I will present the actual fact whether these experts are right or just making noise. Before I do that, let me say something, Federal reserve job is to content inflation and have a stable monetary policy for growing the economy/GDP. Its objective is NOT to destroy the economy. So, it’s not the enemy of stock market. Stock market is not the economy. The stock market might reflect changes in the economy and vice versa. A better stock market helps the economy in terms of employment, production and consumption. That said, when stocks or other financial assets rise in value, there is “wealth effect - investors feel wealthy” and often they spend some of their additional wealth, bolstering sales and promoting economic growth. Companies can issue additional shares and generate lot of cash for their business development and growth.
Coming back to my original point, higher rates should pressure growth stock because the debt/loan or borrowing cost increases pressuring growth stocks. Hence, the Wall Street guru’s scare the retail investors to run away from “growth stock” and buy “value stock”. You may be hearing experts coming on TV and blasting growth stock and praising value stock. But I will provide the fact that shows growth stocks actually perform better than value stocks during rate-hike cycles.
So, the questions come in mind, why is such difference between Wall Street guru’s and reality?
In reality, the stock market is a forward-looking discounting mechanism. Investors look to the future and price things into financial assets before they happen. Usually, the Fed telegraphs rate hikes and the course of monetary policy well ahead of time. As such, investors have ample time to price in rate hikes before they materialize. So, the "valuation gets reset" on growth stocks due to the future anticipated rate hikes which usually happens before the rate-hike cycle even begins. Currently, the stock market is anticipating a quarter point rate hike in March and possibly there will be a couple of more rate hikes during the year. That’s why we see numerous growth stocks have been beaten down to earth losing more 20-80% of their value. Many of those have gone to clearance sale..
The growth stocks are mostly priced for higher rates. Once the rate hike cycle begins, the determinant will be “earnings” not interest rates to drive growth stocks either higher or lower. If the company comes with good earning, the growth stocks move higher at a faster pace even in the face of rising rates (which they already priced for).
As the growth stocks have already crashed and are getting repriced for higher rates, once the Fed starts raising rates in March and we officially enter a rate-hike cycle, the humongous burden of anticipation will be lifted many off these growth stocks and these stocks could rally big! Now let me put those facts. Now let’s see the metrics below:
Growth vs. Value performance during Rate Hike Cycle | |||
Cycle | S&P 500 Return | Russel 2000 (Small Cap) Growth Return | Russel 2000 (Small Cap) Value Return |
1994 -1995 | 01.% | -5.1% | -5.9% |
1999 – 2000 (.com) | 6.8% | 22.8% | -2.8% |
2004 - 2006 | 11.6% | 16.4% | 24.9% |
2015 - 2018 | 20.9% | 18.5% | 16.0% |
2022 - ?? | ? (TBD) | ? (TBD) | ? (TBD) |
Avg. Return | 9.9% | 13.2% | 8.1% |
If we see the above table, there have been four rate-hike cycles since 1990. In three out of the four cycles, growth stocks outperformed value stocks. In two out of the four cycles, growth stocks outperformed the S&P 500. On average, across all four cycles, growth stocks posted the best returns. The average returns for the S&P 500 during the last four rate-hike cycles is 9.9%. During the same time value stocks returned 8.1%. Growth stocks have returned a surprising 13%.
Now let me take a step further and see how the stock market have performed overall during Rate cut and Rate hike cycle since 1989 till Jan 2nd week of 2022:
Interest Rate Cut: DOW up 23%, the S&P 500 gaining 21% and the Nasdaq gained 32%.
Interest Rate Hike: DOW up 55%, S&P 500 gained 62.9% and the NASDAQ up 102.7%.
My thoughts: I have said many times, I am a growth investor. The growth stocks have crashed (20-80%) and may even drop further if market melts down. But when I see such clearance sale, I see value in those growth stocks. So, I have been accumulating in small quantities and selectively buying some leaps. Once this rate hike fear is faded, many of these growth stock could run like crazy, as long as they show the earnings. As we saw above, historically they have come as winner, and I do not think it will be different this time. Though, we keep hearing from experts “this time it’s different” but frankly speaking stock market has always gone up in the long-run irrespective of short term debacles.
Let’s understand that the Bull markets do not die of old age. They die because the fundamentals change. I do not see that has happened yet. But the fear that the good times end as soon as interest rates tick higher and growth stock dies is completely a WRONG notion! Today, with the market down and investors scared, I recall Warren Buffet’s principle “be greedy when others are fearful”. I guess we are approaching to that time. There will be volatility, and nobody should be expecting the market to move higher in a straight line.. That's not how markets work. But if we believe on the stock market, buying good stock at the worst time has provided the best return in the long run! I believe on the stock market hence following the same path by avoiding the noise. Time will tell whether I am right or wrong!!
Which Stock should do well in 2022?
Battered stocks in renewable energy, biotech, semiconductor and technology should bounce back. These stocks have been decimated and I see lot of potential in the long run. Agreed, they have a terrible time now, but these are the sectors with significant growth potential. Sometimes, we should follow the money and sometimes we should go against the Wall Street view. Now Wall Street hate these stocks, but I like some good stocks in these segments. I like accumulating stocks when there is blood on the street. I am cautions when there is falling knife, particularly if there is change in fundaments. I very well understand that in these days of Algorithm based trading and high frequency trading (HFT) fundamentals does not matter too much in short term. Every stock gets slammed when market has a free fall. But when a company keeps performing with good earnings, money will follow and when money follows there will be momentum. But for that to happen, it needs lot of patience to accumulate the stock and wait for the time to come. Many time it gets emotional but it’s important to control the emotions keeping long term perspective.
Revenue & Profit growth for 2021, Forecast for 20202 (updated 2/13/22)
Quarter | Earnings % | Revenue % |
Q1 | 52.5 | 10.9 |
Q2 | 90.9 | 19.7 |
Q3 | 39.6 | 17.8 |
Q4 (In Progress) | 30.3 | 15.00 |
FY21 (projected) | 47 | 16.2 |
Q1 22 (projected) | 5.6 | 10.2 |
Q2 22 (projected) | 4.4 | 8.4 |
FY22 (projected) | 8.6 | 8 |
From the above table, it’s immensely clear that revenue and earnings growth in 2022 will be far less than 2021.
Sectorial Stock Market Performances (TOP 5 sectors for 2021)
Sector | YTD Performance in %age |
Energy | 26.47 (TOP) |
Financials | 2.49 |
Consumer Staples | -2.48 |
Industrials | -6.12 |
Utilities | -6.51 |
Please click below link to view complete sectorial performances:
Source: Fidelity.com
Now let me discuss this month’s inclusion to my Blog Portfolio.
Nvidia (NVDA)
NVIDIA Corporation primarily operates in two segments, Graphics, Compute & Networking. The Graphics segment offers GeForce GPUs for gaming and PCs. The GeForce NOW provides game streaming service, related infrastructure, and solutions for gaming platforms. The company also provides GRID software for cloud-based visual and virtual computing and automotive platforms. The Compute & Networking segment offers Data Center platforms and systems for AI and accelerated computing, autonomous driving development, autonomous vehicle solutions, robotics and other embedded platforms. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. The company was founded in 1993 and is headquartered in Santa Clara, California.
Why do I like Nvidia?
Nvidia is in an enviable position and the future looks even brighter. It’s a dominant player in various product segments including Artificial Intelligence (AI). And as we know, AI coupled with Machine Learning (ML) is where the future of technology is moving. The company first made a name for itself by powering video games with its fast graphics chips. Currently gaming generates 45% of its total revenue. However, data center revenue is anticipated to surpass its gaming revenue in not so distant future. The company's graphics chips are well-suited for the massive processing capacity needed by artificial intelligence (AI) apps. But let’s not forget its professional visualization unit which happens to be the fastest-growing business for the company. Nvidia's Omniverse platform for virtual 3D design and collaboration is already a big hit. Omniverse Avatar, which can be used to generate interactive AI is expected to bring multi-billions dollar market opportunity. NVDA is a major player in which can potentially make even more money over the long term supplying graphics chips that bring the virtual world to life. The company also has tremendous growth potential with its self-drivingcar technology. It also provides software for cloud-based visual and virtual computing The company also provides necessary processing power for the development of quantum computing and recently released cuQuantum, a software development kit designed for building quantum computing workflows. It has terrific revenue and earnings growth for last few years. So, now let’s see the financials.
Financials
Last November, Nvidia announced excellent Q3 earnings. Revenue soared 50% to a record $7.1 billion comparing to Q3 of 2020. The EPS growth was exceptional 83%, $1.17 per diluted share. Please note that NVDA has averaged outstanding revenue growth of about 57% over last eight quarters and EPS growth of 45% for last 5 years!! The company is expected to declare its year end result on this Wednesday, 2/16/22. I strongly believe that the momentum for this company is going to continue for years to come. Now let’s take a quick look to company’s fundamentals.
Market Capitalization | $645.6B | Return on Equity | 41.4% |
Trailing P/E | 79.58 | Total Cash | $19.3B |
Forward P/E | 50.25 | Total Debt | $11.83B |
Price/Sales | 24.99 | Book Value per share | $9.51 |
Revenue | $24.27B | 52 weeks high | 346.47 |
Quarterly Revenue Growth (YOY) | 50.30% | 52 weeks low | 115.67 |
Gross Profit | $10.56B | 52 weeks change | 56.22% |
Net Profit | $8.21B | Held by Institutions | 67.22% |
Quarterly Earnings Growth (YOY) | 84.40% | Float | 2.4B |
EPS | $3.24 | Forward annual dividend | 0.07% |
My View and Strategy
Given its growing addressable market in cloud computing, gaming, AI, and more recently the metaverse, autonomous driving etc. NVDA stock is a great long-term investment. The company has a record of exceptional earnings in last few years. I have bought this stock many times including when it was trading below $10. I also included this stock I guess in 2017 but had a couple of bad quarters, so removed from my blog portfolio. I bought it back again in 2019 and still holding this stock and keep accumulating. I have added and trimmed the stock many times. Currently the stock is trading at $239.49 with a market capitalization of $596.8 billion. The shares are up 56% in last one year despite the recent decline of 31%. So, it’s still not a cheap stock. The company will declare its 4th quarter and whole year earnings this week. So, I feel that this may be the right time to keep taking new position or accumulating slowly at a discounted price. Depending on the results, one can further determine the next step. I do feel that it should have a strong quarter through nothing can be predicted with certainty. As I have said before, I mostly take a combined approach of trading and investing strategybecause we do not know the top or bottom of any stock for sure. It’s even harder in such a volatile market. Hence, I always buy a in a phased manner when it comes down, take some profit when there is a good run and hold remaining shares for long term. I own this stock and keep adding whenever I get the opportunity but won’t hesitate to trim little bit on any big run.
RISKS: The stock has tremendous potential in the long run. Having said that, nothing is certain in such volatile market, so the stock may further go down if the stock market goes down. The stock may move in the direction of overall stock market. That’s the risk, but every equity has that risk, so NVDA is no exception. Whatever may be the risk, once market bounces back this stock is going to roar back unless they screw up their earnings.
My final thoughts
In my view, NVDA is a great long term investment. The company is exceptional in its graphics chips and dominates the gaming space. The data center and virtualization are growing exceptionally well. The company may drive the future of technology with strong presence and possible domination in Artificial Intelligence (AI), autonomous driving, metaverse and quantum computing. The stock may be little volatile and could go up or down in short term. But in the long run this is one of the great technology stocks and almost certainly a winner with a tremendous growth potential. In my view, this is a must have stock for any growth investor’s portfolio!!
Shesa’s Blog Portfolio (As of FEB 13, 2022)
Equity | Suggested Price | Current Price | Suggested Date | % Change | My View |
STOCK (All prices are in USD) | |||||
12.9 | 168.64 | 1/25/13 | 1207% | HOLD (trimmed) | |
47 | 219.55 | 11/13/13 | 367% | HOLD (trimmed) | |
77.18 | 369.77 | 12/12/13 | 379% | HOLD | |
311.73 | 3065.87 | 4/12/14 | 884% | Buy on Dip | |
134.81 | 854 | 11/25/18 | 533% | HOLD (trimmed) | |
297.57 | 391.31 | 1/6/19 | 32% | HOLD (trimmed) | |
4.27 | 24.1 | 1/29/20 | 464% | HOLD (trimmed) | |
12 | 22.04 | 3/22/20 | 84% | HOLD | |
54.59 | 141.83 | 5/25/20 | 160% | HOLD (trimmed) | |
45.3 | 145.69 | 6/28/20 | 222% | Accumulate | |
19.58 | 10.9 | 8/2/20 | -44% | SOLD @10.90 on 1/31/22 | |
62.71 | 42.27 | 11/21/20 | -33% | SOLD @42.27 on 2/4/22 | |
14.39 | 3.18 | 2/14/21 | -78% | HOLD (trimmed) | |
27.98 | 21.29 | 4/25/21 | -24% | Accumulate | |
5.39 | 2.44 | 7/18/21 | -55% | HOLD (trimmed) | |
8.11 | 6.6 | 8/27/21 | -19% | Accumulate | |
51.49 | 51.01 | 10/10/21 | -1% | Accumulate | |
55.21 | 25.84 | 11/21/21 | -53% | Accumulate | |
118.24 | 91.42 | 1/2/22 | -23% | Buy/Accumulate | |
239.49 | 239.49 | 2/13/22 | 0% | NEW ADDITION | |
ETF | |||||
139.1 | 271.33 | 8/16/15 | 95% | HOLD | |
70.23 | 56.35 | 1/3/21 | -20% | Accumulate | |
MUTUAL FUND | |||||
59.45 | 156.4 | 12/20/14 | 163% | HOLD | |
9.05 | 20.5 | 1/15/16 | 127% | HOLD | |
43.66 | 71.13 | 9/24/17 | 63% | HOLD | |
Note: Dividends are not adjusted on the price. | |||||
Positions CLOSED since last Blog
19.58 | 10.9 | 8/2/20 | -44% | SOLD @10.90 on 1/31/22 | |
62.71 | 42.27 | 11/21/20 | -33% | SOLD @42.27 on 2/4/22 |
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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