Shesa's MAY 2024 Investment Blog

By Shesa Nayak

U.S. Stock Market Update 

It was a painful April for the investors in the first three weeks. Nasdaq reached near the correction territory of -10% and S&P 500 pulled-back about -6%. Many tech stocks got hammered and particularly semiconductor sector was decimated. The AI darling NVIDIA lost more than $200 in a couple of weeks. The stock market has been extremely unpredictable as stronger economic reports raising concern about inflation/re-inflation, Federal Reserve hawkishness, treasury yields, Geopolitical situation and so on. The market got hammered and retail investors got smacked. Unfortunately, that’s the name of the game. If we are in the stock market then we have to accept it as a fact and move on. Otherwise better to stay out of the market. Currently, we see a strong economy with a strong consumer driving the U.S economy. Investors are apprehensive that there won’t be many rate cuts as they perceived. I will share my opinion later. Having said that, stocks exploded last Friday in a broad rally powered by strong earnings reports from Microsoft, Alphabet, and few others, as well as a not so bad March Personal Consumption Expenditures (PCE) report. After this rally S&P 500 and Nasdaq have/had its best week since November, gaining 2.7% and 4.2% respectively. 

The next FOMC meeting is scheduled for this Wednesday, 5/1. I am almost certain that there will not be any change in interest rate decision. However, what Fed chairman Jerome Powell says about future rate cuts will be immensely important. I expect he will continue to be hawkish in the near term. 

We are in the middle of Q1 earnings season with 46% of S&P 500 already reported earnings. Fundamentally, we have seen reasonably good earnings so far. The AI related companies have come with strong results and some others did not have great earnings  or they issued lukewarm future projections. I also feel the rest of the earnings season should go well. That should support further market strength possibly into mid-May. During May, it’s likely that we get a fresh round of soft inflation reports, which should push stocks higher. Around June, I anticipate Fed commentary should shift toward dovish and rate-cut hopes should return, leading stocks higher. Having said all these positive things, these are just my personal view. There may be catalysts but let’s not forget that this is election year and it has its own trend. Historically, stock market has done better in the election year, but this also brings lots of volatility, hence one must be careful. We can always expect some pullbacks. Let’s see how the stock market indexes have performed.

Indexes	Open 1/2/24	Close FRI 4/26/24	Change in 2024	% Change in 2024	All Time High	From All Time High	% from All Time High
DOW	37,689.50	38,239.66	550.16	1.46	39,889.05	-1,649.39	-4.13%
S&P 500	4,769.83	5,099.96	330.13	6.92	5,264.85	-164.89	-3.13%
NASDAQ	15011.35	15,927.90	916.55	6.11	16,538.86	-610.96	-3.69%
BTK	5,418.80	4,939.03	-479.77	-8.85	6,376.77	-1,437.74	-22.55%
NBI	4,370.58	4,134.46	-236.12	-5.40	5,517.77	-1,383.31	-25.07%

Economy News

• Interest Rate: 5.5%. 
• GDP: Q1: 1.6%; Q4: 3.4%, Q3: 3.3%, Q2: 2.1%, Q1: 2%. Annual GDP growth: 3%.
• Inflation:   3.5, previos 3.2%. 
• Unemployment: 3.8%, previos 3.9%
• Retail Sales: 0.7% (March), more than double what street expected.
• PCE: For Mach 0.3% and 2.8% vs. 2.7% expected YOY
• Consumer Confidence: 77.2 
• U.S Crude Oil: $83.66 a barrel. 
• U.S Treasury Yield: 2 yr: 4.99, 5 yr: 4.69, 10 yr: 4.66%, 30 yr: 4.78%. 
• US Mortgage Rate: The 30-year fixed: 7.8%.

Q1 2024 Earnings

Earnings: For Q1 2024, 46% of S&P 500 companies reporting actual results, 77% of those have reported a positive EPS surprise and 60% have reported a positive revenue surprise.

Earnings Growth: The year-over-year earnings growth rate for the S&P 500 is 3.5%. If 3.5% is the actual growth rate for the quarter, it will mark the third-straight quarter of year-over-year earnings growth.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 20.0. This P/E ratio is above the 5-year average (19.1) and above the 10-year average (17.8).

Source: FactSet.com

Stock Market - what’s trending?

• As expected earlier, Fed may not cut rates till later in the year and currently market is expecting only two cuts rather than three projected earlier. I do feel that we may see one or two rate cuts later this year. That should fuel a post-election rally into the end of the year. 
• Rising Earnings: So far earnings have been good in Q2 and it’s expected to keep rising rest of this year.
• Sustained Consumer Pending: Consumer confidence is up and they do not seem to be concerned about any recession. March retail sales was up 0.7%, more than double of what street expected. As we know, 70% of the U.S. GDP is dependent on consumer spending. 
• Inflation: We saw falling inflation till February, however, Inflation picked up again from 3.2% in February 2024 to 3.5% in March. That inculcated further fear in investors mind that Fed may not cut rate this year. But I do not buy this thesis. 
• Let’s remember that rising earnings and expectations drive stock prices higher, not interest-rate cuts as such. I do not think a rate cut of 0.25% or 0.5% in a year makes any significant move for the economy. However, once Fed starts cutting rates, the anticipation that Fed will cut rate in future brings the rate down. 
• My outlook remains "bullish" over the longer term. So, any more pullbacks of 3% - 5% over the next couple months can be seen as buying opportunities for long-term.
• The market got slammed in the first three weeks of April but good earnings from Microsoft and Google has put it on track. Also, these tech giants earnings have provided further momentum to NVDA and many other semiconductor stocks.
• We should be watchful as we may see some pullback after the major earnings report in May.

Election Years are historically good for stock market

The below information was posted in my previous blog. However, I have added some more valuable information. I would like to keep updating it because it’s very important as election time approaches. The U.S election will be held on November 5, 2024. There is a historical presidential election year market pattern. Though the stock market may become volatile and certain group of stocks/sectors would tend to move one way or the other direction depending on which government (Democrat or Republican) will form the government. The market 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 historically 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, during this time it may provide an opportunity to buy/accumulate stocks. The stock market becomes highly volatile around late September till the Election (early NOV) because of heightened uncertainty due to following reasons:

• Investors reacts to latest poll data
• Debate create anxiety and chaos
• Potential change/turn/twist in the outcome of the election

Let’s not forget - Stock Market do not go straight up

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. We saw last week Nasdaq reached near the correction territory of -10%. 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 . Also, hedging the portfolio is important. Furthermore, in my view, it’s always a good idea 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 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. Remember that greed and fear are two aspects that controls investors sentiments.

S&P 500 Earnings projections for 2024

Q1 2024: +3.5% vs. 3.4% expected, 46% have reported earnings so far.

Q2 2024: +9.7% (projected) vs. earlier 9%

Q3 2024: +8.3%

Q4 2024: +17.3%

FY 2024: earnings +11% (projected)

Revenue growth for 2024 expected: 3.5%.

The following sectors are expected to have higher Revenue and Earnings Growth in 2024:

Communication Services, Information Technology, Healthcare, Financials and Energy.

 Stock Market TOP sectors for 2024

Sector	YTD Performance in %age
Communication Services (TOP)	17.12
Energy	14.26
Information Technology	8.31
Financials	8.38
Industrial	7.60
Materials	4.66
Real Estate (worst)	-9.15

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. 

Super Micro Computer (SMCI)

SMCI supplies high-end, energy-efficient servers designed to enable high-performance computing, hyperscale data centers, and AI. The company provides a wide range of servers, storage, motherboards, workstations and networking solutions, as well as server management software. It provides solutions for 5G, Internet of Things (IoT), data centers, cloud computing, big data, enterprise, embedded and edge computing. However, what makes special about SMCI is its super-cooled server solutions which are ideal for artificial intelligence (AI) applications. And since all that computing power makes everything run hot, so it’s imperative to keep it cool. The company is located in San Jose, California. 

My thoughts on recent volatility of SMCI Stock

The stock was added to S&P 500 on March 18. However, in April the stock was slammed from about $1070 to $685 in a span of about 3 weeks.  So, what really happened? 

First, in April the technology stocks were hammered due to economy numbers which were stronger than anticipated causing fear that inflation may persist and that Fed may not cut interest rate as expected by wall Street. 

Second, the company announced that it had suspended any early pre-announcements which it used to do in the earlier quarters. Some investors were unduly concerned that SMCI’s third-quarter results may not be as robust as anticipated. As a result, the stock sold off by 23% on Friday, April 19. One important thing to remember that recently SMCI has been added to the S&P 500. So, the company needs to be more responsible with its guidance. Hence, I don’t see any problem with the company’s revised guidance policies.

Third, overall Nasdaq and more importantly semiconductor stocks were smacked and SMCI was one the recipient. It does parabolic move either way up/down.

Fourth, I view it as part of the whole consolidation process since the stock was up more than 1300% (at pick) in last one year. So, such corrections are possible for new institutions to get a pie of the company stock. The stock just needed to digest these gains. It’s also important to note that Super Micro Computer also has a 25.98% monthly standard deviation. The higher the standard deviation, the more volatile the stock.

Why do I like SMCI?

Earlier, I posted a few times in my WhatsApp group about SMCI. However, I thought it’s the right time to include in my blog portfolio. The emergence of generative AI has resulted in accelerating demand for higher computing power as businesses race to profit from this paradigm shift. This in turn has translated into explosive growth for SMCI’s revenue and profits and correspondingly the share price. The stock is highly volatile but it has been one of the best performer technology stock. The journey of AI has just begun and there is a long way to go. So, SMCI will be one of the major beneficiaries of future growth of AI. The current AI trend sparked the beginning of a massive data center upgrade cycle. Existing data center servers aren't equipped with the computational horsepower necessary to withstand the rigors of AI. Some analysts estimate that this upgrade cycle could potentially result in more than $1 trillion in upgrades over the next several years. As one of the leading providers of AI-centric servers, Supermicro is well positioned to ride this trend and shareholders should be benefited. Despite higher share price the stock still look cheap. So, let’s take a look at its financials.

Financials: During the 2nd quarter (ended Dec. 31), it generated record revenue soaring 103% year over year to $3.7 billion. The earnings per share (EPS) grew 85% to $5.10. In addition, the management suggests demand will continue to accelerate. Supermicro is guiding for third-quarter revenue of $3.9 billion at the midpoint of its outlook, which would represent year over year growth of humongous 205%. The company has scheduled to declare its Q3 earnings report after the close of business on Tuesday, April 30. The earnings are forecast to surge 258.3% year-over-year to $5.84 per share, up from $1.63 per share in the same quarter a year ago. Revenue is expected to soar more than 200% year-over-year to $4.01 billion. Recently, the company issued convertible notes of approximately $1.47 billion which will further help to strengthen its financial for future growth. As far as earning is concerned, I am pretty optimistic. But nothing can be predicted with surety. We will wait and see how it goes on this Tuesday..

Company Fundamentals

Market Capitalization	$50.2B	Total Cash	$725M + appox $1.47B
Trailing P/E	67.09	Total Debt	$400M
Forward P/E	27.55	Book Value per share	55.03
Price/Sales	5.29	52 weeks high	1229.0
Revenue	9.25B	52 weeks low	101.71
Quarterly Revenue Growth (YOY)	103.20%	52 weeks change	715.75%
Gross Profit	N/A	Held by Institutions	70.15%
Net Profit	$732.38M	Held by insiders	14.35%
Quarterly Earnings Growth (YOY)	68%	Float	47.91M
EPS	12.78	Dividend	N/A

My View

The stocks currently trading at $857.44. Recently, the stock got hammered without any specific bad news and no fundamental changes. The stock has an all-time high of $1229. So, it’s trading 30% below its 52-weeks high. The company seems to have massive growth opportunity as AI momentum continues due to higher adoption by corporate world, government and countries. Though the stock has up significantly, I still see a huge run way ahead.  The forward earnings is just about 27 and Price/Sales is mere 5 for the company which is growing its revenue in triple digit. So, it looks cheap to me. Furthermore, it has been included recently in S&P 500 which should help the stock to appreciate as more institutions accumulate the share. I also anticipate that there may be stock split, though it’s just my perception. SMCI stock usually move in the same direction NVDA stock moves but at a faster pace. Because it’s just a $50 billion company comparing to NVDA $2.1T market capitalization. To put it into perspective, the stock has gone up incredible 819% in last one year and 3753% in last 5 years based on latest data from Fidelity. I think this is the time to keep accumulating in small quantities and build the portfolio. But as I say, never get in love with any stock. It’s sensible to take some chips out of the table when there is an opportunity and to mitigate some risks and add when it is beaten.

Risks

All equities carries risks. When market comes down the stocks gets hammered and growth stock like SMCI are beaten down heavily. Let’s not forget that Supermicro computer is an extremely volatile stock. So, there are huge fluctuations and sometime it goes up or down making parabolic move. Hence, investors who are not comfortable with high volatility MUST avoid this stock.

My final thought: Super Micro stock has been on tear for last several years. Going forward, it has tremendous growth opportunity due to the emergence of AI and higher need of computing powers. However, this stock is only for those who can digest big fluctuations and not get too emotional. Despite its humongous opportunity, there is nothing written on the stone that there will be astronomical gains ahead. So, one must invest with caution! I am a growth investor and willing to take some calculated risk. SMCI has been a stellar performer and has tremendous future potential. Hence, I am invested as I feel this is a great long-term winner. With that said, if I see any red flags then I don’t hesitate to pull the trigger..

Shesa’s Blog Portfolio (As of April 28, 2024) - Updated 5/21.

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	169.3	1/25/13	1212%	HOLD
META	47	443.29	11/13/13	843%	Buy below $430
MA	77.18	462.42	12/12/13	499%	HOLD
AMZN	15.58	179.62	4/12/14	1053%	Wait for earnings on 4/30
SHOP	13.48	71.33	11/25/18	429%	HOLD
SPG	54.59	142.36	5/25/20	161%	HOLD
ENPH	45.3	111.93	6/28/20	147%	HOLD
PLUG	27.98	2.41	4/25/21	-91%	HOLD
SAVA	51.49	22.34	10/10/21	-57%	BUY/ Accumulate
NVDA	239.49	877.35	2/13/22	266%	Accumulate - Long Term
TSLA	290.25	168.29	5/1/22	-42%	Buy / Accumulate
ABNB	115.21	164.23	10/31/22	43%	HOLD
AXSM	77.13	71.71	1/1/23	-7%	HOLD
RDFN	8.87	5.62	4/6/23	-37%	BUY/Accumulate
SOXL	15.66	39.8	4/6/23	154%	Buy on dip
GOOG	123.25	173.69	5/21/23	41%	BUY/Accumulate
RVPH	7.3	2.99	5/21/23	-59%	Trimmed more than 70% of holding. May SELL all.
LAZR	5.57	1.44	8/27/23	-74%	Accumulate
PATH	15.39	19.46	10/15/23	26%	SOLD all shares
PLTR	20.49	22.52	11/19/23	10%	BUY/Accumulate
MSFT	376.04	406.32	1/1/24	8%	BUY/Accumulate
FLNC	20.54	16.85	2/1/24	-18%	Accumulate
PANW	284.13	291.42	3/31/24	3%	Accumulate
SMCI	857.44	857.44	4/28/24	0%	NEW ADDITION
	ETF
IHF	27.82	51.92	8/16/15	87%	HOLD
MUTUAL FUND
PRMTX	59.45	132.48	12/20/14	123%	HOLD
FSRPX	9.05	18.96	1/15/16	110%	HOLD
FSMEX	43.66	63.61	9/24/17	46%	HOLD

Q1 Earnings

On Friday, 4/26, Microsoft (MSFT) and Google (GOOG) came with fantastic earnings. Microsoft also provided in-line guidance for next quarter. Google declared first ever dividend and the company seems to be back on track. 

Microsoft (MSFT)

• Earnings per share: $2.94 vs. $2.82 expected. Total $21.9B in profit.
• Revenue: $61.86 vs. $60.80 billion expected, up 17%. Total $23.66B in profit.
• Azure and other cloud services grew 31% vs. 30% previous quarter.
• Guidance: for next quarter $64B vs. $64.5B. Operating Margin: 42.3% vs. 41.5%.

My view: Microsoft is still going strong with its Azure cloud and Generative AI (Copilot). This tech giant looks good to me.

Google (GOOG)

• Earnings per share: $1.89 vs. $1.51 per share expected.
• Revenue: $80.54 billion vs. $78.59 billion expected, up 15%.
• Google Cloud revenue: $9.57 billion vs. $9.35 billion expected.
• Dividend: Company declared first ever dividend of 0.20 cents to be paid on 6/17.

My view: I believe Google is coming back to track. That’s a very good sign. I do expect some investment money will now be diverted from META to Google in the short term.

On Wednesday, 4/24, Facebook (META) reported its Q1 earnings that beat top and bottom line.

• EPS: $4.71 per share vs. $4.32 expected, up more than 100% YOY.
• Revenue: $36.46 billion vs. $36.16 billion expected, up 27% YOY.

Guidance: For Q2 the company expects revenue of $36.5-39 billion, with a midpoint of $37.75 billion. However, Wall Street analysts expected revenue of $38.3 billion. The stock plunged about 15% in the AH trading.

My view: as I said in my weekend update, current quarter earnings are OK but what the companies guide for future is “the KEY”. Any company does not provide positive future guidance may get smacked by Wall Street. META also said its operating expenses are expected to go up more than earlier expectations. As such, its shares may go through tough time in the short term, though it’s still a good stock for long term.

On Tuesday, 4/23, Tesla (TSLA) reported its Q1 earnings today. As expected, it missed both top and bottom line.

Earnings per share: 45 cents vs. 51 cents expected.

Revenue: $21.30 billion vs. $22.15 billion expected, down 9%.

My View: During the conference call Musk said, the company plans to start production of new models in “early 2025, if not late this year”. Wall Street was expecting in the second half of 2025. He also said Tesla is in talks with “one major automaker” to license its supervised Full Self-Driving, or FSD, option. Furthermore, in future Tesla plans to use its compute power for processing other stuff when Vehicle is idle, the way Amazon uses its AWS for customers. Robotaxi and Optimus (robotic humanoid) are other two things being worked. A few hours ago, Tesla Elon Musk said to spend $10 billion this year to train AI to be used for FSD and human robots. Having said that, in the short term it would be a tough year for Tesla. But for patience investors it’s worth taking a look for long term. I wouldn’t write off Musk for innovation..

Netflix (NFLX)

Reported good results beating top and bottom line but it said its subscribers growth to slow down. The company said subscribers jumped 16% from the year-earlier period, but added it would no longer report paid memberships starting next year. This was not appreciated by the investment community. I am not excited with this stock at this time.

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. Anyone buying or selling the equities mentioned here must do at their own risk.

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