Shesa's JULY 2023 Investment Blog

By Shesa Nayak

U.S. Stock Market Commentary 

It has been a phenomenal year for a selected group of technology stocks so far. NASDAQ continued its staggering run and up 31.7% recording the best first half for the index since 1983, 40 years. The S&P 500 is up 15.9% for its best first half since 2019. As such, this year has been exciting for Nasdaq, particularly for certain group of stocks. The top 20 Nasdaq stocks accounted for most of the gain in first few months. Artificial Intelligence (A.I.) related stocks and semiconductor sector have been the biggest beneficiaries.  Both Nasdaq and S&P have hit 13 months high. Last week, we saw little bit pullback but in my view that’s very healthy for a long term bull market. Because it gives opportunity for the investors to take little profit and coincidently bring new money to the market from the investors sitting on the sidelines. 

The federal reserve paused its rate hike in June but later Fed Chair Jerome Powell said that they are expecting two more rate-hikes depending on the data. I think we should see diminishing consumer price index (CPI) in months ahead, so inflation would not be a major problem going forward. I will share my thoughts later. 

The earnings season for second quarter will kick-off in next couple of weeks. Based on the analyst forecast, this quarter should mark the end of negative earnings and then we should start seeing earnings to pick up from Q3 of this year. Earnings will be critical but what companies will projects for next quarter and their strategy to achieve better profitability would be of paramount importance. If it’s good then we can continue to have the bull run. If not, market may reward the winners and keep punishing the companies who are struggling to make profits. 

Technically speaking we are already in a bull market, meaning up more than 20% from its bottom in October. The rally was limited to a group of tech stocks, so if we are invested in the right stocks then we get to feel the bull market, if not, it still feels like a bear market. So, where is the market trending and what lies ahead? I will share my thoughts but before that let’s take a quick look to the 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	34,407.60	1,260.35	3.80	36,952.65	-2,545.05	-6.89%
S&P 500	3,839.50	4,450.08	610.58	15.90	4,818.62	-368.54	-7.65%
NASDAQ	10466.48	13787.92	3,321.44	31.73	16,212.23	-2,424.31	-14.95%
BTK	5,281.10	5,225.24	-55.86	-1.06	6,376.77	-1,151.53	-18.06%
NBI	4,213.13	4,076.93	-136.20	-3.23	5,517.77	-1,440.84	-26.11%

Q1/Q2 Earnings

Earnings: In Q1, 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. Q2 earnings to kick-off in a couple of weeks. Most of the high tech companies will release their earnings in the later part of July and early August.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 18.9. This P/E ratio is below the 5-year average (18.6) but above the 10-year average (17.4)

Economy News

• Interest Rate: 5 - 5.25%. 
• GDP: Q123: 2% (revised), Q2 estimated: 1.8%, FY23: 1% and FY24: 0%
• CPI:    4% in May June number will be released on Wednesday, July 12.
• Job growth in May 339K vs. 294K estimated. Unemployment: 3.7%. 
• Consumer Confidence: 63.9 in June vs. 59.2 in May.
• Business Confidence: 46.9 vs. 47.1 
• U.S Crude Oil: $70.45 a barrel. 
• U.S Dollar Index: 102.92.
• U.S Treasuries: 1 yr: 5.43, 3 yr: 4.53, 5 yr: 4.15, 10 yr: 3.84%.

Will Fed keep raising rates?

The Federal Reserve paused rate hikes keeping it at 5-5.25% after ten consecutive rate hikes since 2022. Inflation has been coming down and the YoY rate is now at 4%. In my view, Fed is most likely done with raising rates. Because CPI data will get better and better as we go. Let’s take a look to the inflation numbers since 2022:

Jan: 7.5%, Fed: 7.9%, Mar: 8.5%, Apr: 8.3%, May: 8.6%, Jun: 9.2% (top), July:8.5%, Aug: 8.3%, Sep: 8.2%, Oct: 7.7%….now in May 2023: 4%. So, as we go the average rate of inflation will go down month after month. The consumer spending barely increased 0.1% and personal consumption index (PCE) is also decelerating. So, I do expect a major drop in the CPI number when it’s released on Wednesday, July 12. Hence, unless there are major changes in the data, I doubt there will be further rate hikes, though Fed is projecting two more hikes. However, due to the continued hawkish statements by Fed officials market will remain volatile because the institutions and money managers will try to instill fear in the mind of retail investor so that they can buy cheap. In a worst case situation, we may see another 1-2 hikes but if that happens then it would be a buying opportunity. Well, next FED meeting is scheduled for July 25-26, we will see how it goes..

Earnings projections for 2023: 

Q1 2023: -2.2%  

Q2 2023: -6.4% estimated.

Q3 2023: 0.7%

Q4 2023: 8.1%

FY 2023: 1.0%

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’s happening in the market?

The stock market has been going up since mid-October 2022 when all indexes hit their lows. This year, Nasdaq has been on a run rising 31.7%, best first half since 1983. It could be limited to certain group of stocks but nonetheless Index is up and that’s good. However, the data shows that investor fear is at an extreme level. The total value of money market accounts is around $5.7 trillion right now and it keeps rising because of higher interest as people keep pouring to money market and seeing their account growing steadily. In addition, another data shows that U.S. equity-fund net outflows were up for eight consecutive weeks despite the market rally. In my view, this may not be a great decision for individual investors because history shows that many of the market's biggest moves higher happen during a recovery. Unfortunately, one major issue with individual investor has always been entry and exit at the wrong time! In the whole process, missing great opportunities and being trapped at the wrong time. It’s okay to be a conservative investor but sitting on the sidelines is often a more dangerous financial decision than many folks realize and possibly missing the first year of a new bull market. We don’t know we are in Bull Market until Market is up significantly.

So, are we in a Bull Market?

It all depends on which angle we are looking to the market. Technically speaking, we are in bull market. Why? Because Nasdaq and S&P 500 are up more than 20% from their bottom. When market goes down 20% from its pick, we call it a bear market. So, to answer the question, “Yes” we are in a bull market. If we invested in the right stock then we feel that yes we are in a bull market, if not, we may be depressed and the bear market continues. Off late, one lesson I learned, “trend is your friend - follow the trend where money is moving”. But let’s not get into a hype and keep taking profits as we go. Coincidentally, we can invest and do dollar cost average of a selective beaten down good stocks which got hammered for no genuine reason. I have been telling to my investment group and in my blog for last 6-8 months that there are many historical facts pointing towards a major market run. I hope and wish that some readers took note of it! Tech stocks tend to be the biggest winners when the Fed pauses a rate-hikes because of low interest rate. A few stocks accounted for more than 80% of the total market gain. Good news is that, recently we have started seeing wider participations of stocks as market is getting more comfortable. As said in my January blog, Semiconductor sector has been the biggest beneficiaries due to AI transformation. We should be thankful to NVDA who changed the whole market dynamics by projecting more than 50% revenue growth expected by analysts in this 2nd quarter. Many folks says we are in bubble for the AI related stocks but if that’s true then this may be just the beginning. If we look back to the .com boom then it started around 1998 and ended in 2000. That was a good run for about two years. The time between 1995-1997 is considered to be pre-bubble. So, I think there may be still plenty of time for investors to play this AI boom. According to Wall Street Journal, AI can add $4.4 trillion to the global economy per year. In my previous  blogs I wrote so many historical facts which pointed to a market rally, such as:

• January sets the trend for the year, we saw 9th best January in stock market history
• 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. 
• Lots of money in the sideline: $5.7 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: which triggered some of the longest bull market in the past

• This time I would like to add another very important fact that I found from my research “7 years cycle”. Let’s take a look what I am referring:
• 2022: We saw a massive sell-off Nasdaq losing about 36% (Reason: Pick of inflation and FED’s aggressive hike). Let’s subtract 7 years i.e. 2015
• 2015: First time -ve market return after the great financial crisis, Chines Market topped and still have not recovered. Again, let’s subtract 7 years i.e. 2008.
• 2008: The great Financial crisis, causing a major recession for few months. another bull run for about 7 years. Let’s subtract another 7 years i.e. 2001
• 2001: .com bust and market crashed after 9/11 then we saw bull market for 7 years, and then. Let’s subtract 7 years i.e. 1994.
• 1994, the Bond Market had a major down-turn, which also affected the Stock Markets. Let’s subtract another 7 years i.e. 1987.
• 1987: On October 19, the market crashed on Black Monday. Let’s subtract another 7 years i.e. 1980.
• 1980: U.S experienced a recession from January to July due to inflation and higher interest rates.

This trend goes for many more decades. In a nutshell, every 7 years, the market repeats itself. So, will it repeat again in 2029? I do not know but if this history repeats then yes it should see another major downturn in 2029. But after these years (see above) the stock market has turned bullish for next 6 years. Hence, if history is any evidence then we should see a stock market run till 2028, meaning next 6 years before another major market crisis hits in the 7th year 2029 i.e. 2022 + 7 = 2029. Having said all the aforesaid facts, it does NOT mean market will go straight up for 6 years. That will never happen. There may be some pullbacks, corrections or a small bear market but those should bring the opportunities for investors to build the portfolio. Generally bull markets last significantly longer than bear markets. According to the Associated Press, the average bull market since 1932 is about 5 years when the S&P 500 has gained an average of about 178% during that period. In contrast, the average bear market since 1929 is slightly less than 20 months. 

Let me sum up: Most of the facts are pointing towards a bull market. However, the market would continue to remain volatile in the days ahead. Fed has paused but we are not sure of their action. It depends on the data, though I feel inflation should get better and better. However, the mainstream media may use the volatility to create scary headlines. In case, the market turn south then I believe it should not last very long and that can be seen as buying opportunities. If history is any evidence then we should see a bull run for next 6 years. But market is never going to go up straight and may have some pullbacks, corrections or mini bear market in between. But the 2nd half of the year may result in some profit taking and it will be primarily driven by whether the Fed stops raising rates, and more importantly corporate earnings. Having said that, I will be watchful for the month of September because historically it has not been a investor friendly month. AT this time, I feel very positive on the market cycle but nobody knows the future and nothing is written on the stone, hence one must diligently prepare his/her own investment framework.

Sectorial Stock Market TOP sectors for 2023 - Year to Date

Sector	YTD Performance in %age
Information Technology (TOP)	42.06
Communication Services	35.58
Consumer Discretionary	32.33
Industrial	9.22
Materials	6.61
Real Estate	1.85
Energy	-7.26

Please click below link to view complete sectorial performances:

https://digital.fidelity.com/prgw/digital/research/market

Source: fidelity.com

Now let me discuss this month’s stock picks for my Blog Portfolio.

C3.ai, Inc (AI)

C3.ai, Inc. is an enterprise artificial intelligence (AI) software company located in Redwood City, California, USA. It provides C3 AI application platform, an application development and runtime environment that enables customers to design, develop, and deploy enterprise AI applications. It also offers C3 AI CRM, an industry specific customer relationship management solution; and C3 AI Data Vision that visualizes, understands, and leverages the relationships between data entities. It also offers C3 AI supply chain applications, integrated turnkey enterprise AI applications to various sectors and government organizations.

A quick look into C3.ai

Tom Siebel is the founder and CEO of C3.ai company. Earlier, he started Siebel Systems which was acquired by Oracle Corp in 2005. Subsequently Tom Siebel founded C3.ai in 2009. On December 9, 2020 the company went public and on the first day the stock popped from $42 to finish at $92.49. On December 21, the stock went over $160. After the COVID-19 rush, the stock got smashed and traded as low as $10 in the first week of January 2023. On 23rd January Microsoft disclosed that it has made a multi-year investment in OpenAI, the company behind ChatGPT. Since then the company has not looked back, though it’s a highly volatile stock. Moreover, the whole market dynamics changed when Nvidia (NVDA) released its Q12023 earnings on May 24 and projected Q2 revenue estimate which smashed Wall Street forecast by over 50%. This stunned Wall Street and all Artificial Intelligence (AI) related stock went on fire. Though we have seen some moderation in last few of weeks, I feel that C3.ai should be a good play for artificial intelligence craze. 

Why do I like AI?

As we all know, the trend is moving towards artificial intelligence. The experts says this is the next mega trend after the evolution and revolution of internet. According to WS Journal, artificial intelligence can add $4.4 trillion to the global economy per year. I do feel that C3.ai should be a beneficiary of this mega trend. C3.ai is a leading enterprise software company specializing in artificial intelligence. So, if it can really take the current momentum and execute properly then it can add immense value for the shareholder in the long run. Let’s first see the financials.

Financials

On May 31, C3.ai reported its fourth quarter sales of $72.4 million which was in line with the higher end of the analysts forecast but sales growth was flat year over year. The company had a loss of 13 cents per share, compared to a loss of 21 cent last year. New subscription revenue was $56.9 million, 79% of sales. For the fiscal year which also ended on April 30, the company generated a revenue of $266.8 million which was little above the projection. The company also said that it plans to achieve profitability by the end of fiscal 2024 (current fiscal year).

During the last conference, the CEO said that they are seeing significant interest from customers for engaging in pilot programs, 3 times more interest compared to the same period last quarter. What it means is that, after the ChatGPT and Nvidia news the momentum is picking up for AI related companies. For the current fiscal year analysts are projecting 19% sales growth which is nothing great but this could be possibly be the beginning of future growth. The company is also switching to consumption pricing model which will benefit its enterprise customers as well as developers based on the usage of its software. This should drive better revenue growth and we have seen such benefits by other software companies like Snowflake. However, this process may take a few quarters. The CEO also said that the company was using the economic downturn to complete the switch to the consumption model and which will lower barriers to entry as companies do not have to be tied to long contracts. C3.ai is using generative AI on its application that helps computers apply machine learning and artificial intelligence to voluminous data sets, learn patterns and generate content, analytics based on those patterns. That way, enterprises can make their own analytics and reporting to make better decision and capture market share, sales and profitability.

Partnership

It has partnership with many top technology companies. In May, it partnered with Google Cloud Marketplace and Amazon Marketplace. It also has partnership with Microsoft, Accenture, Baker Hughes and many other companies. 

There is not much to talk about the fundamentals for this company at this time because it’s still in the early innings despite the fact that C3.ai was started 2009. So, we may see significant growth ahead or it may get thrashed.

Company Fundamentals

Market Capitalization	$4.21B	Total Cash	$731M
Trailing P/E	N/A	Total Debt	$39.66M
Forward P/E	N/A	Book Value per share	8.16
Price/Sales	14.60	52 weeks high	48.87
Revenue	266.8M	52 weeks low	10.16
Quarterly Revenue Growth (YOY)	0.10%	52 weeks change	87.47%
Gross Profit	$180.46M	Held by Institutions	42.69%
Net Profit	-$268.8M	Held by insiders	10.32%
Quarterly Earnings Growth (YOY)	N/A	Float	94.87M
EPS	-2.01	Dividend	N/A

My View and Strategy

I added this stock to my blog portfolio on 6/25 and told my WhatsApp group members to elaborate further on this blog. Many industries are are transitioning towards artificial intelligence and momentum is building. We keep hearing that artificial intelligence is a hype. As I said during my investment Q&A, even if it’s a hype then it should last for years. The .com boom started around 1997 and ended around mid 2000. So, this also should take some time before we see any major downturn. Nvidia showed in the last earnings that’s it’s not a hype but a substance. But one quarter does not mean much and next few quarters will determine whether AI is just hype ordeal game. Having said that, it’s better to take some calculated risk to reap the benefit of the A.I momentum. The stock is currently trading at $36.43 and was trading at $33.29 when I added to my blog portfolio. It has a 52-weeks high of $48.87. During December 2020, the stock had gone past $160. I don’t think that hype can come again. However, if the company comes with accelerated revenue and show profits to Wall Street then it can’t be ruled out visualizing current A.I. momentum. I have bought this stock from around $20 and keep accumulating and trimming in small quantities. This is a highly volatile stock, so just buying for long-term may not be the right strategy as it may have huge ups and downs. So, having some core position as investment and do some trading (buy on dip and trim on the run) makes much better sense for such stock. 

My final thoughts on C3.ai

The company may be in a an early innings of growth. It’s one of the early company which has embedded artificial intelligence to its enterprise software. If that’s right then we can expect to seem some major growth in the months and years ahead. It should be able to take advantage of the on-going A.I momentum or hype whatever we say. The next few quarters will tell the story. If the company can really prove then we may have a gold but if it’s just a hype then it can be decimated. So, one should not be heavily invested without seeing further earnings. I have no emotions with any stock. If I see red flags or the company is unable to deliver as promised then it does not matter which stock or company I just get out. But for now, I think it’s better to ride the A.I momentum diligently.

Risks

Nasdaq has gone up significantly this year. When the market goes up and the stock goes up, so also the risk goes up. This tock will go up/down based on how the market does. Particularly, C3.ai (AI) is a highly volatile stock. So, risk averse investors should stay away. One should be mentally and emotionally ready to co-op with the volatility to invest or trade in such stock. Next few quarters will be they key. We will see how the company is able to deliver and guide for future quarters. If it’s able to deliver then we may see huge bump in share price. Otherwise, it would be time to pull the trigger. I have taken the risk and rewarded so far but it does not mean that future will be a smooth ride. For now, it’s worth putting some money, probably not more than 3-4% of the portfolio till we get further clarity. 

Shesa’s Blog Portfolio (As of JULY 2, 2023)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	193.97	1/25/13	1404%	HOLD
META	47	286.98	11/13/13	511%	HOLD
MA	77.18	393.3	12/12/13	410%	HOLD
AMZN	15.58	130.36	4/12/14	737%	BUY/ Accumulate
SHOP	13.48	64.6	11/25/18	379%	HOLD
SPG	54.59	115.48	5/25/20	112%	HOLD
ENPH	45.3	162.35	6/28/20	258%	BUY/ Accumulate
PLUG	27.98	10.39	4/25/21	-63%	BUY/ Accumulate
SAVA	51.49	24.52	10/10/21	-52%	HOLD
NVDA	239.49	423.02	2/13/22	77%	BUY/Accumulate
CHPT	18.44	7.93	3/20/22	-57%	SOLD
TSLA	290.25	261.77	5/1/22	-10%	BUY/Accumulate
ZIM **	46	17.51	6/5/22	-62%	SOLD
DIS	106.1	89.28	7/31/22	-16%	SOLD
FSR	8.95	5.64	9/18/22	-37%	HOLD
ABNB	115.21	128.16	10/31/22	11%	HOLD
AXSM	77.13	71.86	1/1/23	-7%	BUY/Accumulate
STEM	8.30	5.72	2/20/23	-31%	BUY/ Accumulate
RDFN	8.87	12.42	4/6/23	40%	BUY/Accumulate
SOXL	15.66	24.83	4/6/23	59%	BUY/Accumulate
GOOG	123.25	120.97	5/21/23	-2%	BUY/Accumulate
RVPH	7.3	5.86	5/21/23	-20%	BUY/Accumulate
AI	33.39	36.43	6/25/23	9%	NEW ADDITION
ETF
IHF	139.1	255.8	8/16/15	84%	HOLD
QCLN	70.23	46.95	1/3/21	-33%	SOLD
MUTUAL FUND
PRMTX	59.45	115.85	12/20/14	95%	HOLD
FSRPX	9.05	18.06	1/15/16	100%	HOLD
FSMEX	43.66	65.42	9/24/17	50%	HOLD
** Note: Dividends Adjusted

Equity Sold since my Last Blog

• ZIM
• CHPT
• QCLN

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.

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