Shesa's OCTOBER 2023 Investment Blog

OCTOBER 2023 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Commentary 

We saw a wonderful first half for the stock market followed by depressing third quarter and brutal September. It was another terrible month where Nasdaq lost 5.8% for the month and 4.1% for the quarter. S&P 500 was down 4.9% and DOW declined 3.5% during September. But the good news is that we are already in October. How has been October, so far?? Well, the treasury yields have gone up significantly in last few weeks and reached to 16 years high. The congress averted government shutdown for another 45 days but the speaker of the house was ousted. However, same dram will continue again after a few weeks. After the unprecedented attack by Hamas (Palestine) on Israel has changed the whole geopolitical situation and created further apprehension in the stock market which is already navigating through a difficult environment. However, that has become positive for the market as the 10-year Treasury bond yield came down before bouncing back up.  Also, this Geopolitical situation has brought some Fed officials to tone down their voice because it’s unknown what uncertainty it will create.

Now Q3 earnings season has kicked off. Banks and Financials institutions have started reporting. But the key earnings. Thus far, many key banks like JPM, WFC, Citi have reported reasonable earnings but next couple of weeks will be key as the tech giants start reporting their earnings. Hopefully, that should setup a direction for the market. We will see how that goes. In the first half of the year, we saw the market got rejuvenated after spectacular first quarter from Nvidia and boom in AI stock.

On the economy front, the nonfirm payroll showed 336,000 jobs were added in September vs. 170,000 expected by the economists. This is significantly higher. In contrast, the ADP private payroll showed 89,000 jobs were added vs. the expected 160,000. Unemployment rate stands at 3.8%. Visualizing the job report, a recession may not be near. But wage growth was cool, so no further rate hikes may be needed by Federal Reserve. Overall, U.S economy remain strong - still low unemployment, diminishing core inflation, but rents have gain started moving up, and we may see unemployment go up in months ahead, consumer sentiments are down, credit card debts have gone past $1 trillion and consumers spending are slowing. 

The Federal Reserve did not raise interest rate in September but kept the hawkish tone and said they want to keep the interest rate higher for longer. Fed has been singing this song for months and it’s benefiting them to keep the stock market under control. And evidently bears are taking advantage of this tone. But that’s how the stock market is, so we have to acclimatize to the situation. The next FOMC meeting is on November 1, I doubt Fed will hike rate further. If they do, that should be in their December meeting.

So, it a dicey market which has been like a washing machine. With that said, we are in October, is the worst behind us? October happens to be another highly volatile month. However, I am optimistic because the rest three months of the year have brought fabulous return for the stock market in the past. 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 FRI 10/14/23	Change in 2023	% Change in 2023	All Time High	From All Time High	% from All Time High
DOW	33,147.25	34,670.29	1,523.04	4.59	36,952.65	-2,282.36	-6.18%
S&P 500	3,839.50	4,327.78	488.28	12.72	4,818.62	-490.84	-10.19%
NASDAQ	10466.48	13407.23	2,940.75	28.10	16,212.23	-2,805.00	-17.30%
BTK	5,281.10	4,972.85	-308.25	-5.84	6,376.77	-1,403.92	-22.02%
NBI	4,213.13	3,936.68	-276.45	-6.56	5,517.77	-1,581.09	-28.65%

  

Q3 Earnings

For Q3 2023, the estimated year-over-year earnings decline for the S&P 500 is expected to be -0.3%. If -0.3% is the actual decline for the quarter, it will mark the fourth straight quarter of year-over-year earnings declines reported by the index.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.7, less than 5 year average of 18.7% and above 10 years average of 17.5.

Economy News

• Interest Rate: 5.5%. 
• GDP: Q2: 2.1%, Q1: 2%, Q3 projected: 4.9%. Yearly GDP growth: 2.4%.
• Inflation:   0.4% in September above forecast of 0.3. Inflation stands at 3.7% YoY no change from August. 
• Producer Price Index (PPI): It’s a measures on the average price changes that businesses pay to suppliers, rose 2.2% for the 12 months ended in September. On a monthly basis, prices rose 0.5%, a slight cooldown from August’s 0.7% increase. However, it was above the economists forecast annual increase of 1.6% and a monthly uptick of 0.3%.
• Job growth in July 336K vs. 170K estimated in September. Unemployment Rate: 3.8%. 
• Consumer Confidence: 68.1 in Sept vs. 69.5 in August
• Business Confidence: 49 vs. 46.4 in August
• U.S Crude Oil: $87.72 a barrel. 
• U.S Dollar Index: 106.67.
• U.S Treasuries: 1 yr: 5.09, 3 yr: 5.05, 5 yr: 4.63, 10 yr: 4.61%, 30 yr: 4.75. The 10-Year Treasury yield has moved up to 4.61%, its highest since December 2007.
• Retail Sales: After adjusting for inflation have fallen for 9 straight months
• US Mortgage Rate: 30-years rate has moved up to 7.89%, its highest level since 2002 according to Bakrate.com

Federal Reserve and Interest Rate

The federal reserve has been raising rates sine March 2022. The current funds rate is 5.5%. Fed did not raise in its September meeting but continued the hawkish tone saying “rates will stay higher for longer” and that it tilted towards more hikes. It indicated that there may be only 2 rate cuts vs. market expectations of 4-5 rate cuts in 2024. Fed seems to be blindsided with not publicly acknowledging that cracks are forming in the labor, credit, and financial markets. I expect a lackluster retail sales in future because credit card debts have ballooned beyond $1 trillion. Also, job market may get softer due to the UAW strike and softer economy. Travel, leisure and government are the segments that’s adding jobs. But as credit card debts have ballooned, we may see cracks of travel/leisure. So, all these are going to impact the economy. If corporate results are not good then we may see more layoffs. Hence, unless Federal Reserve is logical and diligent recession may not be ruled out. The next FOMC meeting is on November 1, I doubt Fed will hike rate further. If they do, that should be in their December meeting and hopefully that should be the end of rate-hike cycle.

What to expect in October?

In last few months, the stock market has become a washing machine turning up and down based on bond yield, Geopolitical uncertainties, Fed statements, interest rate fears, budget uncertainties, earnings fear and so on. Hence, it’s a very complicated setup for the retail investors to get good ROI. Frankly, it has been a frustrating experience for the retail investors. Long term investment may not be too concerning but in short-term one has to make some calculated trades otherwise it’s difficult environment to navigate through. Neither retail investors have billions nor media and analysts support them, so it’s a challenging environment. So, let’s look at October

Since World War II, the S&P 500’s average volatility in October has been 35% higher than the average for the remaining 11 months of the year. Historically, investors have been fearful of the stock market’s returns in October, mostly because of the crashes it witnessed in 1907, 1929 and 1987. The most horrific was black Monday, October 19, 1987 when market crash was catastrophic when S&P 500 dropped by 21.8% in a single day. If we look back to last 20 years, 2003 through 2022, the S&P 500 has posted gains 65% of the time. Since 1945, the month October has gained 1.4% vs. -0.74% return in September. However, this year The Nasdaq Composite was off 5.8% in September, and down 4.1% for the third quarter. Correspondingly, S&P 500 was down 4.9% for the quarter and 3.7% for the quarter. On September 26, less than 15% of stocks were trading above their 50-DMAs. Such incidence are very rare. In the past whenever such signals have been encountered S&P 500 have returned 4% in 3 months, 9% in 6 months, and 20% in a year.  Furthermore, October and November have been the 2nd and 3rd best performing months for the S&P 500 over the past 10 years, rising an average 2.3% and 3.2% respectively in October and November. My feeling is that, over the next few weeks, the Fed fear will gradually ease due to softening inflation data and weakening economic data.  The higher treasury yields may turn into falling yields. And the stock market selloff may turn into a rally. 

So, I am hoping that October should bring better return this year provided earnings are not too bad. For the long term investors, volatility shouldn't be be a  major concern visualizing October's history of gains. Looking forward, I am anticipating a better end to October and for rest of the year barring bad earnings and spike in inflation.

Earnings projections for 2023

Q1 2023: -2.1%  

Q2 2023: -5.2%

Q3 2023: -0.3% (projected)

Q4 2023: 5.9% (projected)

FY 2023: 0.8% (projected)

Q1 2024: 3.1% (projected)

Q2 2024: 5.8% (projected)

Based on the above table, it shows that we will continue to see earnings recession to end this quarter and touch positive from next quarter i.e Q4.

EV Buyers would get Tax credit at the point of Sale

Per the new proposal by the U.S. Department of the Treasury, starting Jan. 1, 2024,  it would make it easier for consumers to get a tax credit when buying a new or used electric vehicle. Based on its  proposed rules, the EV tax break would be given to buyers/consumers at the point of sale and the buyer won’t have to wait for the tax filing to get the rebate. If incorporated it will be a This is a welcome change for the EV buyers. As readers may be aware the credit is $7,500 if you're buying a new car and $4,000 if you're buying a used car based on the income limits. The annual income limits for the $7,500 new vehicle credit: $300,000 for married couples filing a joint tax return; $225,000 for heads of household and $150,000 for a single filling returns. Please note that, it’s not a rule as of now. In my view, this will be a welcome change and may help the EV companies to a large extent.

 Sectorial Stock Market TOP sectors for 2023 - Year to Date

Sector	YTD Performance in %age
Communication Services (TOP)	43.38
Information Technology	37.92
Consumer Discretionary	24.53
Industrial	3.56
Energy	2.10
Utilities	-16.03

Please click below link to view complete sectorial performances:

https://www.barchart.com/stocks/sectors/rankings?timeFrame=Ytd

Source: barchart.com

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

UI Path, Inc (PATH)

UiPath provides an end-to-end automation platform that offers a range of robotic process automation (RPA) solutions primarily in the U.S, Romania, and Japan. The company offers a suite of interrelated software to build, manage, run, engage, measure, and automate manual processes to greatly enhance productivity for any organization. Its platform combines artificial intelligence (A.I) with desktop recording, back-end mining of both human activity and system logs, and provides visualization tools, which enables users to discover, analyze, and identify processes to automate in a centralized portal. The company offers development environments that allows users in an organization to create automations without any prior coding knowledge. It also offers centralized tools designed to manage, test, and deploy automations and ML models across the enterprise; allows customers to manage long running processes that orchestrate work between robots and humans.

PATH stock went public in April 2021. In its first day of trading, the stock surged from its IPO price of $56 per share to $69 giving it a market capitalization of about $36 billion. Since then the stock has gone down about 78%. In the current market environment, that may not be surprising for a company that is not profitable. However, that could be changing soon. PATH posted its most profitable quarter ever in the second quarter of 2023.

UiPath is a leader in robotic process automation and business process automation. A core part of its business is automating repetitive tasks such as claims processing, accounting as well as risk management and fraud detection. The company has major partnership with Amazon and Alphabet (Google) for generative AI which is further expanding company’s business.  The most important thing about the company is that it has AI built into its products. The company’s software can integrate with generative AI applications to help with more complex projects and features. The combination of its technology with OpenAI and other applications provide a powerful tool to the customers. It has already been working on AI but not necessarily generative AI. During the last earnings conference call with analysts, management said generative AI should be a tailwind as it will enable even less technical people to run UiPath's automation suite. Though, all the limelight for AI goes to companies like Nvidia, Google, Microsoft, Amazon but this is the company provides platform for workplace automation software and growing its market share. 

Financials

In the last fiscal quarter ended July 31, the company's revenue grew 19% year over year to $287.3 million. It generated license revenue of $119 million, 15%, subscription service (SaaS) came in at $160 million or 28.4%, and other services revenue were $8 million. The company generated a gross profit of $238 million but overall a net loss of $60 million after the expenses. Its dollar based customer retention rate was 121%. Let’s take a look to company fundamentals.

Company Fundamentals

Market Capitalization	$8.72B	Total Cash	$1.83B
Trailing P/E	N/A	Total Debt	$63M
Forward P/E	29.85	Book Value per share	3.5
Price/Sales	7.46	52 weeks high	19.94
Revenue	1.15B	52 weeks low	10.40
Quarterly Revenue Growth (YOY)	18.6%	52 weeks change	36.94
Gross Profit	$880M	Held by Institutions	63.75%
Net Profit	-$177.68M	Held by insiders	10.21%
Quarterly Earnings Growth (YOY)	N/A	Float	407.56M
EPS	-2.01	Dividend	N/A

The stock may look little expensive from P/E ratio perspective, however if we look into Price/Sales (P/S) ratio it looks very reasonably priced.

My View and Strategy

A few weeks ago, I took initial position in this stock. After doing further research, I liked the stock and started accumulating the stock. The growth of AI is just the beginning and may go for many years. If so, UiPATH is going to be one of the biggest beneficiaries as companies start automating their business processes, CRM, ERP and so on. In fact, Google (GOOG) is one of the major holder of  its stock possessing around 14 million shares of PATH. What it means is that, Google has lots of confidence on its partner. The stock is currently trading at $15.39. The company has a 52-weeks high of $19.94. In other words, it’s trading at 23% discount to its 52-weeks high and about 78% less than its all-time high. The recently released new integration service connector allows UiPath automation developers to easily integrate generative AI and will help customers accelerate building their own AI applications. 

In the current market situation where volatility has been the name of the game, having some core position as investment and some positions for trading (buy on dip and trim on the run) is of paramount importance. I try to follow this strategy for all growth stocks. It’s always better to take some chips out of the table when stock goes up. Because it gives the opportunity not only to book some profit and feel better but also provide opportunity to buy the same stock at lower price or diversify into other stock with good future prospects in this volatile market.

Risks

All equities carries risks. Moreover, the current market situation is extremely dicey. The risk is even higher for the growth stocks. Having said that, growth stocks also has higher rewards because they grow their revenue faster and capture more market share. Off late, Wall Street does not care much about the growth stocks unless they are generating profits. Though PATH does not have net profit yet, it does have significant gross profit. So, the current environment is the enemy of this stock. But if the company execute as it’s doing, I do not see a significant risk from here.

My final thought: As the corporate world adopt more and more AI and ML, this company should thrive. In my view, I do not see a major downside from the current price. That’s the reason I thought it’s right time to add the stock to my blog portfolio as a longterm investment.  I have already bought some shares and may continue to add on the pullbacks. As I always say, I am not emotionally attached to any stock and willing to dispose, if I see red flags. It does not matter which company it is. Having said that, I see it as a winner in the long run and hence I am invested. 

Shesa’s Blog Portfolio (As of OCT 15, 2023 - updated 11/5)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	178.85	1/25/13	1286%	HOLD
META	47	314.69	11/13/13	570%	HOLD
MA	77.18	398.03	12/12/13	416%	HOLD
AMZN	15.58	129.79	4/12/14	733%	BUY/ Accumulate
SHOP	13.48	51.55	11/25/18	282%	Buy below $60
SPG	54.59	107.03	5/25/20	96%	HOLD
ENPH	45.3	123.74	6/28/20	173%	HOLD
PLUG	27.98	7.34	4/25/21	-74%	Longterm Buy
SAVA	51.49	14.26	10/10/21	-72%	BUY/Accumulate
NVDA	239.49	454.61	2/13/22	90%	BUY
TSLA	290.25	251.12	5/1/22	-13%	BUY/Accumulate
FSR	8.95	6.21	9/18/22	-31%	Longterm Buy
ABNB	115.21	124.08	10/31/22	8%	HOLD
AXSM	77.13	76.66	1/1/23	-1%	BUY/Accumulate
STEM	8.30	5.02	2/20/23	-40%	HOLD
RDFN	8.87	5.89	4/6/23	-34%	Accumulate
SOXL	15.66	18.98	4/6/23	21%	BUY/Accumulate
GOOG	123.25	138.58	5/21/23	12%	BUY/Accumulate
RVPH	7.3	4.51	5/21/23	-38%	BUY/Accumulate
AI	33.39	29.15	6/25/23	-13%	HOLD
LAZR	5.57	4.12	8/27/23	-26%	Longterm Buy
PATH	15.39	15.39	10/15/23	0%	NEW ADDITION
ETF
IHF	139.1	252.05	8/16/15	81%	HOLD
MUTUAL FUND
PRMTX	59.45	113.92	12/20/14	92%	HOLD
FSRPX	9.05	17.45	1/15/16	93%	HOLD
FSMEX	43.66	53.72	9/24/17	23%	HOLD

Equity 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.