Shesa's AUGUST 2024 Investment Blog

 By Shesa Nayak

U.S. Stock Market Update 

For the last few weeks, the stock market has been like a roller-coaster. No major stock indexes and no major stocks were spared causing pain for the investors. In general, stock market is dull in the month of August and September since many institutional investors go on vacation and the volume comes down. It creates great opportunity for the traders, short sellers and hedge funds to cook. These days, the markets reacts to any economy news viz. Unemployment, CPI, PPI, PCE etc. Furthermore, due to the high frequency and algo-trading, the stocks goes on either direction so fast that it’s extremely difficult to take right decision at the right time. Primarily, the stock market is controlled by big players, so it’s further complicated for the retail investors to make money. 

Well, the Volatility Index or so called fear index VIX which was almost dead for last 3 years ignited fire and spiked to 65 on Monday, 8/5, almost three times more than what it was a couple of weeks ago. This spike in VIX was the third biggest spike ever, matched only by big VIX spikes above 60 during the Great Financial Crisis and Covid lockdowns. So, there is immense fear in the market causing panic among investors. Having said that, some investors realized that the fear in stocks were way overdone. If we look, the big Tech stocks have been punished, particularly semiconductor sects has been shattered in the recent stock market sell-off amid worries about the AI Bubble. But if the recent earnings are any evidence then the reports from AI companies were good and I do not think AI is hype or this is the end of their run. Only time can tell, we will see..

In the last FOMC, the Federal Reserve said, they may cut interest rate in September if the current economic condition persist. Visualizing the current situation, Wall Street is expecting at least a 0.5% cut in the next meeting in September. Meanwhile the bond yields have crashed. The 10 year bond rate is 3.94% now. If we recall it went past 5% toward the end of 2023. As such, the mortgage rates have been coming down which is good sign for the real estate market and overall economy. In my view, Federal Reserve may cut interest rate at least 2-3 times this year, possibly in Sept, Nov and December. We will see how it goes. If history is any evidence, whenever interest rate cut happens, it becomes a positive catalyst for the stock market.  So, we can anticipate further turnaround in the market. But we are in the month of August and entering into September, so caution is warranted. Usually, September is the worst month of the year for Stock market but this year we saw some market Tsunami in August, so we will see if it would be different. 

The second quarter (Q2) earnings have been really good. Overall, 91% of the companies in the S&P 500 have reported results for Q2 2024 to date. Of these companies, 78% have reported actual EPS above estimates. The average sales growth rate is about 5% and average profit growth rate is about 10.8%, higher than 8-9% expected by Street. Overall, I am still optimistic about the turnaround in the stock market. However, as I said caution is warranted and it’s better to hedge the portfolio little bit. But one question that comes to mind, why suddenly the market became so volatile and trending down? Well, I will share my view later but let’s first see the stock market index.

Indexes	Open 1/2/24	Close FRI 7/5/24	Change in 2024	% Change in 2024	All Time High	From All Time High	% from All Time High
DOW	37,689.50	39,497.54	1,808.04	4.80	39,908.00	-410.46	-1.03%
S&P 500	4,769.83	5,344.16	574.33	12.04	5,570.33	-226.17	-4.06%
NASDAQ	15011.35	16,745.30	1,733.95	11.55	18,671.07	-1,925.77	-10.31%
Russel 2000	2,012.75	2,080.92	68.17	3.39	2,442.74	-361.82	-14.81%
SOX (Semi)	4,023.04	4,724.00	700.96	17.42	5,931.83	-1,207.83	-20.36%

Economy News

• Interest Rate: 5.5%. 
• GDP: Q2: 2.8%; Annual GDP: 2.9%
• Inflation:   June: 3%, July numbers are expected on 8/13.
• Unemployment: 4.3%, previous 4.1%. 
• Retail Sales: June: 0%, July number will come on 8/15.
• PCE: 2.63% 
• Consumer Confidence: 66.4 down from 68.2 
• U.S Crude Oil: $76.84 a barrel. 
• U.S Treasury Yield: 2 yr: 4.05, 5 yr: 3.80, 10 yr: 3.94%, 30 yr: 4.22%. 
• US Mortgage Rate: The 30-year fixed 6.8%.

Why market fell so much so fast?

Nasdaq was down almost -11.8% in last couple of weeks from its all-time high. So, what are  the factors potentially contributed to these fall. Here are my thoughts: 

• The earnings from the big tech companies were good  but possibly not great per Wall Street expectations.
• A slew of disappointing economic data. There were 249,000 weekly jobless claims filed, up from 235,000 in the previous week
• The institute of Supply Management (ISM) announced that its manufacturing index declined sharply to 46.8 in July, down from 48.5 in June. Since any reading under 50 signals a contraction in economy.
• The U.S. economy added ONLY 114,000 jobs in July vs. 179,000 expected. This was the lowest paces in the past decade. The unemployment rate unexpectedly spiked to 4.3%. Suddenly, the markets panicked that the economy is weakening enough right now to plunge into a recession.
• The Nikki Japan crashed 13%, its largest one-day fall since October 1987. This also impacted U.S market.
• In the election year stock market remains very volatile, so we can expect such volatility going forward.

My thoughts: Frankly, I do not think the U.S. economy is not tumbling into a recession.  I also shared my views in my recently published YouTube channel video. The Street seems to be overreacting to some economic data. Undoubtedly, the economy is weakening and the pace of has accelerated in last few weeks but it is not crashing as it happened during COVID or during the Great Financial Crisis of 2008-09. The economy is still adding jobs but at a much slower pace. The U.S. economy service side is expanding, according to the July ISM Services Report though manufacturing index declined sharply in July.

S&P 500 Earnings projections for 2024

Q1 2024: 8% (done)

Q2 2024 (Current Quarter): +10.8% vs. 8.8% (projected), revenue growth: about 5%

FY 2024: earnings +11% (projected)

Revenue growth for 2024 expected: Around 3.5%.

 Stock Market TOP sectors for 2024

Sector	YTD Performance in %age
Communication Services (TOP)	20.52
Information Technology	18.19
Utilities	16.01
Financials	12.38
Consumer Staples	11.27
Consumer Discretionary (worst)	-1.30

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. 

Zillow Group Inc (Z)

Zillow Group, Inc. operates real estate brands in mobile applications and Websites in the United States. The company offers premier agent and rentals marketplaces, new construction marketplaces, advertising, display advertising, and business technology solutions, as well as floor plans. It also provides mortgage originations and the sale of mortgages, and advertising to mortgage lenders and other mortgage professionals; and title and escrow services. The company was incorporated in 2004 and is headquartered in Seattle, Washington.

Why do I like Zillow?

Zillow was a high flier stock a few years ago. However, since the inflation erupted and Federal Reserve started hiking interest rate, followed by major losses, the stock got thrashed. The gloom and doom continued for about 2.5 years before showing the turnaround this quarter. Now that inflation has come down and it’s highly likely that Federal Reserve will cut interest rate, it should be very favorable to the real estate market and as a matter of fact we can expect a major turnaround for Zillow stock. More the buying and selling of homes, more the revenue and profits for the company. And let’s not forget that Zillow is the market leader in the Real Estate Listing Management category capturing 36.09% of market share and making it as #1 in rank. As we see the turnaround in real estate activities, I believe this would be best time to take some position in Zillow stock.

Financials

On Thursday, 8/8, Zillow reported second quarter results and the CEO stepped down. But the stock went up about 18% after the earnings. Because the company said that revenue in the quarter rose 13% to $572 million, easily beating the company's own guidance and topping Wall Street estimates of $538.3 million. Revenue growth was good all across, residential revenue was up 8%, rentals revenue up 29%, and mortgage revenue up 42%. Zillow's loan origination volume jumped a whooping 125%. The net loss narrowed from $35 million in the quarter a last year to $17 million. For the current (Q3) quarter, the company called for revenue of $545 million to $560 million, which was in line with the Wall Street estimation, representing a growth of 15%. Though, one quarter does not set the trend, it indicates that good time may be ahead for the company. 

Company Fundamentals

Market Capitalization	$11.90B	Total Cash	$2.63B
Trailing P/E	N/A	Total Debt	$1.81B
Forward P/E	51.28	Book Value per share	19.45
Price/Sales	5.86	52 weeks high	61.13
Revenue	2.07B	52 weeks low	33.80
Quarterly Revenue Growth (YOY)	13%	52 weeks change	19.03%
Gross Profit	N/A	Held by Institutions	100.86%
Net Profit	-$141M	Held by insiders	11.87%
Quarterly Earnings Growth (YOY)	N/A	Float	282.55M
EPS	-0.61	Annual Dividend (Fwd)	1.25%

My View

If we see the above financials it does not look compelling. In addition, the current housing market is still challenging due to low volumes and pretty high home prices. As such, it’s really tough for buyers to afford home, especially first time home buyers. And particularly for the buyers in San Francisco Bay Area, home prices are still very high. Having said that, the interest rates have fallen significantly in last few weeks. Per Bankrate.com, the 30 years fixed mortgage stands at around 6.4% from as high as 8% several months ago. The stock is currently trading at $51.92. It has an all-time high of $161.33. So, it’s trading 67% below its all-time high. However, I do not expect the shares to make new all-time high in the foreseeable future. But when the interest rate comes down and home activities keep taking momentum, then I can expect the share prices to possibly hit tripled digits figure. I feel it should be a good turnaround stock. So, I believe that it may not be a bad time to keep accumulating this stock. 

As I say, I never buy any stock at once because nobody can predict the top or bottom of a stock. Hence, my strategy is to keep accumulating in small quantities and build the portfolio. Also, it’s imperative not to fall in love or emotional with any stock. It’s sensible to take some chips out of the table when a stock run ahead to book some profits and mitigate risks. If I find that the stock has further momentum then it can be added on a pullback. But it depends on every investor investment framework. That’s just my perspective. 

Risks

All equities carries risks. When market comes down most of the stocks gets hammered and every stock looks cheaper. If interest rate does not come down or inflation becomes sticky then Federal Reserve may not cut interest rate as expected. That may further damp the home market and correspondingly Zillow stock. But  based on the current indicator, I think we should see better time ahead.

My final thought: Zillow came with a good quarter and there is an expectation that interest rate will come down further. If so, this should be a good catalyst for the real estate sector. And Zillow is a market leader, so I do anticipate turnaround for the company and the stock price. However, there is nothing written on wall that we may see huge gains ahead. So, one must invest with caution! I am a growth investor and willing to take some calculated risk. I am invested because I feel that Zillow has the potential to be a long-term winner in a turnaround home market. Having said that, if I see any red flags then I don’t hesitate to pull the trigger..

Shesa’s Blog Portfolio (As of AUGUST 11, 2024)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	216.24	1/25/13	1576%	HOLD
META	47	517.77	11/13/13	1002%	Buy/Accumulate
MA	77.18	456.78	12/12/13	492%	HOLD
AMZN	15.58	166.94	4/12/14	972%	HOLD
SHOP	13.48	69.3	11/25/18	414%	HOLD
SPG	54.59	158.67	5/25/20	191%	HOLD
ENPH	45.3	107.86	6/28/20	138%	Accumulate
SAVA	51.49	21.85	10/10/21	-58%	Accumulate
NVDA	23.9	104.75	2/13/22	338%	Accumulate Long Term
TSLA	290.25	200	5/1/22	-31%	Long term BUY
AXSM	77.13	83.09	1/1/23	8%	HOLD
RDFN	8.87	7.02	4/6/23	-21%	BUY/Accumulate
SOXL	15.66	31.01	4/6/23	98%	Buy on dip
GOOG	123.25	165.39	5/21/23	34%	HOLD
PLTR	20.49	30.01	11/19/23	46%	Accumulate
MSFT	376.04	406.02	1/1/24	8%	Accumulate Long Term
FLNC	20.54	16.25	2/1/24	-21%	Accumulate
PANW	284.13	331.48	3/31/24	17%	Accumulate
SMCI	857.44	508.76	4/28/24	-41%	Accumulate
ENVX	10.48	10.56	4/28/24	1%	Accumulate
DELL	138.96	92.55	7/6/24	-33%	HOLD
Z	51.92	51.92	8/11/24	0%	NEW ADDITION
	ETF
IHF	27.82	55.23	8/16/15	99%	HOLD
MUTUAL FUND
PRMTX	59.45	139.39	12/20/14	134%	HOLD
FSRPX	9.05	18.55	1/15/16	105%	HOLD
FSMEX	43.66	63.36	9/24/17	45%	HOLD

A few Key Economic report this week (8/12 - 8/16)

MON, 8/12: Monthly U.S. federal budget

TUE, 8/13: Producer price index (PPI)

WED, 8/14: Consumer price index (CPI)

THU, 8/15: Retail Sales, Initial Jobless claims

Equity Sold since my Last Blog

Luminar (LAZR)

AirBnB (ABNB)

Plug Power (PLUG)

Here is my YouTube channel link:  https://www.youtube.com/channel/UCt7oLVUMG3NkJUzAVUzl4Tg

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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