Shesa's NOVEMBER 2023 Investment Blog

 By Shesa Nayak

U.S. Stock Market Commentary 

This month brings the completion of 10 years or one decade of writing my Investment Blog. I thank to all my blog readers for their continued interest.

Stock Market: After struggling for three months we finally saw a big rally in the stock market.  Nasdaq and S&P 500 is up 34.96% and 17.57% for the year till date. The Federal Reserve did not raise interest rate in October and there was a change of tone from Fed Chairman J Powell. The tone was little more dovish and investors think that FED is done raising rates. As a matter of fact, the bond yields came down significantly and short covering added fuel to the rally. The huge rally in bond yield had escalated the interest rate significantly and that did the job of Federal Reserve. The stock market had a continuous 8-day win streak in this cycle from November 1 to November 8, first time since late 2021. This is really and I will elaborate later. The so called magnificent seven stocks - Apple, Microsoft, Nvidia, Tesla, Amazon, Google and Meta have gone up from around 40 - 240% for the year. However, the small cap stocks are flat or negative which is very unfortunate. Winners keep winning and losers keep losing..

Earnings: 94% of the S&P 500 companies have reported earnings. We saw a mixed report on Q3 earnings. Some of the big tech companies like Amazon, Microsoft, Netflix reported good earnings where as other like Apple, Google and Meta were OK. The chip giant Nvidia reports earning on Tuesday, 11/23 after the bell. Earnings growth rate for the S&P 500 is 4.3% whereas analysts were projecting negative -0.3% for Q3. So, it’s much better than what analysts anticipated. 

Economy: From the economic perspective, GDP grew at 4.9% in Q3, inflation ticked up 0.4% in October (3.7% YOY), retail sales were up 0.7%. The nonfirm payrolls increased by 150,000 for the October, below the forecast  of 170,000. The ADP private payroll showed 113,000 jobs were added vs. 130,000 expected. Interest rate remained at 5.5% but mortgage rate went past 8%, unemployment rate ticked up to 3.9%. This is not good sign but these days bad news are now good news. The consumer price index (CPI) increased 3.2% on an annual basis comparing to 3.7% in September. The “core” CPI (excluding food and energy) fell to 4% in October from 4.1% in September on YOY. The 10 years bond yields had gone up as high as 5.15% and pulled back to 4.4% as of date. So, overall we are in a mixed economy but if the high interest rate prevails then we may trend towards a recession.

As I said in my last blog, I am optimistic because interest rate may not be a headwind going forward. Also, November, December and January has given a better return historically. Moreover, we have to keep an eye on the economy numbers and bond yields. Having said that, I feel that we have passed the storm and future looks more brighter. I will share my thought of my bullishness on the stock market but before that let’s take a quick look to the stock market index. 

  

Indexes	Close FRI 12/30/22	Close FRI 10/20/23	Change in 2023	% Change in 2023	All Time High	From All Time High	% from All Time High
DOW	33,147.25	34,847.28	1,700.03	5.13	36,952.65	-2,105.37	-5.70%
S&P 500	3,839.50	4,514.02	674.52	17.57	4,818.62	-304.60	-6.32%
NASDAQ	10466.48	14125.48	3,659.00	34.96	16,212.23	-2,086.75	-12.87%
BTK	5,281.10	4,785.59	-495.51	-9.38	6,376.77	-1,591.18	-24.95%
NBI	4,213.13	3,792.33	-420.80	-9.99	5,517.77	-1,725.44	-31.27%

Q3 Earnings

Earnings: 94% of S&P 500 companies have reported results, 82% of S&P 500 companies have reported a positive EPS surprise and 62% of S&P 500 companies have reported a positive revenue surprise.

Earnings Growth: Earnings growth rate for the S&P 500 is 4.3%. If 4.3% is the actual growth rate for the quarter, it will mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022. Please note that before this quarter analysts were projecting negative -0.3% earnings growth for Q3. So, it was much better than anticipated. 

Valuation: The forward 12-month P/E ratio for the S&P 500 is 18.6, less than 5 year average of 18.8% and above 10 years average of 17.6.

Economy News

• Interest Rate: 5.5%. 
• GDP: Q3: 4.9%, Q2: 2.1%, Q1: 2%. Yearly GDP growth: 2.9%.
• Inflation:   0.0% in October better than forecast. Inflation stands at 3.2%. 
• Producer Price Index (PPI): It’s a measures on the average price changes that businesses pay to suppliers, rose 2.4% for the 12 months ended in October. On a monthly basis, prices declined 0.2%, vs. 0.1% expected by the street. 
• Job growth:  The nonfirm payrolls increased by 150,000 for the October, below the forecast  of 170,000. Unemployment Rate: 3.9%. 
• Consumer Confidence: 60.4 in October vs. 68.1 in September
• Business Confidence: 46.9 vs. 49 in Sept
• U.S Crude Oil: $75.84 a barrel. 
• U.S Dollar Index: 103.82.
• U.S Treasuries: 1 yr: 5.25, 3 yr: 4.62, 5 yr: 4.44, 10 yr: 4.4%, 30 yr: 4.59. 
• Retail Sales: 0.1% vs. -03% expected. 
• US Mortgage Rate: 30-years rate has moved up to 7.64%.

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 interest rate in October meeting but chairman Jerome Powell was little dovish. The next FOMC meeting is on December 12-13. It’s unlikely that Fed will hike rate further. The treasury yields had gone up significantly but cooling off now. And that’s a good sign for stock. In fact, now market is expecting a few rate cuts in 2024 rather than any further rate hikes.

What to expect going forward?

As you know, we saw some good rallies in the stock market till July. After that the stock market went through a terrible time bringing all indexes down. In fact, Nasdaq went down more than 10% entering to the correction territory. However, we have/had a very good start to the month of November reversing the downtrend. So, what can we expect going forward? In my view, we may potentially see a major holiday rally before the end of the year. Why do I think so?

• We have entered into the best six month of the year of the stock market starting November 1. Economy is cooling down - employment, inflation, consumer confidence are down
• Surging oil prices have taken a downturn which is good to bring inflation down
• The 10-year Treasury yield climbed beyond 5% has dropped almost more than 50 basis points in the past few to 4.44% 
• The Fed has shifted its gear from hawkish to dovish tone. The inflation came down to 32% from 3.7% in October
• In the recent days rate-hike fears have become rate-cut hopes for stock market
• Fears about third-quarter earnings turned to much better earnings 4.3% vs. expectation of  negative -0.3%
• The stock market had a continuous 8-day win streak in this cycle from November 1 to November 8. So, what does it mean? It suggests that we’re just starting a new muti-year bull market. The S&P 500 rallied for eight straight days for the first time since late 2021 and for the first time since the 2022 bear market. Historically, the stock market has always soared after its first eight-day win streak in a cycle since 1950. The eight-day win streak for the first time after a bear market is a signal that optimism has returned to markets and that signals into a new bull market. Let’s take a look to the historical facts when S&P 500 has 8-day winning streak:

Apart from late 2023, we should see bull market going into 2024. The fact that Fed cuts rates without having a recession is a great sign for market. A combination of Fed rate cuts and without recession stock market has always led to powerful stock market rallies. It happened in 1984-86, 1994-95, 1998-99, and 2019. So, will it repeat in 2024? I will share my view in my next blog. Stay tuned!

Rethink and ReStrategize

As we approach to the end of the year, it’s extremely important to rethink about our portfolio what did well, what did not do well and what would be the market trend in future. Based on all these we have to rethink and restrategize our portfolio. Irrespective of all our due diligence and research always market surprises the investors. Particularly these days when high frequency algo-trading are in place it becomes very tough for the retail investors to beat the market. Investing for the long term is good but it’s also extremely important to have some strategy to buy good stock on the dip and trim on the way up. This is of paramount importance for getting better return on investment (TOI) in such continued market volatility and uncertain environment. Before the year end, it makes sense revisit our portfolio and remove some junks and better position ourselves for the future. We may have gained in many stocks and lost in many. It does not necessarily mean that same will prevail next year. So, it’s extremely important to give another thought. I will write more in my next blog. 

Earnings projections for 2023-2024

Q1 2023: -2.1%  

Q2 2023: -5.2%

Q3 2023: 4.3% vs. -0.3% projected

Q4 2023: earnings +2.9%, Revenue: +3.2% (projected)

FY 2023: earnings +0.6%, Revenue: +2.3% (projected)

Q1 2024: earnings +6.5%, Revenue: +4.2% (projected)

Q2 2024: earnings +10.4%, Revenue: +5% (projected)

FY 2024: earnings 11.6%, Revenue: +5.4% (projected)

Based on the above table, finally earnings recession have ended. It’s expected that earnings and revenue growth will continue to rise. 

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 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 welcome change for the EV buyers. As readers may be aware, the credit is $7,500 for buying a new car and $4,000 for buying a used car. 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 industry to a large extent.

 Sectorial Stock Market TOP sectors for 2023 - Year to Date

Sector	YTD Performance in %age
Information Technology (TOP)	49.52
Communication Services	48.87
Consumer Discretionary	31.67
Industrial	7.18
Materials	3.09
Utilities	-12.20

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.

Palantir (PLTR) is a data science company that is pioneering an AI-powered approach to data analytics which the company hopes will be a standard across the industry in future. Palantir was started in 2003 to develop advanced software for the U.S. intelligence community’s counterterrorism investigations and operations. The company was was incorporated in 2003 and is based in Denver, Colorado. 

On September 30, 2022 Palantir went public at $10 a share and closed lower at $9.5. Fast forward, the company has grown its government-focused data science platform significantly in last few years and has established itself as a major players on AI systems providing services to key U.S. government intelligence agencies viz. Central Intelligence Agency (CIA), the Federal Bureau of Investigation (FBI), the National Security Agency (NSA), and the Department of Defense (DoD). In addition, it also provides services to some no-intelligence agencies like FDA, CDC, Health and Human Services (HHS). Today, Palantir’s platform is considered the “gold standard” in government data analytics and has been used to power emergency evacuation operations, U.S. vaccines program, help identify Russian money-laundering operation and so on. But the most important thing is, now Palantir is further commercializing its technology beyond government agencies into private sector wherein it provides data-mining and business analytics. That has proved to be the fastest growing segment for the company. So far, this expansions have been very successful for acquiring new customers, new product launches, and higher fees. Commercial revenues have been growing in excess of 15% for the past several years and expected to grow significantly for next few years. Now the company is heavily focussing on AI and has been conducting many boot camps for its its Artificial Intelligence Platform (AIP). In addition to its own flagship offering it is also making huge progress on offering generative AI models and systems. The debut of the company's Artificial Intelligence Platform (AIP) earlier this year was met with brisk adoption.

Financials

During lat quarter (Q3) Palantir reported revenue of $558.2 million, up 17% year over year. The company also reduced its overhead and brought down its operating expenses over 5% to $410.3 million. Overall the operating income came at $40 million for the quarter, huge improvement from its loss of -$62.2 million in the same quarter last year. The EPS came at 0.07 vs. 0.06 expected. Since the end of last year, Palantir has continuously generated triple digit earnings growth. For FY2023, Wall Street forecasts more than 300% EPS growth. That’s outstanding! Also, sales growth  continues to be in double digits, ranging from 13% - 17% over the last four quarters. I expect further accelerations of sales and profit as it ramps up its AI platform. The CEO wrote in their August news letter “The demand for AIP is unlike anything we have seen in the past twenty years…”. This indicates the momentum and demand for AI platform. Now let’s see the fundamentals.

Company Fundamentals

Market Capitalization	$44.59B	Total Cash	$3.28B
Trailing P/E	292.7	Total Debt	$236.2M
Forward P/E	69.44	Book Value per share	1.48
Price/Sales	21.53	52 weeks high	20.37
Revenue	2.13B	52 weeks low	5.92
Quarterly Revenue Growth (YOY)	16.8%	52 weeks change	184.98%
Gross Profit	$1.5B	Held by Institutions	35.28%
Net Profit	$147.31M	Held by insiders	11.13%
Quarterly Earnings Growth (YOY)	N/A	Float	1.94B
EPS	0.07	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 reasonably priced.

My View and Strategy

As I have written in my previous blogs, the growth of AI is just the beginning and may go for many years. Palatir is a great AI and ML combination data science company with specialization on intelligence, terrorism and diversifying rapidly into private sector. That’s bringing double digit revenue growths and triple digit profit growth. This would further accelerate going forward.  After doing my research, I took my position a few months ago. These days market behavior has changed and volatility has been the name of the game. Some winners keep winning and losers keep losing more, particularly small cap stocks have been decimated.  But luckily PLTR is a $45 billion company and lots of growth ahead. So, it’s better to keep adding on the dip and trim some portion on the way up. Basically, having some core position as investment and some positions for trading. As I says, it’s always better to take some chips out of the table when stock have a good run. Nothing is certain in the stock market. Hence, I try to follow this strategy for all growth stocks. The stocks currently trading at $20.49 and sitting on its 52-week high. So, the stock is not cheap and usually I avoid any stock trading at their pick. However, the stock has a all-time high of $39. Currently, the stock is consolidating and it seems institutions have been accumulating after Q3 earnings. Only 39.7% of the float is being held by the institutions, hence I expect that institutions will continue to accumulate and that would increase the share prices to new highs in foreseeable future. 

Risks

All equities carries risks. The current market situation remain uncertain though it’s getting better starting November. The risk is always higher for the growth stocks. Having said that, growth stocks has higher rewards because they grow their revenue faster and capture more market share. Palantir is a growth company so risk is obvious. Over the weekend, some drama has developed at OpenAI (the company which develops ChatGPT). We will see if there will be any impact on the AI stocks as a result of that, though I do not think there will be any longterm impact for PLTR.

My final thought: Palantir CEO said, the demand for AIP is unlike anything they have seen in the past twenty years. What it means is, “there is significant growth ahead for Palantir”. At present, the company is generating triple digit earnings growth and revenue is growing around 17% but I am pretty confident that these will accelerate further as it ramps up its AI platform and further penetration to private sector. I feel it as a great longterm investment though nothing is guaranteed. But I am not emotionally attached to any stock and willing to dispose if I see red flags.

Shesa’s Blog Portfolio (As of NOV 19, 2023)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	189.69	1/25/13	1370%	HOLD
META	47	335.04	11/13/13	613%	HOLD
MA	77.18	400.30	12/12/13	419%	HOLD
AMZN	15.58	145.35	4/12/14	833%	BUY/ Accumulate
SHOP	13.48	68.34	11/25/18	407%	Accumulate
SPG	54.59	121.68	5/25/20	123%	HOLD
ENPH	45.3	92.86	6/28/20	105%	HOLD
PLUG	27.98	4	4/25/21	-86%	HOLD
SAVA	51.49	22.22	10/10/21	-57%	BUY/Accumulate
NVDA	239.49	493.45	2/13/22	106%	BUY/Accumulate
TSLA	290.25	234.17	5/1/22	-19%	BUY/Accumulate
FSR	8.95	2.43	9/18/22	-73%	SOLD
ABNB	115.21	127.15	10/31/22	10%	HOLD
AXSM	77.13	59.88	1/1/23	-22%	BUY/Accumulate
STEM	8.30	2.98	2/20/23	-64%	HOLD - I may sell
RDFN	8.87	6.77	4/6/23	-24%	Accumulate
SOXL	15.66	23.13	4/6/23	48%	BUY/Accumulate
GOOG	123.25	136.94	5/21/23	11%	BUY/Accumulate
RVPH	7.3	4.01	5/21/23	-45%	BUY/Accumulate
AI	33.39	29.31	6/25/23	-12%	SOLD
LAZR	5.57	2.88	8/27/23	-48%	BUY/Accumulate
PATH	15.39	18.27	10/15/23	19%	BUY/Accumulate
PLTR	20.49	20.49	11/19/23	0%	NEW ADDITION
ETF
IHF	139.1	252.09	8/16/15	81%	HOLD
MUTUAL FUND
PRMTX	59.45	122.59	12/20/14	106%	HOLD
FSRPX	9.05	18.61	1/15/16	106%	HOLD
FSMEX	43.66	54.94	9/24/17	26%	HOLD

Equity Sold since my Last Blog

• Fisker (FSR): I did held this stock with lots of patience for last couple of years. But this company is failing in every angle production, delivery, revenue and profitability. Hence I sold all my stock portion but held some options. It’s better to rethink our strategy for next year, hence I removed it from my portfolio. The stock seems to be dead for now. If there will be further improvements then I will re-think in future. I may also sell some other stock before the end of the year. If I do so then I will provide an update. 

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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