I remember this now; it came out with this headline – Serve Robotics skyrockets as Nvidia takes stake.
It’s an UBER spin off with robots for food delivery or other consumables, was going nowhere till the Nvidia stake was disclosed, which they bought from an early investment in a convertible primary note. The stake is about 10%. Interestingly, two others have investments as well including 7-11, and Delivery Hero based out of Germany.
Delivery Robots could work for the last mile, there is potential and its similar to drone delivery.
This business will need a lot of cash to stay alive and keep developing robots so another big risk is dilution – they will have to keep coming to the market and issuing shares for funding needs.
Its hugely speculative and risen from $2.50 this year, if one caught it early around 4 a tiny speculative position wouldn’t have been bad, on a bad day this one could easily drop 50%.
After the disastrous 3.6% drop in the Nasdaq composite and 2.3% drop in the S&P 500, yesterday, don’t be in a hurry to jump back in. Or as they say on Wall Street – don’t catch a falling knife.
Analysts were right to badger Google’s management on monetization of AI, and Google’s inability to give straight answers made them realize that all that spending is going to see returns a few years out. It was a cue to offload and led to the overbought M-7 and tech crashing. Tesla didn’t help either with the usual vagueness – an inherently risky stock with a lot of promises.
The other big reason for the fall yesterday was algorithmic trading, or computerized trading. Algo trading uses the VIX (The Volatility Index) as a trigger for selling/buying. The VIX is often known as the Fear Gauge, and it was pretty fearful on Wednesday shooting up from 14.72 to 18.04 – a 23% jump! For the most part of 2024, the VIX has stayed steady between 12-14, so this was way out in uncertain territory.
As of writing the VIX is at 19.17, up 6%. If you recall we had another 2%, drop last week, at that time the VIX had shot up to 16.52.
THE DOOM LOOP – When markets are over leveraged, overbought or over concentrated a big fall sends it into a doom loop. An example of this would be a mutual or Index fund manager or ETF having to sell stocks because of redemptions – so he/she’s selling and driving prices down, which further leads to investors knocking on the door for more redemptions…and so on. Similarly, if you’re trading in a margin account you have to sell to meet the margins…this is self-perpetuating – a doom loop.
For Algo traders its worse, the triggers to buy and sell are preset – “stop loss limits”, the speed is too fast to have any human control, and most computerized trading firms will not allow overrides.
I would wait for the dust to settle. The S&P 500 is down almost 5% from its all-time high and the Nasdaq 8.5%. These could head to correction territory, especially the Nasdaq, which again is not the end of the world – we had a great first half of the year. There are big earnings next week – MSFT, AMZN, AAPL, META, will update then.
June revenue at Alphabet grew 5% sequentially from March to $84.3 billion, a 13% year-over-year rise and a bit of a deceleration from March’s 15.4% year-over-year rise.
Q2 GAAP EPS of $1.89 beats by $0.04.
At $180, Alphabet is priced at only 21-times 2025 earnings. Very reasonable for a member of the M-7, search market leader, AI pioneer, and owner of You-Tube.
Why is it down post earnings: WSJ’s title was apt Google Fails to ‘Wow’ as AI Bills Mount
Overall revenue exceeded Wall Street’s consensus projection by just 0.6%—the lowest beat percentage in at least five years,
Capex = $49Bn for the year, this was mostly expected but still got a thumbs down, because depreciation will hurt the bottom line.
Google has to spend to keep up – it doesn’t have a choice.
“Look, obviously we are at the early stage of what I view as a very transformative area,” Alphabet Chief Executive Sundar Pichai “the risk of underinvesting is dramatically greater than the risk of overinvesting for us here,” not mentioning the record amounts of capex that tech rivals Microsoft, Amazon and Meta Platforms are pouring into the same thing.
Rejected Alphabet’s bid for $23Bn – I think that’s actually good for Google, at 46x current year sales. Granted this would have given them a considerable leg up in cybersecurity – but is a $500Mn revenue company, which would never move the needle for the behemoth.
I own GOOG, and plan to hold for a long, long time, it’s been recommended on several occasions here. I could buy more if the price drops but given the change in sentiment towards big tech I’m happy to sit on the sidelines for a bit.
There seems to be an inflection point – the rate of growth is going to get lower on tougher comparisons and therefore there is more hesitation to buy at inflated levels.
Revenue missed by about 2% ($440Mn miss on $21.8Bn revenue). Revenue dropped 1.4% YoY, indicating that economically sensitive cyclicals are still having a hard time. FedEx too, expects just 1.8% growth for the second quarter. UPS’ earnings miss was 10% – that hurt the stock more, its down 10% premarket to $130.
For the past 3-4 weeks there has been a steady drum beat to get out of expensive tech to companies that could benefit from lower interest rates and cheaper valuations.
The 10% drop in UPS due to the big earnings miss and the lack of growth underscores how difficult it is to find and invest in the right cyclical. Avoid the value traps and be very discerning in finding the right company or index.
TSM hit it out of the park last week, confirming that the high-performance semiconductor sales are doing extremely well.
Q2 revenue growth of 32.8% y/y and net income growth of 29% y/y.
Q3 expected to set another revenue record on strong AI and smartphone demand, full year guidance raised. Full Year expectations are for 28% and 24% earnings growth to $6.4 per share.
3Nm (the most advanced node powering Nvidia, Apple, etc.) revenue was 15% of sales. Nvidia’s not the only company with higher prices, they in turn pay TSM quite well for 3Nm processing! 5Nm also went to 35% of sales – the two now dominate TSM sales with 50%.
If TSM didn’t have geopolitical risks from China, and Trump demanding payments for protection didn’t help either, this would have been easily 40x earnings, over $250 per share. given the technological and market share lead. Overall, TSMC should continue to dominate in advanced process nodes and high-volume manufacturing for many years.
I had sold 20% around $183 last June, but am going to hold on to the rest, there’s really nothing much we can do with Chinese tensions – if there are nasty developments from that front, we’ll have much bigger problems than the price of TSM!
The anti-China rhetoric likely will continue till elections. The Biden administration wants further curbs on exports, and Trump wants Taiwan to pay for protection….
The markers opened weak with the S&P 500 down 1% and the tech heavy NASDAQ Composite (COMP) down 1.75%. The rhetoric will likely not let up till the elections as both parties will try and outdo each other in jingoism. ASML (ASML) was beaten down 10% in spite of great results, reaffirming guidance and bookings. With the ongoing rotation to interest sensitive cyclicals, this pre-election noise will only add to tech volatility. The COMP is now down about 3% from its high and will likely correct further, we saw that big drop of 2% last Thursday, I would expect to see more of these. I’m not going to buy the tech dip, either wait it out or even take more money off the table on good days.
Playing defense. I’m going to add dividend / income generating defensive stocks/ REITs to diversify from semis and tech.
REITs are structured to invest in property and distribute income as dividends to shareholders. They often work well as defensive, less volatile income generating vehicles and its worth owning some.
Long dividend growth track record, maintains a top-tier balance sheet.
High exposure to investment grade tenants.
Lower leverage profile than peers, with small and manageable near-term debt maturities.
Less bottom-line drag from refinancing maturing debt at higher interest rates.
Realty Income appears to benefit from its A- credit rating.
0.8% same store rental revenue growth, a solid number for the industry.
Risks
Tenant Red Lobster filed for bankruptcy but is only 1% of volume.
The REIT is down 7% for the past year but has recovered from its low of $45.
The main fear with REITs/Dividend stocks – while dividend growth and dividend yields are attractive, its essential that the stocks at least remain flat otherwise pocketing the dividend and losing it in the share price is meaningless! We must be careful to not overpay.
Consistently higher than 99% occupancy, diverse set of retail clients.
Investment grade tenants, Agree’s debt rating is BBB Investment grade
Well diversified tenants – groceries, auto, restaurants, big box and convenience stores
Borrows at a spread of 1% above treasury, interest rate cuts are going to help debt renewals in 2025 and beyond.
Forward growth estimates of 5-10% for total revenues
Agree is valued at 15 times Adjusted FFO (Funds from operations) – higher than the market average of 12-13. FFO is a better measure than Earnings for realty companies. Agree’s FFO growth is estimated higher as well, as is the payout to shareholders so the yield will actually get better.
In Agree’s case the stock has actually remained flat over 1 year in spite of higher interest rates and all the action being focused on tech. In the past 5 years it returned 3% but in the last 10 over 124%, so with the dividends this has been quite a good performer. The other risk is that 50% of its business is concentrated in 10 states, but the states are diverse from the sunbelt to the Northeast.
This is an electric bike maker from Thailand, with a tiny market cap of $37Mn. The company’s debut product, the i300, is a high-performance electric “perfect city bike” with widespread acclaim, including winning the prestigious Red Dot Product Design Award, the German Design Award, the Australian Good Design Award, and other E-Mobility awards.
The value proposition – Price around only $10,000 lightweight motor, rechargeable and removable battery pack.
Weaknesses and challenges
Pre revenue, development stage company with a limited operating history as a public company, Product development in new category in this cyclical and volatile sector is notoriously costly, and their planned entrance to the U.S. market will require considerable capital, effort, and time.
In addition, the sobering fact is that the i300 has been in development for almost six years (admittedly the COVID-19 crisis was a legitimate factor in this delay) and can only be ordered online at the company website at Zapp i300 Urban Electric Scooter/Motorbike | Zapp EV.
Two competitors at an advanced stage:
Livewire (LWR) – Market cap of $1.7Bn
LVWR has a strong strategic relationship with Harley-Davidson (HOG) which spun off its electric motorcycle division on 9/20/22 as a separate, publicly traded company in a SPAC deal. LVWR has retail partners in more than a dozen states in the U.S, and sales of only $38Mn, 18% lower than 2022, but is expected to grow 30-40% in the next 3 years.
Niu Technologies (NIU), with over 400 retail stores in the U.S. through retail partners is another strong competitor with a market cap of $165Mn and revenues of $479Mn with 20% growth prospects.
ZAPP’s lack of experience to produce at scale and shareholder dilution are two other weaknesses.
I suspect that the 15% rise was due to short covering, this was quite heavily shorted. I want to take a close look at the Niu.
Analysts forecast that the S&P 500 index’s earnings will likely grow above 12% for the second quarter and about 11-12% for the year to 247.
Source: FactSet
This is way above the 8% average growth, mostly because of a weaker Q2-2023, when earnings actually declined 4% over the previous year.
Besides, S&P 500 earnings have been stagnant at $220 for the past two years so 2024 had beat the average significantly just to catch up and revert to the mean.
Here are past 5 years – basically smoothening out the effects of Covid. After the big pandemic fall of 14% in 2020, there was that massive jump of 48% in 2021, and then two years of indigestion and inflation, which now leads to the 12% expected jump in 2024.
FactSet estimates that over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.8% on average – everybody sandbags, (under promises and over delivers). I wouldn’t be surprised if earnings actually close over $250 for 2024.
Great, earnings look good with the 11-12% increase, but what about valuations?
The bottom-up target price for the next 12 months for the S&P 500 is 6006.66, which is 7.6% above the closing price of 5,584.54.
The Forward P/E Ratio is 21.4, which is above the 10-Year Average (17.9), and above the 5-year average of 19.3.
The two main causes for the high P/E
a) Out performance and AI expectations, from the Magnificent 7, which controls about 33% of the index.
b) Decline in inflation and expectations of interest rate cuts.
I believe there is exhaustion in the M-7 – there is over participation (everybody and their uncle own Nvidia) and over bought. We we saw it for a bit in the last 3 weeks with Nvidia slowing down, but Apple and Tesla picked up the slack – Tesla rose 40% and 7 days in a row! What looked like a possible correction in the middle of June, never really materialized.
Secondly, now the 10 year has finally come down to about 4.19% and two interest rate cuts are a certainly after benign inflation numbers (still high over 3% and above the Fed target of 2% but definitely in the right direction). I believe the 10 Year will be between 3.5% and 3.75% for the most of 2025, if not lower.
Strategy for the second half of 2024 and beyond. High valuations should keep the index in check, and even cause a 5-7% correction, which is actually a good thing in my opinion. Lower interest rates will keep a floor.
What should we do? In my opinion,
Lower expectations for sure, if we make a return of 8-10% a year + dividends, that’s great, thus with this target, we can lower risk as well. For most of the year, almost every stock I had recommended had expectation of at least 15% Returns.
You don’t have to necessarily move away from tech but a mixture of Growth At a Reasonable Price (the GARP strategy) and absolutely looking for and investing in bargains should be the cornerstone of investing for the next 12 months. In two cases recently, GitLabs (GTLB) and Samsara (IOT) waiting for bargain prices have worked very well. I started the first 5% purchase, higher and slowly worked my way down as they kept falling and in both cases the prices are 15- 20% higher than my average cost.
Keep cash handy for corrections and drops – On June 19th, I had sold 15-20% of semi stocks as profit taking; I’m still holding onto about 10% cash, which at 4-5% in money market funds is safe and I won’t invest till I get an outstanding bargain.
Rotation – This week I’ll identify and recommend some GARPS, some dividend picks, and cyclicals.
I picked up Duolingo, consumer, which is expensive – about 40% invested but am adding in the 190 range.
I’ve been pyramiding in the two big pharma companies – Eli and Novo, which is the exact opposite of cost averaging, buying smaller quantities even as they get higher, simply this obesity craze will last, and they’re relatively inured with strong pipelines.
