Shesa's APRIL 2023 Investment Blog

 APRIL 2023 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Commentary  

The stock market remains volatile as it keeps confronting with various economic developments. The market experienced continued hike in interest rate and collapse of U.S banks within no time. On March 10, another disaster struck - collapse of Silicon Vally Bank with an asset of $209 billion. This was the 2nd largest banking collapse after the collapse of Washington Mutual in September of 2008. We also saw collapse of Signature Bank and debacle of European Bank - Credit Suisse. Why did all these happen? Obviously, for Silicon Vally Bank it was primarily a management failure. However, the main reason of all these collapses possibly was “persistent and fastest rate increase by federal reserve”. Under all these circumstances, Fed had no choice but raise only 0.25% interest rate. Probably they are almost done raising rates. Possibly, we may see another 0.25% rate hikes in May. That may be the end of rate hike cycle. It won’t be surprising if they don’t raise rates again. Meanwhile we also saw the CPI, PCE, job numbers have been moderating.

With all these chaos, Nasdaq still had a stellar first quarter, up 16.77%, S&P 500 was up 7.03% and DOW barely managed to remain positive, up only 0.38%. April happens to be a one of the best month for the stock market. So, we will see whether will see more fireworks or reverses the gear. The first quarter earnings will start from 2nd-3rd week of April. Those stocks which will come with solid earnings will thrive and those who misses and provide poor guidance may get slaughtered.

The market pundits says that we don’t enter a bull market until Fed is done raising rates. However, there are many factors which indicate that time may be approaching to deploy some cash on the sideline. Though the expert  may be right but it may be wise to be a step ahead and not to wait until Fed is done. Fed may/may not be done yet but certainly we are almost at the door step of the end of rate cycle. Hence, it’s better to take advantages of some stocks when they are still available at cheap price. That’s my personal view but each investors must invest based on their own due diligence and comfort level. The market will never go straight up, there will be volatility, pullbacks every now and then but that may provide opportunity to grab some good stocks. But my due diligence says that we may be approaching and inching towards next bull market, slowly but steadily. I may be totally wrong but I may position my investment based on my research. I will share my detailed view but first let’s look into stock market index.

Indexes	Close FRI 12/30/22	Close THU 4/6/23	Change in 2022	% Change in 2022	All Time High	From All Time High	% from All Time High
DOW	33,147.25	33,485.29	338.04	1.02	36,952.65	-3,467.36	-9.38%
S&P 500	3,839.50	4,105.02	265.52	6.92	4,818.62	-713.60	-14.81%
NASDAQ	10466.48	12087.96	1,621.48	15.49	16,212.23	-4,124.27	-25.44%
BTK	5,281.10	5,391.84	110.74	2.10	6,376.77	-984.93	-15.45%
NBI	4,213.13	4,193.72	-19.41	-0.46	5,517.77	-1,324.05	-24.00%

Economy News

• Interest Rate: Fed hike another 0.25% interest rate in March bringing the current Fed rate to 4.75-5%. Possibly Fed is done or we may see another 0.25% rate hikes in May. After that, most likely Fed will wait and watch.
• CPI & PPI: 6%, PPI: 4.59%. March 2023 CPI data to be released on April 12,.
• Mortgage Rate: 30 years conforming loan: 6.6%
• GDP:   In  Q4 2022  GDP grew at 2.6%. Q1 2023 GDP data will come out on April 27.
• Unemployment rate: 3.5%. In March 236,000 jobs were created almost meeting the Wall Street expectations of 238,000 jobs.
• Consumer Confidence: 62 down from 67 in February 2023.
• Business Confidence: The ISM Manufacturing PMI decreased to 46.3 in March of 2023, the lowest since May of 2020, and below to 47.5 expected.
• U.S Crude Oil: $80.46 a barrel. 
• U.S Dollar Index: 102.09.
• U.S Treasurys: 1 yr: 4.64, 2 yr: 3.99, 5 yr: 3.51, 10 yr: 3.41%.

Earnings projections for 2023

Q1 2023: -6.6%

Q1 2023: -4.4%

Q3 2023: 2.3%

Q4 2023: 9.3%

FY 2023: 1.5%

Based on the above table, it shows that we will continue to see earnings recession till the end of Q2 before turning positive in Q3.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.8. This P/E ratio is below the 5-year average of 18.5 but above the 10-year average of 17.3.

Is the market inching towards a new bull market?

In my earlier blogs, I wrote many factors why I think stock market should do well in 2023. Please read my February/March blog. I wrote all the below indicated points and substantiated with facts. However, I would like to recap those facts for the benefit of the readers in one liner.

• January sets the trend for the Year: 9th best January this year. In 86% of the cases a positive return in January led to 11.3% gains over the rest of the year.
• Mid-Term Election Year has an average return of astounding 46.9%.
• Stock Market return after bear market - ROI of 16% after 1 year and 35.5% after 2 years. 
• Inflation is slowly but gradually coming down
• Supply chain is getting better
• Lots of money in the sideline
• Fear of Missing Out (FOMO)

After my previous blog, we saw emergence of a new economic problem and that’s “banking crisis”. The banking crisis has taken its tool on Individual investors as they are scared right now and are feeling very uncertain. Any bump in the stock indexes are seen as a game. Obviously, I also feel the same way. The market has frustrated lots of individual investors. In just five weeks, the bull ratio fell 32% which is the largest five-week drop over the past decade. The last time we saw such decline in sentiments way back in 2006. Based on the statistics, the sentiment has dropped faster only 12 times since 1990. Whenever such reversal of trend has occurred, the stock market has returned in the following way: 

• 3.4% gains in 3 months
• 9.2% gains in 6 months
• 14.4% gains over next 1 year

This has been true 92% of time in the past. Hence, this type of sentiment switch may provide an opportunity to take little risk and start investing. The trend is our friend. Having said that, let’s just remember that stock market is not in our control. What is in our control is, when to invest, how much to invest and where to invest. We need to have some sorts of strategy. No strategy pays from the next after picking a stock. Sometime it needs patience, adjustments and setting right expectations. If it does not work then revisit and re-strategize. 

Breakaway Momentum Indicator

This is another most important fact that I would like to emphasize why I think we may be in for a forthcoming bull market “Breakaway Momentum”. This is where we look at the relationship between two groups of stocks that I would like to elaborate more.  The breakaway momentum in simple term“stocks that are advancing vs. stocks that are declining”. This is the comparison of the ratio of stocks advancing each day for 10 days vs. the stocks that are declining each and every day. As a matter of fact, wen this mathematical calculation hits a certain level it’s time to focus on long term trend of the stock market. According to Chaikin Analytics this signal triggered recently. That coupled with bearish investors sentiment could indicate that it’s time think about our investments. The Breakaway Momentum signal has only triggered 18 in the previous years since 1950, 73 years. So, let’s take a quick look into the historical metrics:

• This signal occurred 3 years ago during the COVID recovery in 2020 and the market rocketed 57%. 
• This signal also flashed in March 2009, before the market rose more than 300% during its longest bull market that we saw in history. 
• Before 2009 the signal had flashed 18 years ago in Jan 1991 and stock stock market went up few hundred %age points. 

The percentage of S&P 500 Index stocks trading above their 200 days moving average (DMA) is around 50% which is slightly below what it has been recently as we saw some pullbacks in last few days. However, it's much higher than only 10%-20% stocks which were going up since October 2022. This is another positive sign since more stocks are going in positive direction.

Another reason, the U.S. Dollar Index ("DXY") is still trading below its 200 day moving average (DMA) which means the "strong dollar" trend could be behind us. Strong dollar makes import cheaper but export becomes expensive. Hence, the multi-national companies lose because of strong dollar. Dollar kept rising because Fed has been raising interest rates persistently. 

Finally, according to Bespoke Investment Group, NASDAQ began its latest bull market on December 28, 2022. In their study of last 16 years of NASDAQ 100 bull markets,  the median gain was 58.7% over a span of 262 calendar days. As of March 31, 2023, the NASDAQ 100 was up 22% in just 93 days since 12/28/22. Hence, we may have long way to go. However, the market never goes up straight, so patience and strategy is of essence. 

Let me sum up: Most experts think that bull market will not begin until Fed pivot. I may not disagree with them. Having said that, we have so many factors which indicates that we may be approaching the end of bear market and inching towards the next bull run. Nobody can exactly predict whether it will weeks or months and we won’t know unless most of the stocks are up and expensive.  As such, it’s better to think ahead and start building the portfolio when some stocks are still cheap to reap the biggest reward. It reminds me of Warren Buffet’s principle, “it’s wise for investors to be fearful when others are greedy and greedy when others are fearful”. This is one of the principle that I believe. But we must do due diligence to make sure that we are not catching the falling knife. I am repeating again, the stock market never goes up on a straight line.  The stock market already has a good year starting January 2023, particularly Nasdaq had a stellar quarter rising 16.77%. There will be volatility on the way and we can anticipate some pullback in the range of 3-8%. But as an investors we may have to learn to appreciate these pullbacks because it gives the opportunity to build our portfolio and new money waiting on the sidelines to come into the market. In investing, experts say it’s impossible to time the market. I do agree with this notion. But when the end of rate hike cycle is approaching and most of the indicators are flashing for a forthcoming bull market, I do not mind putting my money to work though I may be little early. It’s OK for me to sit tight in case I am wrong. But if the historical facts are repeated then it should bring better Return on Investment (ROI). Somehow if it goes wrong then we may have to control our emotions and wait with patience. It’s up to each investors to decide what works for them, how much risk they can/can’t take, how much knowledge, experience, patience they have in investing and of course how much capital to deploy. Hence, they should do their due diligence and evaluate their own strategy. I am not a fortune teller so can’t predict anything with surety. However, I can put the facts from all my research. It may be right or wrong, so one must do his/her own due diligence. Hence, in my view, it’s time to think about the next phase of the market and how to make use of available cash.

Which stocks may do well? 

There are a few sectors doing well at this time, communications services, technology, consumer discretionary etc. But I like technology stocks and look for growth. But it’s not that all the stocks in the technology sector will boom, hence we must do our research and pick equity which may do well. Thus far, NVIDIA,  Tesla, Netflix, Microsoft, Meta and Apple has lead the way. Almost 80% of the Q1 index growth has been contributed by these stocks. However, I like two more stocks i.e Amazon and Google. I think these two stocks may have room to run. The first quarter earnings will start from 2nd-3rd week of April. Those stocks which will come with solid earnings will thrive and those who misses and provide poor guidance may get slaughtered. One of my favorite sector is Semiconductor. These stocks were beaten down heavily but their earnings may get better because of few factors. First, gradual rise in demand and secondly easy year-over-year comparison. Hence, I do really like this sector. Another sector worth watching may be Real Estate because we may have gone past peak in the interest rate. Hence, things may take time to turnaround but it should get better in months to come. The oil and gas sector is cheap based on their earnings potential but please note that the year-over-year comparison will going to get tough this year because they had a terrific 2022.

Sectorial Stock Market TOP sectors for 2023 - Year to Date

Sector	YTD Performance in %age
Communication Services (TOP)	22.98
Information Technology	20.10
Consumer Discretionary	12.34
Materials	2.44
Consumer Staples	1.07
Real Estate	0.63
Financials (Worst performer)	-6.66

Please click below link to view complete 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 stock picks for my Blog Portfolio.

Redfin Corporation, (RDFN)

Redfin Corporation operates as a residential real estate brokerage company in the United States and Canada. It operates an online real estate marketplace and provides real estate services, including assisting individuals in the purchase or sell of home. It also provides title and settlement services; and originates and sells mortgages. Redfin was founded in 2002 and is headquartered in Seattle, Washington.

As we know interest rate has/had sky rocketed as Federal Reserve has been hiking interest rate persistently to bring down inflation. In last few months 30 years mortgage zoomed from around 2.5% to as high as 7.1%. So, it was obvious that the affordability to buy home came down significantly. Because of higher interest rate the mortgage payment has more than doubled. This has impacted home market significantly. However, things have been changing offsite. House hunters are wading into the market as mortgage rates and home prices continue to decline, according to a report from Redfin, the for the week ending March 26, the application for mortgage purchase increased for the fourth week in a row and Redfin’s Homebuyer Demand Index jumped to its highest level since last May. But it’s yet to translate into more home sales. Based on the latest report, pending home sales dropped 19% year over year nationwide in the four weeks ending March 26. In other words, demand for homes hasn’t yet translated into an improvement in sales mainly because of many reasons:

Lack of homes in the market. Sellers are not interested to sell the home because they have bought the home and paying very less interest rate. If they sell their home and buy another one then they have to pay 2-3 times more interest rate. Hence, it’s not sensible to sell home.

Secondly, because of higher interest rate there are not many buyers willing to pay higher price. So, sellers can’t get premium rather they may have to sell less than their asking price. Overall, Real Estate has a terrible time since last 12-18 months. But in this environment why do I still like Redfin?

Why do I like RDFN?

The time is neither good for buyer nor sellers. Still why do I like Redfin? Well, interprets rate hiking cycle is almost approaching towards the last phase. Possibly, we may see another one or two hike of 0.25% and then Fed should be done. Currently, 30 years mortgage rate is around 6.5% but as Fed comes to the end of rate hike cycle the rate could drop to possibly 5 - 5.5% range. Hence, there should be spike in demand for home buying. Because we may see lots of home buyers jumping to the market. On Friday, 3/31, the Redfin issued a report saying that homebuyer demand among early stage buyers had surged recently. Please note that stock market factors all the events 3-6 months ahead of time.

Redfin’s code business is real estate brokerage. However, the company has expanded its business into rentals and mortgages. The monthly visitors to its redfin.com website has been growing and reached to 50 million. Redfin's brokerage business covers astronomical 98% of the U.S. real estate market. As a matter of fact, the company is able to afford a listing fees of mere 1% comparing to industry standard 2.5% listing fees. 

For 2022, the Redfin achieved a market share of 0.8% of all U.S. homes sold. On annual basis, it was an all-time high for the company. 

placing it in a great position to benefit once Federal Reserve stops raising rate or once the pivot. interest rates do begin to decline and the housing market picks up steam.

Financials

The Wall Street is estimating $1.1 billion in revenue for 2023 which is around 50% less from previous year. One of the reason is that it stopped it RedfinNow business because that was not profitable. At this time, Wall Street only values those companies who’s are making profit and stable. All other factors does not carry much significance particularly for many institutional investors. It’s expected that this year RDFN may be able to achieve positive earnings before interest, tax, depreciation, and amortization (EBITDA) on an adjusted basis this year. Some segments for Redfin are beginning to heat up. The company originated $4.3 billion in mortgages during 2022, a whopping 337% growth comparing to 2021. About 17% of home that it sells are attached to the loan provided by Redfin. By the end of 2022, the company generated $2.3 billion in revenue, $365 million in cash and $1.35 billion in debt. Last year and early this year has been terrible for the real estate sector, so those are not worth narrating. So, why do I still buying this stock. Let me explain my view.

My View and Strategy

The real estate sector is doomed at this time. But Fed is approaching to the end of rate hike cycle and that should be a catalyst because mortgage rates will come down to at least around 5.5% level from current 6.6%. This will push the buyers those who have been waiting in the sidelines for months or years. This should be a great stock to own this stock. The reason, the stock is currently trading at $8.87 and had a 52 weeks high of $16.37, so it’s down about 46%. However, let’s not forget that in February 2021 this stock had a all-time high of about $76. So, effectively it’s down about 89% from its all-time high. Assuming the old good times ay not come soon but once mortgage rates comes down in next few months this stock should move beyond $15, $20 or possibly $25 by next year. I bought this stock from below $5 and I keep accumulating on the down days and keep trimming little bit when it has a good run. My investment has been two folds buying stock and some long-term options. But options are risky so obviously not advisable unless one is well-versed with it. Even then it’s very risky. Well, the stock has taken a huge beating and I do feel that it’s a great opportunity for the long-term investors. For last one year or so, Wall Street is has no sympathy for the companies who are not making profit and just relying on long-term growth. Hence, we see all renewable energy stock and many cloud stocks have been devastated. However, things could change once Fed pivot or stop raising interest rate. Particularly, I am optimistic about Redfin to turn the corner once home market bounces back in next few months. So, one can wait for the turnaround of home market but I am a bottom fisher, so I take these opportunities to accumulate. And when other start chasing I start trimming. However, that need patience and some time lots of patience. Otherwise, better to invest in conservative stocks. But I am a growth investor, so I do not think there will be an immediate turn-around but I am extremely confident that this stock may potentially go up at least 50-100% in next 12-18 months conservatively. However,  at this time, it needs patience to keep accumulating. Currently value the company at $877 million. That means the stock trades at a price to sales (P/S) ratio is mere 0.40, which is the cheapest level since the company listed publicly in 2017, and far below its peak P/S of 7.7. This might be a chance for investors to buy in at a rock-bottom price, ahead of a more favorable environment for real estate in the medium term. 

Risks

The stock market has recovered since the beginning of this year. But the current environment is still very dicey because of inflation and continued rate hikes by Federal Reserve. So, the volatility will remain for foreseeable future. But after the banking crisis FED must be very cautious on their action going forward. But future is uncertain so we can expect any eventuality. Obviously, there are lots of risks for the companies who are not making profits at this time. I will say that’s a universal risk. But in my view it’s worth the risk and keep accumulating RDFN for long-term.

My final thoughts on RDFN

The stock market has been very volatile and future is unknown. But as we are approaching end of Fed rate hike cycle the real estate market should bounce back in next few months. And if that happens I think it’s compelling opportunity to accumulate Redfin. I see great long term growth opportunities. Hence, I am invested. As usual, if I see red flags, it does not matter how great the company is, I may pull the trigger. But at this time I smell good opportunity with RDFN, hence I am invested for long-term.

Direxion Daily Semiconductor Bull 3X Shares (SOXL):

This month I am adding one more very aggressive ETF know as SOXL. It may sound crazy to buy such aggressive equity in such an uncertain market environment. However, I have been accumulating and trimming SOXL for quite some time. I also discussed it during my investment meet. I am not going to elaborate too much on this equity. But just to remind the readers that SOXL is 3x meaning that if the semiconductor index goes up 1% then this should go up 3%, when the index goes down 1% SOXL comes down 3%. Also, please note that such 3x equity keeps losing its value in the long run. So, why am I have been bullish on SOXL? 

My thoughts on SOXL

Semiconductor stock has gone through a very rough phase in lat 12-18 months and now the sector seems to be recovering. The demand for chips are expected to pick up in the 2nd half of this year. Furthermore, the buzz on artificial intelligence, self driving, robotics etc. are going to be the future. All these need sophisticated chips. We all know that almost every electronic device these  days needs chip. Semiconductors are cyclical meaning that there are phases of upturn and downturn. We just saw the downturn and the next phase is anticipated to be upturn. SOXL hold many chip companies like NVDA, AMD, AVGO (Broadcom), QCOM, Texas Instrument etc. So, if we are bullish on the chip sector then I think SOXL is the best way to increase the return on investment (ROI). Similarly, if the sector goes south then it may be a terrible hold because we may lose 3x values. But as I said before, I am seeing bullish momentum for this sector. Hence, even though it’s high risk, I am willing to add it to my portfolio. If I am right, it should be great, if I am wrong it may be worst. This ETF has a Net Assets of $5.68 billion at this time. Currently, SOXL is trading at $15.66 with a 52-weeks high of $30.85, discount of 49%. In December 2021, it had all time high of $68. If we factor into that then it’s trading 77% below its all-time high. However, I do not think we may see such astronomical gain again. If we are bullish, this may be the best one to own. But as I said, risk is very high if the sector turn bearish. So, one has to be very diligently strategize how much to invest depending on the risk taking capability and ability to co-op with the volatility.

RISKS: SOXL is highly leveraged and hence it carries immense risks. Frankly speaking, it’s not an investment rather it should be used as trading not as an investment. Buy at low in a phased manner and sell at when it bounce back in a phased manner. Any investor who is not willing to take high risk or can’t co-op the volatility must avoid such leveraged ETF. It’s our hard earned money, so we have to decide whether it fits our investment framework. If yes, we can go ahead, if no, we must avoid it. In my case, I take some calculated risk and look for growth and hence SOXL is in my portfolio. I accumulate when it goes down and trim when it goes up. If I feel that the sector is turning b then bearish then it’s better to get out of this ASAP. At this time, I see the sector is on the verge of taking uptick and hence I have added to my portfolio. 

Shesa’s Blog Portfolio (As of APRIL 9, 2023)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	164.66	1/25/13	1176%	BUY around $140
META	47	216.1	11/13/13	360%	Accumulate
MA	77.18	361.47	12/12/13	368%	HOLD
AMZN	15.58	102.06	4/12/14	555%	BUY/ Accumulate
SHOP	13.48	45.35	11/25/18	236%	HOLD
SPG	54.59	109.77	5/25/20	101%	HOLD
ENPH	45.3	191	6/28/20	322%	Accumulate
PLUG	27.98	9.27	4/25/21	-67%	HOLD (Trimmed)
SAVA	51.49	23.97	10/10/21	-53%	HOLD
NVDA	239.49	270.37	2/13/22	13%	BUY/Accumulate
CHPT	18.44	9.19	3/20/22	-50%	HOLD (Trimmed)
TSLA	290.25	185.06	5/1/22	-36%	BUY/Accumulate
ZIM **	46	17.39	6/5/22	-62%	BUY/Accumulate (Huge DIV)
DIS	106.1	99.97	7/31/22	-6%	HOLD
FSR	8.95	5.39	9/18/22	-40%	BUY - EV expected to soon
ABNB	115.21	109.69	10/31/22	-5%	BUY/Accumulate
AXSM	77.13	59.75	1/1/23	-23%	HOLD
STEM	8.30	4.92	2/20/23	-41%	BUY/Accumulate
RDFN	8.87	8.87	4/6/23	0%	NEW ADDITION
SOXL	15.66	15.66	4/6/23	0%	NEW ADDITION - High Risk & Reward!
ETF
IHF	139.1	258.43	8/16/15	86%	HOLD
QCLN	70.23	48.02	1/3/21	-32%	BUY/ Accumulate
MUTUAL FUND
PRMTX	59.45	105.91	12/20/14	78%	HOLD
FSRPX	9.05	16.79	1/15/16	86%	HOLD
FSMEX	43.66	64.52	9/24/17	48%	HOLD
** Note: Dividends Adjusted

Stock Sold since my Last Blog

None

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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