Shesa's APRIL 2024 Invesmtent Blog

APRIL 2024 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update 

The stock market continue its run this year lead by Artificial Intelligence (AI) related semiconductor stocks and hope for interest rate cut. During the March FOMC interview the Federal Reserve Chairman Jerome Powell made a bold statement saying “despite the recent bump up in inflation, the Fed still forecasts three rate cuts before the end of the year”. This statement further ignited the stock market. All U.S stock indexes have hit their all-time highs. Nvidia stock has/had a phenomenal run. It took Nvidia 24 years to reach a valuation of $1 trillion but took only 8 months to reach $2 trillion market capitalization from $1 trillion. I keep hearing that many AI stocks are in bubble.  Well, there may be some bubble in a few stocks but most of the big companies have supported with their earnings and provided positive future guidance. And that’s the reason they are leading the market. Meanwhile it has been a few days the stock market has not gone anywhere. The reason is Q4 earnings season is over and Q124 earnings season to kick-off after a few days. So, the market is now in a holding period for a moment to "catch its breath”. We should see further momentum in the market in a couple weeks when earnings season kick-off.

The Federal Reserve and other central banks just set the stage for a strong stock market rally into the summer. The prospects of incoming rate cuts alongside a growing economy sets a powerful combination for stock market. Furthermore, the forthcoming U.S election is another positive factor for the market. Having said that, the stock market never goes straight so there will be a pullback at some point. That's just the reality of the short-term market outlook. But that doesn't mean to be scared and run for the hills. Any pullback in a bull market is healthy for the stock. Because that brings new buyers/money to the market. I think the stock market is in a “holding period” until the Fed actually does cut rates. But once they do, and I think that’ll happen in May or June – this market should wake-up in a dramatic fashion and stocks should go much higher. Having said that, what are the positive catalyst to look for the stock market to justify higher? I will discuss but before that let’s take a quick glance to the stock indexes.

Indexes	Open 1/2/24	Close THU 2/1/24	Change in 2024	% Change in 2024	All Time High	From All Time High	% from All Time High
DOW	37,689.50	39,807.37	2,117.87	5.62	36,952.65	2,854.72	7.73%
S&P 500	4,769.83	5,254.46	484.63	10.16	4,818.62	435.84	6.61%
NASDAQ	15011.35	16379.46	1,368.11	9.11	16,212.23	167.23	1.03%
BTK	5,418.80	5,284.41	-134.39	-2.48	6,376.77	-1,092.36	-17.13%
NBI	4,370.58	4,429.97	59.39	1.36	5,517.77	-1,087.80	-19.71%

Economy News

• Interest Rate: 5.5%. 
• GDP: Q4: 3.4%, Q3: 3.3%, Q2: 2.1%, Q1: 2%. Annual GDP growth: 2.9%.
• Inflation:   3.2%. 
• Unemployment: 3.9%
• Retail Sales: -0.6%
• PCE: 0.4% for January and 2.8% YOY
• Job growth: US economy added 275,000 compared to 198,000 estimated.
• Consumer Confidence: 79.4 
• U.S Crude Oil: $83.11 a barrel. 
• U.S Treasury Yield: 2 yr: 4.62, 5 yr: 4.21, 10 yr: 4.2%, 30 yr: 4.34. 
• US Mortgage Rate: The 30-year fixed: 7.5%, 30 years Fixed FHA: 6.97%

Current state of the Stock Market - bullish and bearish sentiment

There are many reasons why stock market is going up. However, I believe that the following are factors are contributing to the upliftment of stock market. 

• Fed still forecasts for three rate cuts before the end of the year
• Rising Earnings: Earnings were reasonably good in Q1 and it’s expected to keep rising during 2024.
• Sustained Consumer Pending. Consumer confidence is up and they do not seems to be concerned about any recession, hence they are spending. As we know about 70% of the U.S. GDP is dependent on consumer spending. This is the key which has kept the stock market afloat.
• Falling Inflation: Inflation has come down from about 9.5% to 3.2% in February 2024
• More importantly, AI Momentum ignited by Nvidia: AI has been the name of the game why stock market and particularly technology stocks have been doing well.

Having said that, we are also seeing some pullback in the market. Why so? The consumer-price index (CPI) rose 3.2% in February compared to last year, which was slightly higher than the 3.1% expected. Core inflation, excluding food and energy, also increased by 3.8%. The producer price index (PPI), which measures pipeline costs for raw, intermediate and finished goods, jumped 0.6% on February, and 1.6% YOY.  This was the biggest move since September 2023. Most of these rise came from higher food, gas and rent price. The PCE number which came last Friday was in-line with the Wall Street expectations. But all these numbers are shifting to gradual reinflation in March. So, when the March CPI report comes in around 2nd week of April it would not be pretty. If reinflation continues then this could negatively affect stocks in the short term. However, in my view, we may again start seeing disinflation in next couple of months. With that said, I anticipate that strong earnings and improving economic activity will counter any short-term challenges caused by the current reinflation scare. In addition, Inflation has been stabilizing unemployment is rising and consumer spending is falling but stable, so that is good enough for the Fed to cut rates multiple times this year. But I do not expect it to happen before June/July. Also, let’s not gorget that next presidential election is coming and that’s good for the stock market. I will elaborate more on this.

Election Years are historically good for stock market

The U.S election will be held on November 5, 2024. There is a historical presidential-election-year market pattern. And we have the strong start to the year so far in stocks. On top of that, the Fed is about to create a broad macroeconomic tailwind by cutting rates. Though the stock market may become volatile and certain group of stocks/sectors would tend to move one way or the other depending on which government (Democrat or Republican) will form the government. The stock on their respective priority sectors should do well. But until the counting is over, nothing can be predicted with surety, hence volatility increases around the election time. Furthermore, with the anticipation that the new government should do more constructive work the stock market has mostly done well. Since last five election this is how S&P 500 has performed: 

2004: 11% (Bush - II)

2008:  -37% (Obama)

2012: 16% (Obama)

2016: 12% (Trump)

2020: 18% (Biden)

2024: ??

According to Yardeni Research, the S&P 500 has climbed an average of 6.2% in the election year since 1932. But let’s remember that the final seven months of presidential-election years (from June 1 to December 31) are often the best-returning months. In 16 of the past 18 presidential-election years, the S&P 500 was up over that span. And in all those instances, the index averaged a 10% gain. The major spike of stock may happen after the election day. But for now, we're in the “April to May" time frame of the presidential-election-year pattern. So, this time period may provide an opportunity to buy/accumulate stocks. In other words, the next three months are usually the most challenging part of this pattern. But the key is Q1, 2024 earnings which will kick-off from around 3rd week of April.

Why we should be bullish about Stock Market in long term?

Well, there is another factor to be bullish. When November, December, January and February were all positive for the S&P 500 in the past, more gains have historically followed as indicated below:

3 months later: 4.9%

6 months later: 6.4%

9 months later: 13%

10 months later: 15.5%

12 months later: 18.1%

Another one, when the Nasdaq 100 move 21% or more above its 52-week moving average which has happened 27 other times since 1985. It has returned annual gains of 13.6 - 16% in that time frame. So, these are great pointers what may be expected in the stock market. Though history may not repeat but mostly it does.

Another pointer to be bullish, in late 2023, the trailing 12 months return for Nasdaq swung from -25% to +25%. Such bullish sentiments have occurred only 4 times in the past. Whenever it has happened, it marked a start of multi-year bull market. But these bull markets do not go up straight for multi-year.

Stock Market do not go straight up

So, we saw so many bullish indicators above. We need to our due diligence and get prepared for what may come in future. But let’s not forget one very important thing, always there has been 8-10% pullbacks during the bull market. So, despite the fact that indexes and stocks go up, one must be prepared for any such pullbacks. It’s immensely important to have some cash and take rational decision when and which stock to buy during such pullback. Furthermore, it’s always a good idea in my view to trim and take some profit when a stock goes up significantly and buy something which is in our shopping list or wait for the same stock to have a pullback. Investing for long term is a good strategy but in this era of high frequency algo-trading it’s sensible to have some trading strategy built into it. Otherwise it may be difficult beat the market. One must not get emotional in trading rather have a strategy to deal with such situations. As I keep saying greed and fear are two aspects that controls investors sentiments.

Are AI Stocks still good for investment?

Nvidia went as high as $974 and came down to $865. That’s $109 swing on a single day. This is what happens with the Algo/HFT trading these days. Big players are too big to control! It seemed like a well orchestrated plan by Wall Street. When such things happens to the AI leader with $2.4 trillion valuation then think what can happen to small companies!! Hence, taking some profits when time is good is the essence and have some dry power available to deploy as needed. But we keep hearing that the market is over valued and AI stocks are in the bubble. But in my view, the A.I bull run is NOT over as yet! How great a stock may be, there will always be pullbacks. And that’s healthy for the stock and overall market. That brings new buyers/money to the market. By the way, it’s estimated that there is still about $6.6 trillion siting in the money market and all together $8.8 trillion of cash is sitting not the sidelines. When market goes up some of those money should come to the market. The market is certainly not as overvalued as it was during .com bubble in 2000. A lot of bearish investors claiming that the stock market is as overvalued as it was at peak of the Dot-Com bubble. But that isn’t totally wrong in my view. If we dig deeper to the fundamentals then stocks are much more cheaply valued today than they were at the peak of the bust in 2000. There may some very few exceptions, if any. Here is an example of two high flying stock Cisco in 2000 and NVDA in 2024. Cisco's shares were trading at roughly 200 times its earnings in 1999-2000 and revenue growth was just about 43%. But Nvidia revenue growth is astronomical 265.2% YOY and it’s trading with 37.4% of future earnings. So, if we bring the comparative valuations with Cisco in 2000 then Nvidia stock should be at least around $4500 today. So, you decide whether we are in a bubble!! 

Agreed, that no boom last forever. However, it could last a lot longer than many think. That's because many wall Street analysts are expecting that the overall GPU market is expected to grow 10 times from 2022 through 2027, from $40 billion to $400 billion. So, this is another pointer to think whether these AI stocks like NVDA, SMCI, MSFT, AMZN, GOOG, META etc are over valued!

Earnings projections for 2023-2024

Q1 2023: -2.1%  

Q2 2023: -5.2%

Q3 2023: 4.3% 

Q4 2023: 9%

Q1 2024: earnings +6.7% (projected)

Q2 2024: earnings +9% (projected)

FY 2024: earnings +10.9% (projected)

Revenue growth for 2024 expected: 4-5%.

Based on the above table, finally earnings recession have ended. It’s expected that earnings and revenue growth will continue to rise. Some of these companies are expected to contribute significantly to the earnings growth: NVDA, AMZN, META, GOOG, MSFT.

 Stock Market TOP sectors for 2024

Sector	YTD Performance in %age
Communication Services	15.57
Energy	12.68
Information Technology (TOP)	12.48
Financials	11.97
Industrial	10.67
Materials	8.44
Real Estate	-1.36

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. 

Palo Alto Networks (PANW):

Palo Alto Networks provides cybersecurity solutions worldwide. It offers a comprehensive cybersecurity portfolio that includes a variety of products and services designed to protect organizations across networks, clouds, and mobile users. Some of the products include: Next-Generation Firewalls, Threat Intelligence Management, DNS Security, Cloud security solution, IoT Security, extended detection and response platform and so on.

A case for PANW

The company is recognized as a leader in cybersecurity, continually innovating to stay ahead of cyber threats and has been a market leader in this space. Palo Alto Networks has been integrating Artificial Intelligence (AI) and Machine Learning (ML) into their security technologies for over a decade. They are continuously innovating and expanding the use of AI across their product portfolio to enhance cybersecurity measures. The company’s Q2 2024 results were great where sales jumped 19% year over year, and profits were up nearly 19-fold. However, the investors were spooked when the CEO said about new "platformization and consolidation" strategy that could slow sales growth to 13% year over year in Q3, and reduce billings growth to 2%. The stock took a hit of almost $100 in a single day. However, now the company is going a step further to introduce a proprietary AI model using generative AI for specific security use cases and task. This is expected to be big one for the company.

Financials

• In the latest second quarter revenue grew 19% year over year to $2.0 billion
• Net income for the fiscal second quarter 2024 was $1.7 billion, or $4.89 which includes a $1.5 billion net tax benefit. Without this company earned $0.5 billion, or $1.46 per share.
• Guidance: Total revenue in the range of $1.95 billion to $1.98 billion, representing year-over-year growth of between 13% - 15%. And for fiscal 2024 it expects total revenue in the range of $7.95 billion to $8.00 billion, representing year-over-year growth of between 15% and 16%.

Company Fundamentals

Market Capitalization	$91.80B	Total Cash	$3.37B
Trailing P/E	43.98	Total Debt	$2.18B
Forward P/E	51.81	Book Value per share	13.5
Price/Sales	13.26	52 weeks high	380.84
Revenue	7.53B	52 weeks low	176.30
Quarterly Revenue Growth (YOY)	19.30%	52 weeks change	27.86%
Gross Profit	N/A	Held by Institutions	84.4%
Net Profit	$2.28B	Held by insiders	1.13%
Quarterly Earnings Growth (YOY)	1974.7%	Float	319.53M
EPS	6.46	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

The stocks currently trading at $280.13. The stock got hammered due to lackluster guidance. The Wall Street does not forgive lower expectations. However, I feel it was an over-reaction by Wall Street. The stock has an all-time high of $384.84. So, it’s trading 27% below its 52-weeks high. In my past experience, whenever a good company is hit by such temporary phenomena it’s a good idea to keep accumulating for long term. In case of PANW, I am very optimistic that this is a short term bump and I do strongly feel the stock should bounce back in next one/two quarters. When we see above fundamental, the stock is not cheap.  It’s trading 52 times of forward earnings. But the price to sales is 13 times which is reasonable. Currently, the stock seems to be consolidating and it seems institutions have been accumulating. So, I think this is the time to keep accumulating in small quantities and build the portfolio. 

Risks

All equities carries risks. As far as PANW is concerned, the stock may not go up significantly unless the company shows the street in the coming quarters that they can still deliver. The company must strive to keep its leadership position in the security space. PANW also needs to prove that its AI products are picking up and resulting in higher revenue. Secondly, all security companies depends on the web crime, malware, viruses, hacking and so on. If these activities come down then they will struggle. Having said that, it’s highly unlikely that such crimes will come down in the foreseeable future.

My final thought: Cyber security crimes have been growing and these unscrupulous elements are not going to stop. Rather, it may further escalate due to geopolitical tensions, economic challenges, availability of ransomware tools, and technological advances. And Palo Alto Network is the leader in this space. So, it may have temporary bad phase but I expect this company to bounce back fast. I believe PANW as a long term winner and hence I have invested in this company. However, if I see any read flag or stagnation then I will pull the trigger because I do not fall in love with any stock or company and PANW is no exception.

Shesa’s Blog Portfolio (As of March 31, 2024)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	171.48	1/25/13	1229%	HOLD
META	47	485.58	11/13/13	933%	Buy on Dip
MA	77.18	481.57	12/12/13	524%	HOLD
AMZN	15.58	180.38	4/12/14	1058%	Buy on Dip
SHOP	13.48	77.17	11/25/18	472%	HOLD
SPG	54.59	156.49	5/25/20	187%	HOLD
ENPH	45.3	120.98	6/28/20	167%	HOLD
PLUG	27.98	3.44	4/25/21	-88%	Accumulate
SAVA	51.49	20.29	10/10/21	-61%	BUY/ Accumulate
NVDA	239.49	903.56	2/13/22	277%	Accumulate - Long Term
TSLA	290.25	175.79	5/1/22	-39%	HOLD
ABNB	115.21	164.96	10/31/22	43%	HOLD
AXSM	77.13	79.8	1/1/23	3%	HOLD
RDFN	8.87	6.65	4/6/23	-25%	BUY/Accumulate
SOXL	15.66	46.53	4/6/23	197%	BUY
GOOG	123.25	152.26	5/21/23	24%	HOLD
RVPH	7.3	3.78	5/21/23	-48%	HOLD
LAZR	5.57	1.97	8/27/23	-65%	HOLD
PATH	15.39	22.67	10/15/23	47%	HOLD
PLTR	20.49	23.01	11/19/23	12%	BUY/Accumulate
MSFT	376.04	420.72	1/1/24	12%	BUY/Accumulate
INTC	50.25	44.17	1/1/24	-12%	SOLD
FLNC	20.54	17.34	2/1/24	-16%	Accumulate
PANW	284.13	284.13	3/31/24	0%	NEW ADDITION
ETF
IHF	27.82	54.54	8/16/15	96%	HOLD
MUTUAL FUND
PRMTX	59.45	136.81	12/20/14	130%	HOLD
FSRPX	9.05	21.28	1/15/16	135%	HOLD
FSMEX	43.66	67.57	9/24/17	55%	HOLD

Equity Sold since my Last Blog

• STEM