Shesa's MAY 2023 Investment Blog

U.S. Stock Market Commentary 

Finally, the stock market got some breather last week with the hope that democrats and republicans will strike a deal for debt ceiling/limit. The S&P 500 and Nasdaq are multi-months high, Nasdaq up 21% this year. Nasdaq 100 has a remarkable comeback, up 33% from its October lows. However, the market momentum is restricted to a handful number of stocks. Mostly, a few large cap technology stocks who came with good earnings, other stocks still remain dismal. It can be noted that the top 10 S&P 500 stocks account for more than 95% of the gain this year, to name a few NVDA, META, Microsoft, Apple, Netflix, Google etc. Apple and Microsoft each company is now larger than whole Russell 2000 index. In other words, the whole of small cap 2000 stocks value less than Apple or Microsoft. The Russel 2000 is trading about 40% discount comparing to S&P 500, historically it trades around 7% difference. This indicates that how narrow the market has been and investors are mostly chasing the performers. But this is nothing new - follow the market trend,“trend is your friend..”.

The federal reserve hiked another 0.25% interest rate on May 3rd. This was the 10th rate hikes which takes the fed funds rate to a target range of 5-5.25%. Chairman J Powell did not say that this is the end of interest rate hike cycle. However, in a speech last Friday Powell said that “stress in banking sector could mean interest rates won’t have to be as high to control inflation”. Hence, in my view, Fed is hinting that they are done with interest rate hike, barring any major bump in the inflation numbers. There are still a lots of data to come before next Fed meeting and that may provide further clarity.

The retail sales and inflation have been receding as day passes. The Q1 earning reports are almost over. Earnings were not as bad as market anticipated. However, guidance has been a problem which is nothing new in such an economic environment. Now the other factor which is looming in investors mind is about debt ceiling. Both democrats and republicans have their own agenda because election is coming next year, so the drama continues. Irrespective of theft that Nasdaq is up 21% this year it’s still in the bear market territory, down -22% from it all-time high. I believe this is one of the longest stretch that the markets have been down since the financial crisis of 2008-09. However, it’s not that the markets will be down for ever and probably we have already started seeing some turnaround. I will provide my views, but before that let’s take a look to Stock Market Indexes.

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	33,426.63	279.38	0.84	36,952.65	-3,526.02	-9.54%
S&P 500	3,839.50	4,191.98	352.48	9.18	4,818.62	-626.64	-13.00%
NASDAQ	10466.48	12657.90	2,191.42	20.94	16,212.23	-3,554.33	-21.92%
BTK	5,281.10	5,417.07	135.97	2.57	6,376.77	-959.70	-15.05%
NBI	4,213.13	4,186.34	-26.79	-0.64	5,517.77	-1,331.43	-24.13%

Q1 Earnings

For Q1 2023, 95% of S&P 500 companies have already reported results out of which 78% have reported a positive EPS surprise and 76% have reported earning surprise. 

Earnings: Analyst expected an earnings decline of -6.7% for Q1 whereas the actual earnings were -2.2% which is much better than expectation. Revenue growth was 4.1% for Q1.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 18.3. This P/E ratio is below the 5-year average (18.6) but above the 10-year average (17.3).

Economy News

• Interest Rate: 5 - 5.25%. 
• GDP:  Q1: 1.1%, Q2 estimated: 1.8%, Q422: 2.9%. 
• CPI:    4.9% in April vs. 5% in March.
• April job growth came at 253K vs. 180K estimated. Unemployment came down to 3.4% lowest since 1969, 54 years!!  ADP’s private payroll added 296K jobs vs. estimated 133K.
• Consumer Confidence: 57.7 down from 63.5 in April 2023.
• Business Confidence: 47.1 up from 46.3 in April.
• U.S Crude Oil: $71.67 a barrel. 
• U.S Dollar Index: 103.19.
• U.S Treasuries: 1 yr: 5.02, 3 yr: 3.96, 5 yr: 3.73, 10 yr: 3.68%.

Earnings projections for 2023: 

Q1 2023: -2.2%  => in progress 95% done.

Q2 2023: -6.4% estimated.

Q3 2023: 0.7% estimated.

Q4 2023: 8.1% estimated.

FY 2023: 1.0% estimated.

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.

What happens after Fed is done with Interest Rate hike?

When we look back to the history, there were 6 rate-hike cycles in the last 40 years. In five of those cases, stocks were dramatically higher a year later. And the average gain was an impressive 19.5%. The only exception after the Fed pause was year 2000 where stock dropped 11% over the following year. We saw Nasdaq fell 35% last year and S&P 500 fell 20% from its all-time high due to fear of inflation and Federal Reserve’s persistent rate hikes. It’s not that Fed will go on raising rates for ever. My perception is that Fed is done with interest rate hike or probably a small hike in case the inflation persist in future. But please note that stock market is always forward looking. So, it factors in a few months ahead of time. Mr. Market may not be always right but mostly right. Hence, once Fed stops raising rates then we may see some meaningful bounce in the stock market and that may continue to the end of the year. However, it would never go straight up and volatility will remain. The economic pain isn't over yet, earnings may still take a hit. But one thing to remember, not all stocks will go up. Those companies who comes with better earnings and guidance may soar and those who misses will get slaughtered. The growth stock may get a life after Fed stops raising rate. But one thing to remember, even if Fed don’t raise rates, let’s say in June then also they may not Pivot. Fed may insist of being data dependent and its target toward bringing the inflation down to 2%. If they pivot, market may see a huge bounce and stock market may get little speculative. Under such circumstances, people may start spending more and that would potentially bring some inflation back. So, I feel that Fed won’t pivot. However, once they stop  raising rates market may assume that there is no more rate hikes but it may still remain volatile depending on future economic data.

Market may be slowly moving towards a new bull market

In my earlier blogs, I wrote many factors why I think stock market should do well in 2023. 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: YOY inflation is down from 9.1% in June to 4.9% in April 2023.
• Supply chain is getting better
• Lots of money in the sideline: $5 trillion retail money is sitting on the sideline. When market start rising the Fear of Missing Out (FOMO) would potentially bring the biggest bull market.
• Breakaway Momentum Indicator: It got triggered in January this year. It has only triggered 18 in the previous years since 1950, 73 years. When it triggered during COVID stock market zoomed 57% and when it triggered in  March 2009, before the market rose more than 300% during its longest bull market that we saw in history. 
• U.S. Dollar Index (“DXY”): The declining dollar is a good news for the multi-national companies because they can get more dollar for the same product sold. Dollar kept rising because Fed kept raising interest rates persistently. 

Let me sum up: I keep writing aforesaid factors because those are the facts  which have historically taken place and it’s highly likely that we may see similar possible outcome. So, better to strategize accordingly. There would be light at the end of the tunnel. However, this tunnel has been much longer than anticipated because of higher inflation and persistent rate hikes by the Federal Reserve. So, we can’t do much but to wait with patience and take some opportunity when we wait. 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 available to deploy or remain on the sideline. Ultimately, everything needs some luck to succeed! I am not a fortune teller so can’t predict anything with surety. However, I can put the facts from all my research. And that’s what I have been doing all along. It may be right or wrong, so one must do his/her own due diligence and decide. 

Should we sell in May and go away?

There is a proverb or old saying in Wall Street, “Sell in May and go away”. This term is used because historically the stock market because it has not performed well  during May to October timeframe. Hence, many institutional investors and money managers goes to sideline because of lackluster performance of the stock market. Since 1990, the S&P 500 has averaged a return of about 2% annually from May to October, whereas it has returned 7% from November to April. However, this pattern did not hold in 2020 because market came out very strong after the COVID-19 crisis. Having said that, the history is different this year and market remained in doldrum because of inflation and Fed’s persistent rate hikes. Hence, as soon as Fed stop raising rates market may shot up. As such, it may not be advisable to remain on the sidelines this year. But we must remember that historically September has been a brutal month for the stock market in most of the years. Hence investors should keep it in mind and be diligent.

Sectorial Stock Market TOP sectors for 2023 - Year to Date

Sector	YTD Performance in %age
Communication Services (TOP)	30.77
Information Technology	27.45
Consumer Discretionary	17.93
Consumer Staples	1.42
Industrial	1.33
Materials	1.06
Real Estate	-2.37
Financials (Worst performer)	-9.38

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.

Alphabet Inc, (GOOG)

Alphabet Inc. is a technology company that offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America. It operates through Google Services , Google Cloud. Some of its products and services include ads, Search, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, and YouTube. The company is located in Mountain View, California, USA.

Last year the technology stocks were decimated and whole sector was stinking to the investors. They lost all their edge and other sectors took precedence. However, the scenario is changing now as Nasdaq has bounced back 21% from its low. Moreover, the hype around Artificial Intelligence (AI) is playing some nice bounce in the technology sector. If we remove the AI boom then without AI related popular stocks, S&P 500 would be down about 2% this year. Goole did not participate in the stock rally until recently. Why so? The AI frenzy kicked off in November, when San Francisco-based company OpenAI launched ChatGPT which wowed users with its human-like conversation. It also served up quick answers to complex questions vastly cutting down on research time. 

Why do I like Google?

We all know Google is a technology giant. If we talk of searching means it’s nothing other than Google. But it’s not only searching, as I said above it has multi-faced business that’s generating billions in earnings. In February, Microsoft added ChatGPT capabilities to its Bing search engine. In response, Google tweeted out a video of its own chatbot named Bard. Unfortunately, in the video, Bard gave false information to one of its trial users. That news shattered Alphabet stock losing 7% of its market cap in a single day.  The stock came to about $80. Fast forward, on May 10 Google announced a new suite of AI integrations in its annual developers conference.  Google CEO Sundar Pichai told that Google’s new A.I. module uses nearly five times more text data for training than its predecessor. The market got excited on the news and Alphabet’s shares jumped 4% on that day. And the stock jumped another 4% on May 11. These kinds of back-to-back jumps are very rare for Alphabet. In fact, Google's share price has only moved 4% on two consecutive days 5 times in the company's history. That's not a big sample size. But we can still look at past performance to see what has happened after similar rallies. When we lower the threshold slightly, we get 21 occasions when the price jumped 3% on back-to-back days. And Alphabet's stock went on an absolute tear following those cases. When such an indicator has flashed in the past, this is how it has returned on investment:

Bullish Momentum: 3 months: 12%, 6 months: 25%, 1 year: 63%.

All Period (life of Google): 3 months: 5%, 6 months: 11%, 1 year: 23%.

If history is any evidence, then this indicator has never failed in a one-year period in the past. Now let’s take a look to its Valuation comparing to its peer technology leaders. Let’s take a quick look:

	Revenue Growth	Earnings Growth	Forward P/E
GOOG	2.6%	-8.4	19.30
MSFT	7.1%	9.4%	28.33
AAPL	-2.5%	-3.4%	28.49
META	2.6%	-23.5%	20.62

Based on the above table we can see that Google is still cheap, particularly from the forward earnings and its potential in the A.I. space. I believe its profit will continue to improve after laying off 12,000 people and taking other cost cutting measures.

Company Fundamentals

Market Capitalization	$1.37T	Total Cash	$115.1B
Trailing P/E	23.22	Total Debt	29.49B
Forward P/E	19.30	Book Value per share	20.51
Price/Sales	4.78	52 weeks high	126.48
Revenue	284.61B	52 weeks low	83.45
Quarterly Revenue Growth (YOY)	2.60%	52 weeks change	10.37%
Gross Profit	$156.6B	Held by Institutions	64.2%
Net Profit	$58.59B	Held by insiders	0.01%
Quarterly Earnings Growth (YOY)	-8.40%	Float	10.96B
EPS	4.50	Dividend	N/A

My View and Strategy

As we all know technology stocks are going through a tough and rough phase. Google was a laggard to its peers. However, the company seems to be turning the table after its layoffs and A.I. hype. Despite the hue and cry about ChatGPT, this company has all required resources and expertise to take a major market share in the future. 

The stock is currently trading at $123.25 almost at its 52-weeks high. The stock had a 52-weeks low of $83.45. I am accumulating this stock in small quantities from around $84 to 1$00+. During my investment meet in February, I had presented Google and spoke why I like this technology giant. The stock was trading at $90 at that time. A great company may have some lean period but most of those bounces back. And Google has done it.

My final thoughts on Google

Google is still under valued to it peer. If the company can produce good earnings then the stock can move north of $130-140 range. With all the A.I. momentum and current stock price, I feel it’s a great long-term investment. But it does not mean that it will just go up on a straight line. The investing dynamics have changed, hence we must be able withstand any volatility. As the A.I race heats up, Alphabet is at a pivotal point and this company is an an innovator. But nobody can guarantee that it will lead the way. Even if it does not, it would remain a major player in the technological innovation. And if its past performance is any evidence, this tech giant should rise to the occasion and its shareholder particularly long-term shareholders should be handsomely rewarded.

Risks

Nasdaq is still in bear market territory. Some of the large cap technology stocks have bounced back but a large number of small stocks are still doomed. The inflation and Federal Reserve are still a major threat to the market. If next quarter earnings are not good then it may get hammered. Also, we must keep in mind that it’s not as cheap as it was couple of months ago. The stock has gone up over 40% in last 3 month. So, obviously, when a stock price goes up so also the risk. Having said that, we have almost reached to the end of quantitive tightening. Once, Fed stops raising rates, we should see some nice bounce in the stock market. And Google should be benefiting from the market turnaround as long as it does not disappoint investors with missed revenue/earnings.

Reviva Pharmaceuticals Holdings, (RVPH)

This month I am adding another small biotech stock because I feel this company may have a great future potential. I discussed RVPH in my last couple of investment meets but spoke in details during my last investment meet on May 7.

Reviva Pharmaceuticals is a clinical-stage biopharmaceutical company, discovers, develops, and commercializes next-generation therapeutics for diseases targeting unmet medical needs in the areas of central nervous system, respiratory, cardiovascular, metabolic, and inflammatory diseases. The company's lead product candidate is brilaroxazine, which is in Phase III clinical trials for the treatment of schizophrenia. It also have some products under Phase 1 studies. The company is located in Cupertino, California, USA.

Why do I like RVPH?

Let me clarify that Reviva Pharmaceuticals is a tiny biotech company. But I am adding this to my blog portfolio because I see an exciting future for this company at this time. The company's lead product candidate is brilaroxazine, which is in Phase III clinical trials for the treatment of schizophrenia - A brain disorder that induces delusions, trouble with thinking, disorganized speech, and lack of motivation. According to allied market research, the global schizophrenia market was $7.16 billion in 2021 and is expected to achieve a compound annual growth 5.18% and reach $12.53 billion by 2031.

• RVPH’s Phase 2 trial was significantly better than current drugs available in the market from both efficacy and safety point of view. 
• Phase 3 trial in schizophrenia with top-line data anticipated in mid-2023 (July/August). Per the CEO, the early indications of phase-3 is looking very good.
• Very small market cap of just $150 million makes it a huge upside potential 
• Its closer competitor Karuna Therapeutic (KRTX) which is also in Phase-3 clinical trial. However, Reviva’s drug is much better on efficacy as well as safety. Having said that, the market capitalization of  KRTX is $8.38 billion which is about 56 times more than RVPH. So,  RVPH is ridiculously cheap comparing to KRTX. In other words, it’s so tiny and cheap that I will not be surprised if it can be acquired by any other Biotech/Pharma company with a humongous premium. The only advantage that I see KRTX over RVPH is that it’s about 6-12 months ahead. 

My View and Strategy

I did my due diligence probably a year ago and bought this stock from around $1.80 and have been accumulating since then. But my investment framework is to buy in a gradual manner and trim little bit when a stock has a good run. Again, buy at the dip and keep accumulating if the stock has good prospect. Despite the fact that this is a small biotech company and has a huge risk, my position on this stock has grown up and now it has become a major holding for me. I may be wrong and time will tell but so far it has been a good investment. Currently, the stock is trading at $7.30. Before the phase-2 result this stock was trading around $1. However, the investment community found the effectiveness and safety of this drug after phase-2 trial and the stock has gone up about 600% in one year. As I said earlier, the phase-3 result is expected around July/August timeframe. If result is good, then this stock may be a bagger and the opportunity would be astronomical. If it fails then the stock may fall to around $1. So, one can hedge some money in case something goes wrong. Because nothing can be predicted with 100% certainty. It can be noted that the company is also doing an open label study for its phase-3 and that would continue to next year. Hence, the NDA submission to FDA is expected sometime in the later part of next year.

My final thoughts and RISK for RVPH

In general, small biotech stocks are extremely risky and rewarding depending on how their trial goes. Despite its huge run the market capitalization is just a fraction of KRTX. The market opportunity of a successful drug with higher safety result can be astronomical. If the company will have a successful phase-3 with similar efficacy and safety as demonstrated in phase-2 then it’s highly likely that the company may have a great partnership to market the drug -or- most likely the company may be sold with huge premium. Because $1-3 Billion could be a pocket change for the big Pharma companies. What it means is that it can even go up 3, 5, 10, 20 fold from here. Having said that, nothing can be guaranteed in life. Hence, one must do due diligence and invest only that much one can afford to lose, in case something goes wrong. So it’s very HIGH RISK and highly rewarding. I have done my due diligence and invested. Only time will tell how it goes..

Shesa’s Blog Portfolio (As of MAY 21, 2023)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	175.16	1/25/13	1258%	HOLD
META	47	245.64	11/13/13	423%	HOLD
MA	77.18	385.57	12/12/13	400%	HOLD
AMZN	15.58	116.25	4/12/14	646%	BUY/ Accumulate
SHOP	13.48	60.2	11/25/18	347%	HOLD
SPG	54.59	105.36	5/25/20	93%	HOLD
ENPH	45.3	162.35	6/28/20	258%	HOLD
PLUG	27.98	7.73	4/25/21	-72%	HOLD
SAVA	51.49	24.14	10/10/21	-53%	HOLD
NVDA	239.49	312.64	2/13/22	31%	BUY/Accumulate
CHPT	18.44	7.93	3/20/22	-57%	SOLD
TSLA	290.25	180.14	5/1/22	-38%	BUY/Accumulate
ZIM **	46	17.51	6/5/22	-62%	SOLD
DIS	106.1	91.53	7/31/22	-14%	HOLD
FSR	8.95	6.17	9/18/22	-31%	BUY (U.S. EV delivery starts late next month)
ABNB	115.21	107.38	10/31/22	-7%	HOLD
AXSM	77.13	75.71	1/1/23	-2%	BUY/Accumulate
STEM	8.30	3.96	2/20/23	-52%	HOLD
RDFN	8.87	10.46	4/6/23	18%	BUY/Accumulate
SOXL	15.66	17.39	4/6/23	11%	BUY/Accumulate
GOOG	123.25	123.25	5/21/23	0%	NEW ADDITION
RVPH	7.3	7.3	5/21/23	0%	NEW ADDITION - High Risk & Reward!
ETF
IHF	139.1	249.18	8/16/15	79%	HOLD
QCLN	70.23	46.95	1/3/21	-33%	HOLD (pls to sell)
MUTUAL FUND
PRMTX	59.45	108.97	12/20/14	83%	HOLD
FSRPX	9.05	17.38	1/15/16	92%	HOLD
FSMEX	43.66	64.37	9/24/17	47%	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 must do at their own risk.

Note: Click on Blog archives to read all my Blogs and updates.