Category: Market Updates

Sentiment Puts a Floor Under this Dip

Posted on by io-fund

For passive investors, this has been an easy year to be a bull. The market is up over 17% YTD in what is one of the lowest volatility years since 2017.

In 2017, we were in the first year of the Presidential Cycle, the market finished the year up over 19.4% without showing a single 5% dip. For comparison, the S&P 500, on average will experience a 10% or more correction almost every year, and has shown an average annual return over the last 30 years of 10.9%.

Similar to 2017, the S&P 500 is currently up just over 17% and has yet to provide a drawdown greater than 5%. However, unlike 2017, this year is not a broad market uptrend. In fact, the divergence we are seeing with a high number of stocks not participating in this year’s uptrend is important to note.

Big Tech Holds up a Weak Market (Again)

Please reference Knox’s previous analysis here: Upcoming Correction but Still a Bull MarketUpcoming Correction but Still a Bull Market

The above chart shows the price returns of the S&P 500 next to the percentage of stocks in the index that are above their Simple 200-Day Moving Average.

In a healthy market, the two graphs should be trending upward together, which would indicate more stocks across a wider variety of sectors are participating in the bull market. In an unhealthy market, we tend to see the majority of stocks in a downtrend, while the broad market keeps moving higher with narrower leadership. Note the pattern in 2020 – as the indexes makes a new high, the % of stocks above their 200-Day MA makes a lower high. This was a warning that the markets were weakening under the hood. Starting in March of this year the same divergence began, and is still playing out right now.

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Because the weighting of the Index is market cap weighted, which is just price times float, it allows for narrow leadership to hold the market up while the underlying stocks move into a correction. As of now, nine of the top 10 names in the S&P500 are Big Tech. Collectively, they account for 25.18% of the entire index weighting. Some may view this concentration as a negative; however, this concentration in Big Tech is what has allowed for the underlying index to complete a covert and deep correction in 2021, without bringing the market down with it.

The above graph compares some of the most important companies in the US Economy since December of 2020 to now. The red area indicates when these names topped and began their corrections. Many names topped in Dec/Jan of last year while a number of names topped in May/June of this year.

The top row, Microsoft and Apple, collectively account for 11.8% of the S&P 500. The combined weighting of Exxon, Caterpillar, JP Morgan, Walmart, Home Depot and Johnson & Johnson is only 4.97%. This shows how major stocks, as well as multiple sectors, can be in a correction while just a handful of key names remain strong.

2021 Has Tested Even Seasoned Investors

The eye-opening consumer price index (CPI) numbers in February/March announced that inflation was potentially here. This led to the indiscriminate selling of risk-on assets, focused specifically in your high beta names that are priced with future cash flows in mind. 

We saw this as a buying opportunity within a much larger uptrend, which we expressed both publicly and within our premium service. For one, the renewed uptrend within the bond market as well as a collapse in many commodity names was suggesting that inflation fears may be over blown. Also, the technical analysis work that we do on broad markets was further suggesting that we still had higher to go.

Over seven months after the growth sell-off, we still hold true to our original thesis.

We spoke in length about the M2 money supply and why it is key to measuring actual inflation in the economy here. In short, it is the layer of the money supply that filters into liquid assets like money market funds, savings accounts, CDs etc. This is the layer that the FED does not directly control, and it measures actual credit/money entering the economy.

Even with a 34% increase in the M2 money supply, we believe that the two one-time events of excessive global stimulus as well as the re-opening of global economies will likely outweigh the increase in M2 on a meaningful level.  These are two extraordinary events that are not being factored into current CPI numbers. Inflation is likely here, as suggested by the increase in M2, however we do not believe that it will have a meaningful and immediate impact on the current bull market that is underway.

Last year was arguably one of the more extreme anomalies in market history, while this year is forcing investors to address the consequences of global policy decisions. Rising rates and commodity prices, coupled with an unexpected dovish FED, has affected growth in different ways.

Many popular high fliers from last year, are negative for the year, as we see a rotation out of Covid names and primarily into tech stocks that surprise to the upside with strong fundamentals.

At I/O Fund, we raised cash going into the end of August due to the technical analysis that we perform on various broad market indexes. Our Elliott Wave work was suggesting that we were approaching a big top or minor top as the NASDAQ100 approached the 16000 level.

The above scenarios are what we based our broad risk management on in August. The red path had us topping in what would likely be a relatively deep correction, while the blue count had us only in a minor dip, which would be relatively brief. Keep in mind, both scenarios still had us in a much larger uptrend, which we see moving into 2022.

Through our cycle work, we had identified that Aug. 30 – Sept. 7 would likely mark an inflection point. This information coupled with fading momentum and a complete 5-wave pattern (in red), had us raise cash going into the inflection point.

In our August 19th report I stated that It’s my belief that the market is marching towards a large degree correction within a much larger uptrend. Whether that large degree correction has started or not will depend on what supports hold. Below is a visual of what I generally believe is playing out.” In other words, I was leaning towards the red count playing out, and so we prepared accordingly.

However, as we progressed in the initial dip, what had shift in real-time towards the more bullish blue count was a few data points. The primary one being sentiment, followed by seasonality trends and relative strength in key economically sensitive sectors. All of these data points were suggesting that a low was in, or at most, one more minor low was possible.

Sentiment

Implied Volatility vs. Realized Volatility

Prior to big unwinds in the market, we will typically see decelerating implied volatility while realized volatility starts ticking up. In short, sentiment is characterized by a belief that the bull market has much more room to go, which causes an increase in leveraged bullish bets.

On September 9th, with the S&P 500 down just 1.1% from its high, we were seeing an unusually large separation from actual volatility over a 30-day period, and what investors were expecting within the next 30 days.

The S&P 500 had a low realized volatility of just 7.5% while the implied volatility was well over double at 18.12%. What this means is that investors were willing to pay high fees for downside protection before at the very beginning of this drawdown.

On Sept 20th, with the S&P 500 down just over 4% from its high, this trend intensified to an extreme we usually see at major bottoms.

The S&P 500 had over 200% gap between its 30-day realized volatility and the implied volatility going forward. In other words, the premium between what investors were expecting and what was going on had investors willing to pay anything for downside protection.

Put/Call Ratio vs Realized Volatility

Another way to view the unusual level of fear in the market surrounding the recent drawdown is in the Put/Call Ratio vs. Realized Volatility.

The above chart takes the 30-day moving average of the Put/Call Ratio (green) and compares it to the 30 realized volatility of the S&P 500 (Blue). Note the pattern going into the February bear market. As realized volatility was actually increasing, investors couldn’t buy enough calls compared to puts. This is the type of sentiment that usually results in overleveraged long bets, and the unwinding of this leverage is usually what fuels large drawdowns.

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Compare that pattern to today. We are seeing the opposite unfold – as realized volatility continues to trend down, investors are buying more puts. This is signaling that sentiment is rather bearish to cautious as the market continues to climb higher in a low volatility environment.

The Importance of October

From our estimation, October should be strong. September is known as a seasonally weak period in the markets, while October is historically a strong month. This becomes evident when you look at the average monthly returns for the S&P 500 going back in time.

According to the same data, October has historically been a seasonally strong month. However, there is a caveat to how October tends to play out, and it is determined by how the market is trending into this month.

October has historically been a pivotal month in market history. We have seen an outsized number of major lows, and some major tops in the month of October.

The above chart shows the history on major turning points within the month of October. We’ve had 8 bear market/deep corrections bottom in October with only two major tops occurring in the month of October. In other words, how a market is trending into October is a key factor to the year-end trend.

This pattern also seems to play out on smaller scales. In 2019 and in 2020, September proved to also be weak months. We then saw the market find a bottom in October, which led to a year-end rally.

Conclusion:

When you note seasonal trends and historic patterns, coupled with an unusual amount of negative sentiment and the recent relative strength in economically sensitive sectors, we believe a similar trend will unfold into year-end. For this reason, we have been accumulating high conviction names that are showing excellent relative strength. Many of these names are embedded in strong tech microtrends that we anticipate to continue into the foreseeable future.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

IPO Round Up

Posted on by io-fund

IPO Report card:

As of late, the underlying goal of IPOs appears to be how to get retailers to pay as much as possible until the lock-up expires. It doesn’t matter if Berkshire invests unless you get a chance to buy at the same price. Your shares could lose 50% and Berkshire would break even. That’s not a public offering by any stretch of the word. Please keep in mind, that many winners in tech retrace well below their opening price (up to 50% below opening price in the case of Crowdstrike).

Prior to Snowflake raising its opening price (for the fourth time), I had cautioned that: “the biggest risk of all is how much alpha will be left in the first year of trading by the time retailers are offered the crumbs.” When I wrote that, I did not imagine we’d see the opening price of $245. It was, in a word, astounding.

Like Warren Buffet says, the best part of investing is you don’t have to hit every ball. On that note, I can confidently say Berkshire would not be hitting the ball at 98X NTM revenue – but they sure hope you do.

Snowflake went public with an IPO price of $120. It opened at a 105% premium of $245, and closed on its first day of trading just under $254. Based on its opening price, this gave the stock a valuation of 98x NTM revenue if generously calculating 121% growth across all four quarters.

Keep in mind, in the chart below, companies over 40x NTM revenue are profitable.

Regarding their business, Snowflake reported 121% revenue growth YoY with a net retention rate of 158%. As stated, the company is not profitable. In the six months ending in July, they spent roughly $190.5 million on marketing while making $149 million in gross profit.

I discussed Snowflake’s product strength in detail in my previous analysis, stating it demonstrated: “triple-digit growth, clear product differentiation, key metrics that prove product-market fit and gravity-defying management.” However, the price of the stock has become untethered from reality. As stated in the Forbes article, there is little alpha left over the next year and that is the primary risk.

JFrog

JFrog opened trading at a $71.20, which is 62% above its offering price. This gave the stock a valuation of 40x NTM revenue, which was the highest forward multiple in enterprise software at time of IPO until SNOW started trading about an hour later. The company provides DevOps software to organizations globally, enabling those businesses to build and release software faster and more securely.

JFROG posted an impressive 50% growth rate in its latest quarter with 81% gross margins and  positive 11% FCF margin, which is why they commanded such a high premium. However, the company faces a bevy of competition including Google Cloud, Amazon Web Services, and Microsoft Azure.  JFROG is a pure play, which I tend to favor; however, this IPO valuation is over its skis.

Sumo Logic

Sumo Logic began trading September 17th with an initial offering price of $22 a share. The first trade was 21% above the premium at $26.50 and closed at $26.88. Regarding key metrics, Sumo Logic stated that its dollar-based net retention rate has fluctuated between approximately 120% and 135% for each of the past nine quarters, which is notable. Their forward price/sales based on their opening price gives the stock a valuation of 8.3x NTM revenue.

Sumo Logic’s biggest risk is their competition. Companies such as Splunk, Elastic, Datadog, Dynatrace, Microsoft and Google all have bigger budgets, greater name recognition and a larger customer base.

Amwell

Amwell (AMWL) is a mobile and teleheath platform that connects patients with doctors over video. The stock went public on September 17th with an IPO price of $18. It began trading with 42% premium at $25.51, and closed the day at $23.95.

Amwell’s YoY revenue growth accelerated from 31% year-over-year in 2019 to 77% year-over-year in H1 2020. Based on their opening price, this gave the stock a valuation of 8.4x NTM revenue.  

Unity

Unity (U) is set to open trading September 18th at an expected price range of $44-$48. This would value the company in the range of $11.6B-$12.6B. At the high end of the proposed range, Unity would trade at 14.2x NTM revenue. 

Unity grew revenue 39% YoY in the first half of 2020 and increased its net-retention rate to 142%, a strong indication of increased spending within its existing customer base.  With 93 of the top 100 gaming studios already Unity customers, it is crucial for the company to continue to drive higher spending among existing customers. 

Here’s how the string of tech IPOs stack up this week:

May Convictions: Blog Update

Posted on by io-fund

The May spreadsheet will be out soon. The spreadsheet will reflect the information in this blog update.

In September, when many cloud software stocks sold off in the so-called value rotation, I wrote the following: How to pick long-term stock winners in cloud computing

“My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust and are susceptible to consumer spending changes.

The best companies in the category of “cloud software” will continue to post rapid growth regardless of economic conditions, and the investors who run from this sector will suffer bigger losses from missed opportunities than investors who know their winners.”

The reason that cloud is more insulated is that it reduces costs and improves efficiency. Basically, things happen quicker for businesses and are cheaper to run when workloads are in the cloud. Therefore, the idea there would be a value rotation away from cloud didn’t make much sense to me as it was my prediction cloud would perform/grow like value stocks during a time of uncertainty. (Valuations are another matter which I plan to cover this month at a detailed level for my premium readers.)

The main thesis of the article quoted above is that you should know your winners because the market is telling you it does not know who the winners are when it goes through phases of indiscriminate selling. You can also say this is the case when the market goes through indiscriminate buying. To me, the market has been playing the game pickle; rushing in and out of cloud. My goal is to position you with the winners for 2020 but also in any beat-up stocks that will soar in 2021 (and beyond) once the economy resumes.

Most of you know that I don’t trend follow or trade on prices. Meaning, I don’t recommend stocks based on their price movements. This is the major advantage to this website because the gains are much higher if you can get in before the quants are turned onto a stock. I’d say the majority of my recommendations (80-90%) on the premium site are written while the stock price is near a low. It also helps to keep a steadfastness when the market panics and sells out of a promising company.

After solidifying my convictions with you in May, and getting you set up to weather the storm that has become 2020, I am going to turn towards emerging technologies again in the second half of the year. This is 5G, artificial intelligence, blockchain and various small cap stocks. I had only just begun to do this before covid-19 broke out and we very quickly had a top performing stock in our coverage (INSG) plus some nice returns on (WIFI) and (TLRA) if you followed Knox’s entries/exits.

For anyone joining us recently, here is our plan and an introduction to how we enter/exit stocks:

  • We have core holdings that will not be traded or sold under any conditions. These are MSFT, ROKU, NVDA, ZM, WORK, BABA, DDOG, DT, BTCUSD.
  • Up until the market sell-off in March, we held the stocks listed on the spreadsheet until we stopped out with gains. You can access the prior spreadsheets here and here.
  • For any stocks we stopped out of, we plan to build more core holdings this year with buy and hold entries that we believe we will see at some point in 2020. These are on the March and April spreadsheet.
  • We will buy at the upper end of these price ranges for any data center stocks (see below) and in the mid to lower region for stocks that may see headwinds from the current economic situation.
  • In an effort to stay open to all possibilities, including that the market may go up before it goes down (and to buy insurance against all scenarios), we will continue to look for entries and trade stocks. This also helps us to serve various styles on the site. Please note that we only recommend stocks that make great buy and holds. We don’t trade into stocks that we wouldn’t want to own long-term.
  • Although we believe valuations will eventually settle down from 2019 and 2020 pricing, we still look for break outs with stops where we can participate in momentum.
  • Knox enters and exits stocks via real-time updates on the forum. It’s essential to subscribe to his chat room and my chat room if you want real-time updates as we can’t fill your inbox with blog updates for every instance of communication. Please also subscribe to the stocks you are interested in on the forum as we have chat rooms set aside for each stock. This will help you get the most value from the site.
  • Knox posted on Pinterest yesterday on the forum prior to earnings, as well as Roku and Alibaba

Below, I break down my ongoing high convictions around the Data Center, Productivity Tools, and other Outliers for May. This is in an effort to come full circle on companies I’ve covered in the past and my plan moving forward. Please also keep in mind these aren’t earnings calls as we have some earnings this week and in the near future.

 

Data Center

This earnings season showed serious strength in the data center with Microsoft beating pre-coronavirus earnings. I like Alibaba here, as well, as the trajectory of their data center growth will surprise the market. This is because China is going from 0 to 100 on their data center growth as a country that has lagged the United States yet has aggressive ambitions to catch up. I’ve been forecasting this for quite some time now (published on FATrader and pre-dating my premium site) and I believe this analysis is currently in play.

Looking beyond Microsoft and Alibaba, Nvidia and AMD are even stronger choices for the data center but will take time to play out. This is because you’ll see companies reduce capex this year and tighten their budgets, which will affect Nvidia and AMD. Don’t be discouraged by that. Our plan is to use this as the final opportunity to lock-in our ten-year position on these companies.

The next layer of the data center is security and monitoring. For every enterprise that moves over to the cloud, especially the hybrid cloud which I’ve covered in great detail for my premium readers, there will need to be endpoint security and network/application/infrastructure monitoring. This is where it can get tricky as the field opens up and there are many competitors in each area. My favorite companies — relative to the competition — are Datadog, Dynatrace and Okta. This means that even if these companies miss earnings that my conviction will remain.

Also downstream from cloud infrastructure is MongoDB and Elastic. I like them both. I’m not sure exactly when the revenue will show up as these are not essentials for all businesses but they should see a boost from the ongoing cloud migrations at some point this year.

PDFs for reference:

 

Productivity Tools

When I wrote out my convictions for the premium site this year, I talked about productivity tools being a hot space. These tools, especially, save time and reduce costs. Therefore, don’t be surprised if Zoom, Slack and DocuSign continue to climb this year. I do believe valuations will come down at some point across the board as economic data and Fed stimulus battle it out. With that said, I believe these three will continue to break out as their revenue should grow at a clip and you can expect them to have higher valuations than their peers. If you believe there are others that will sustain high valuations this year, feel free to ping me on the forum to discuss.on the forum to discuss.

Knox especially thinks there is strength in Slack’s chart. I think the market is still confused on the company. That’s a good combo to have.

One thing I’d like to make very clear about Slack is that it has one of my favorite components across all tech stocks which is a strong developer community (even though Slack is not open source, there are many custom APIs being developed).

Investors may not realize that Apple’s success is due not only to the iPhone but also the developer community that supported the iPhone/iOS operating system and developed third-party applications. This created a robust ecosystem that was impossible for any competitor to shake. Design played a role too, of course, however Microsoft’s Windows mobile OS got shut out because it did not have the developer following to develop apps. In the beginning, Facebook also had a large developer community that propelled the platform forward which is how Zynga became popular.

In the S-1 Filing, Slack stated there are over 450,000 third-party applications or custom integrations. The number is likely much larger now. What is important to understand is that it’s nearly impossible to envision where Slack will end up in five years from now because the level of iteration and creativity that comes from these customizations is impossible to predict. The forward innovation will come from technologists who are not employees of Slack. They are in need of a messaging system they trust and that can be customized.

For instance, security professionals are now using Slack for anomaly notifications. When there’s a breach, or anything suspect, the security team is notified on Slack. Wall Street investors can set up price movement alerts on stocks. I’ve seen others use Slack to program robots and control commands.

With that said, Slack is following a popular maneuver for monetization that confuses the financial industry and will require a bit of patience before the profitability unfolds. Slack is choosing to scale while being underpriced and then will convert down the road to being priced more in-line with the value of the platform. For now, this means there will be questions around the path to profitability.

Shopify is an outlier that we covered with a prediction that the company would outpace the market due to the focus on merchants rather than customers. Perhaps with covid-19, the emphasis on merchants is more important than ever as many will lose brick-and-mortar sales. I do want to point out that Shopify released a new application. This was something I had predicted they’d do as it was the next natural step after the fulfillment center (an aggregated store front). I thought it might be a website but a native app makes perfect sense. This product announcement is very important for the long-term trajectory.

From the Shopify PDF in October:

“The question many investors ask about Shopify is whether it can compete with Amazon — or even Alibaba? Today, this is not a possibility as Amazon and Alibaba drive traffic to products and take a premium for helping secure the sale. They own the domain website, so customers are loyal not to the merchant, but to Amazon and Alibaba.

I believe this could be where Shopify will end up, eventually. If the fulfillment center is a success, which will take some time to test and gather traction, then the back-end will be set up for the front-end development of a website or some kind of product aggregator – whether that’s a website domain or another recommendation engine.

For Shopify, it makes sense to first build out the fulfillment center for their point-of-sale software in order for a successful pivot.”

Although I have not written a formal PDF on Docusign, the company fires on a lot of cylinders. The addressable market the company will (finally) be able to serve can become quite large as industries shift towards work from home policies. I will try to write something up officially soon although I’ve favored covering others, such as Lam and Micron, as most know/understand the Docusign story. Regardless, it’s worth repeating that I think their story has improved and is strengthened beyond 2020 by the work-from-home trends.

PDFs/References:

 

Downgrades For Q2-Q4

Alteryx priced at $5000+ is steep and I pointed this out in previous reports. I would never suggest someone sell a winning position; however, you may want to determine how much downside you’re willing to stomach if the market were to go red. I’m pulling AYX out of the pack as an example because unlike other cloud software, the price is not cheap. If the economy goes back to normal tomorrow, this won’t be an issue. If there are tech layoffs announced in Q2 and Q3, you might want to keep it in mind.

From the Alteryx PDF:

“Alteryx primary risk is the high pricing. The company will have to continually iterate to demand its current pricing while staving off competitors. At over $5,000 per user for the Designer product (and much steeper across other products), economic headwinds could affect Alteryx if companies seeks to reduce costs.”

And …

“Designer costs $5,195 annually per user with optional add-ons, such as location insights for $11,700 and business insights for $33,800. Server expands the offerings from Designer to include APIs and applications for more customized and automated analytic workflows. Enterprises especially have a need to improve internal server architectures for multiple employees and cross-functional teams with custom options. Server costs $58,500 per user per year with add-ons, such as Connect for $39,000.

Connect allows for data cataloging and the discovery of data with the goal of accelerating productivity. This is not a core product for Alteryx at this time, rather it provides an end to end pipeline for a full range of needs. There is indication from the Server add-on pricing that the cost is in the $39,000 range.”

We’ve also seen initial reports that human resources software is not holding with SAP expecting a decline this year and analysts downgrading similar companies, like COUP, PAYC. (The market has not taken notice). This means Workday could be exposed. Workday also carries over $1 billion in debt and may need to borrow more in the future.

PDFs:

 

Ad-Tech

As you know by now, I’m concerned about ad-tech for a few reasons. The peak to trough that occurred between Jan/Feb and March has been hard to quantify as company executives provide fairly vague overviews of “single digit declines” or “double digit declines” or “approximately flat” or “stabilized” while avoiding hard and fast numbers. Those that gave more specific numbers sold off (PINS and TWTR). All around, guidance is being pulled for the year, which is unique to ad-tech within the industry of tech. Meanwhile, ad-tech is trading at all-time highs.

I’ve covered this in great detail already as to why I began the year with ad-tech as one of my top trends and changed my position on this for Q2-Q4 2020 and maybe early 2021. For me, there is too much risk with stocks trading at all-time highs that are going through a major readjustment in supply/demand. I’d need more information on forward revenue this year and next year before committing to these valuations. Considering companies can’t provide this, then I’d want a discount in valuation.

I want to follow up on Roku specifically. The difference between Roku and the other ad-tech companies is that it’s situated in the center of an important micro-trend as a pureplay. This means it’s a gamble as to when the true breakout occurs because the trend is so strong.

On one hand, Roku may have a tough year as a company that is not profitable and relies on advertising. On the other hand, Roku may have a breakout year as a company that sees record adoption at a time when connected TV is already one of the best trends in technology. Knox will do his best to provide for both situations but I want to emphasize we are long on Roku and it’s one of my highest long-term convictions even with advertising headwinds. With that said, it’s likely Roku misses earnings or negatively surprises the market in some fashion this year. Follow Knox on the forum if you’re building a new position here.

For Q2 through Q4, I have changed my viewpoint on The Trade Desk. I think Snap is weak too (I understand the market doesn’t think this right now). The market beating up Pinterest and not Snap is interesting to me on many levels (and the lack of response when Snap raised debt immediately following earnings).

I personally feel that Facebook and Google are somewhat saturated and will need new growth markets but that’s counter to the market (I’ve felt this way about Apple too for most of 2019 and into the near future). Those three have enormous amounts of cash so micro-trends/growth markets are irrelevant because of traditional DCF analysis.

 

5G

Our 5G coverage was primarily focused on business cases. I believe the government will continue to push for 5G and that INSG and WIFI are solid choices as they require little to no capex. In fact, they lower capex depending on the situation.

I also like Twilio as a very early 5G play. Twilio is exposed to many different industries and we will find out in the earnings report tomorrow if retail/ecommerce and health care offset any of the others (such as Lyft and Uber) plus the decreased marketing budgets that SendGrid likely saw.  

PDFs:

 

Outliers & New Coverage

Lam Research, Micron and Qualcomm are solid choices to keep an eye on. Knox will update in the forum if he sees something interesting here price wise.

I’m still very bullish on Chainlink for reasons that are not obvious right now. I believe Chainlink will jump from being a crypto to a reputable form of collateral for blockchain smart contracts. I want to emphasize that Google and Oracle are early backers.

Bitcoin is also going through the four-year halving this month. I’ll write up an editorial in advance.

Regarding blockchain, I had written an article about how blockchain and health care will one day merge in order to make data more available for cures. This is an area that should take off with the pandemic. I’ll be hunting for breakthroughs here.

PDFs:

Target Entries

Posted on by io-fund

We’ve laid out our broader market thesis over the past few weeks and are now turning our attention to individual target entries. Identifying broader market levels first was an important step as the market is reacting to these levels. We noticed that Goldman Sachs published something similar today.

If the market breaks 2340, we will likely see the market trade down in the 2100 region. This is the primary target that we diligently identified over the past few weeks. 

We mentioned that Knox follows an analyst who uses the same discipline and is calling for 1800. However, at some point, we have to be satisfied and not time the bottom. This is a personal choice.

Our positions will be 70% built in the target entries we are publishing this week. We will keep 30% on hand to either allocate at another leg lower or when we see a renewed uptrend.

Please note: We do expect there to be corrective bounce(s), which is the fourth of five waves in this C-wave down. The momentum indicators are at unusually low levels. They will need to reset for the next leg lower. What this means is some investors might get bullish too early from seeing some green on the indexes. Until the VIX settles below 20 and we see normal days (i.e. 100 bps to 500 bps), it’s unlikely that a bottom is in place. 

Target Entries:

The market is moving fast and we want to get information out to you as quickly as possible. We will be updating target entries for (3) stocks per day from our Top Stocks list in column J of the spreadsheet.

You can access the Top Stocks List here.You can access the Top Stocks List here.

Please check the Top Stocks list for daily updates on our target entries. Today we updated target entries (column J) for Roku, The Trade Desk and Slack. 

Here are some bullet points about these target entries:

  • Column J will not change as it’s based on the broader market thesis that we have worked diligently towards building over 2-3 weeks.
  • Our game plan is outlined in Column K to help provide additional information into the technicals we are monitoring for entry.
  • Knox will be posting charts and additional TA on the forum for anyone who has questions or wants more TA information.
  • We will do a summary of the target entries this weekend.
  • We don’t want to overwhelm your inbox with blog updates while also getting the information out asap – therefore, please check for daily updates on the spreadsheet. 

Top Stocks List:

We will be updating this monthly around the first of the month. Our convictions on the fundamentals have not changed. The only stock we foresee adding right now is AMD. We are evaluating other semiconductors and will update you accordingly. Docusign (on our watch list) is also a potential. Notably, Beth is not ready to initiate on Micron as the memory market is looking sluggish this year. Those earnings are coming up soon. If this changes after earnings, we will let you know.

You’ll get the AMD PDF report tomorrow. 

We do understand that there was a bigger seller in Roku today. This does not change our conviction. 

Thank you for your readership!

Broad Market Update – Technical Analysis

Posted on by io-fund

My Methodology: Tracking 10-year Bull Market

Looking at the current bull market that began in March 2009, we can map out the path using Elliott Wave Theory, and guess a likely trajectory for the remainder of the move up.

To provide context, Elliott Wave Theory, in essence, claims that the market moves in 5-waves up, then 3-waves down. There is a rigorous number of rules as well as math involved to justify a count, but the fundamental idea is the 5-3 structures.

Each 5-wave move is part of a larger degree 5-wave move, and it also has smaller degree 5-wave moves within it. It’s fractal, which is very important, and something we witness on the hourly chart as well as a monthly chart.

The chart is a close up of the prior chart that is focusing on the bull market that started in March of 2009. In the larger context, we are looking at a close up of the final 5th wave in red, and within this wave we have several degrees of waves, which constitute this move.

On a smaller degree, the blue count is meant to express the 5-wave move that started in March of 2009. Within that blue count, you have the green count, and then below that in the red count.

The Current Correction

Regarding this correction, I consider this to be a buying opportunity, as long as we hold 2950.

Zooming in even closer, we can see the structure of the current correction within its bigger context. The 3rd wave of the red count topped out exactly at the 161.8% extension, which is a text book 3rd wave. That being said, we can expect the current 4th wave to target the usual range, which is around the 123.6% and 78.6% extensions between 3220 – 3070.

I am personally buying in this pullback in the 3220-3070 range with some funds reserved if we hit the 2950 level.

Below 2950, and we could be in for a much larger correction. Each of our individual positions have relatively tight stops that coincide with this level of SPX. Of course, my high conviction investments purchased with low cost basis will not be sold (BABA, MSFT, ROKU, NVDA, etc). This only applies to stocks that I’m still trying to find a breakout on (ZM, AYX, DDOG, etc). I will re-enter anything I stop out of to make back those incremental losses when the trend resumes.

As of now, the more likely scenario is the 3220-3070 range. I’ll update you if this changes.

 

8 Predictions For Tech Stocks In 2020

Posted on by io-fund

This article was originally published on Forbes on Jan 16, 2020, 03:22pm ESTForbes on Jan 16, 2020, 03:22pm EST

Despite record highs in the market, the consensus forecast is for an earnings recession with the aggregate S&P 500 expected to fall 2.6% in the fourth quarter. This will mark the fourth consecutive quarter of year-over-year net income declines. When taking into consideration buybacks, which help to reduce companies’ shares, the S&P 500 could post 0.6% EPS growth in all of 2019 compared to 2018’s 23% increase in EPS.

Although sentiment is bordering on euphoria in the market, there are pitfalls to watch out for and winning tech verticals to lean into.

As the analyst who early-on called the top-performing stock last year (Roku) following its IPO, plus many other accurate calls such as Uber’s IPO flop, Zoom’s successful IPO, and Microsoft’s Pentagon win, here are my top 8 predictions for successful tech investing in 2020:

1. 5G is a business to business growth story; the consumer story is overblown

Investors who believe 5G will drive a “supercycle” for Apple are not taking into consideration that 5G is a replacement cycle for 4G. The consumer opportunity will not be as significant as previous generations, such as when 4G delivered mobile broadband with smartphones being the primary beneficiary.

Apple’s revenue declined 2% year-over-year and is nearly stagnant in forward estimates at 4% growth from fiscal 2018 for fiscal 2020. To put it simply, investors are paying 105% more for each dollar of Apple’s earnings as the fundamentals are flat with a decline of 7% in net income. Some of this hype is being driven by the highly speculative 5G release in September of 2020.

To determine the 5G story of the year, the following has to be taken into consideration:

  • China is ahead of the United States; the 5G story of the year will be more geographically diversified than Apple, who has conflicting reports from shipments in China. There are reports that iPhone shipments were up 18% in December, yet conflicting reports that iPhone shipments decreased by 35% in November. Regardless of how these monthly reports play out, Apple is number five in the top 5G market globally and one month’s worth of sales is unlikely to change this.
  • 5G semiconductors can sell 50% more-dollar chip content per device versus the previous 4G generation, meanwhile, handsets are in all-out price war. In other words, the profits will be more substantial at the chip level than the handset level while average sales price (ASP) continues to erode.
  • There are many areas where 5G will create major gains for investors. See #2 below.

2. Diversified 5G Small Caps and 5G Suppliers will be 2020 Winners

5G is unique from previous wireless generations due to the required change in infrastructure. While previous generations delivered increased speeds and robust internet, 5G proposes a more advanced technology stack. A brief overview of infrastructure changes include:

  • Massive Multiple Input and Multiple Output (MIMO) – more antennas will be needed.
  • 5G frequencies cannot penetrate glass and are up to 100 times worse at penetrating walls than 4G. Indoor 5G cellular is a major concern at this time.
  • Small cell sites are needed to avoid the interruptions and latency that base stations alone can cause.
  • Carriers have various strategies with low-band, mid-band and mmWave.
  • Microdata centers and the edge cloud will open up hundreds of thousands or even millions of data centers globally.
  • Orthogonal frequency domain multiplexing (ODFM) will need to condense channels into mmWave range.
  • 5G allows for virtualization, which allows traffic to be software-defined and centrally located. This greatly reduces the need for power and cooling costs.

The best 5G stocks will come from companies that solve real issues related to 5G infrastructure and performance, or who supply a broad swath of the ecosystem. Triple-digit (and maybe quadruple-digit) returns in 5G will come from scarcely-known names.

3. Ad companies will quietly outperform:

As I write this, the Consumer Electronics Show is taking place in Las Vegas with futuristic promises, such as electric air taxis from Uber and Hyundai, rollable OLED screens from LG, and autonomous security drones from Sunflower Labs.

I’ve been to tech gadget shows for over a decade and have concluded that making real money in tech is often much more boring. Ad conferences may not make headlines but they will make you money and 2020 will be another “slow-and-steady-wins-the-race” year for ad revenue.

My prediction is ad companies will continue to quietly outperform their futuristic tech peers. There are 7 billion people on this planet, or 14 billion eyeballs, and companies are flush with cash to reach them.

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According to Magna, media net advertising revenue will grow 4.1 percent in 2019 and 6.2 percent in 2020, partly due to political ads and the Olympics.

The outcome for the usual suspects of Facebook and Google is anyone’s guess, while stock market darlings, The Trade Desk and Roku, see plenty of volatility. I recommend looking far and wide as there are many companies driven by ad revenue on the public markets that target audiences while being privacy compliant.

4. Cloud companies will continue to report strong growth

The market became more prudent with valuations last year, and cloud software took the brunt of the rotation. Before the correction, cloud software was the leader in the market – and for good reason, as cloud spending is currently outpacing IT spending by 400%. According to Gartner, global IT spending will grow 3.7% in 2020 with enterprise software growing 10.9% and software-as-a-service growing 16.5%.

With cloud spending outpacing IT spending by 400%, it’ll be important to know and predict the winners. The market’s widespread categorical pullback on cloud software, coupled with forward earnings projections, places cloud software winners in an enviable position going into 2020. Keep in mind, this performance is simultaneously occurring during an earnings recession across most other industries.

The trick will be to choose wisely as there is an overabundance of cloud software companies on the market and many are unproven across various fundamentals. Silencing the noise and determining where the real long-term growth and profits will be in this burgeoning category is key.

5. Semis will not be able to sustain current valuations

Less than fifty percent of semiconductor companies will return to growth next year, or twelve out of thirty, up from three out of thirty in 2019. Most of the sales growth expected next year will be regaining lost ground to return to 2017 levels — before the U.S. trade conflict with China. Meanwhile, because of flat earnings, these stocks are incredibly expensive.

AMD is a growth stock with a forward price-to-earnings (P/E) ratio of 45, a current P/E ratio of 257 and EV to EBIT of 201. The company is posting low-single-digit revenue growth year-over-year and 18% revenue growth quarter-over-quarter. In October, AMD had a 12-month price target of $32.94 based on a 25% expected sales increase in 2020. The company has blown past this target based on 4% growth this year, and is trading near $50 per share.

6. Some AI and ML investments will continue to bleed, but will steal all the glory in the coming years

Artificial intelligence and machine learning investments will go through a period of flat growth over the next few years as the transition costs and capital expenditures exceed the output gains.

Over the next year and perhaps into 2021, investors will be able to pick up AI stocks cheap relative to the forward 5-7 year growth potential.

7. Look for the market miscalculating the competition. Netflix is a prime example.

Netflix is one example of how financial analysts overestimate the competition. Netflix is the top streaming service by a wide margin, claiming 87% of OTT households in the United States. In Western Europe, Netflix has a penetration of 70-87% in English-speaking countries and 55-64% in non-English speaking countries.

According to Digital TV Research, the OTT market is set to grow from $68 billion in 2018 to $159 billion in 2024. Combine this growth with Netflix’s current market share, and you have an unshakeable first mover. The speculation on competitors may become marginally true. Disney could do well. But, to think Netflix will be ruined, despite being in the lead on all accounts and posting $1.5 billion in yearly profits, is a rather sensational conclusion.

8. Balance sheets will matter again

Remember balance sheets? That’s where you can find the debt a company is holding. Don’t tell Tesla investors but balance sheets will eventually matter again and Tesla’s $13.3 billion in long-term debt isn’t going anywhere fast with negative operating margins. Don’t tell Uber investors either as this company’s $5 billion in debt won’t exactly evaporate with $1.3 billion in quarterly operating losses and $4 billion in annual operating losses. It’s this combination of high debt and a lack of profitability (by any reasonable margin) that causes trouble when sentiment turns.

Market Update – January 16th

Posted on by io-fund

As we have referenced in the past, we are not a research site that attempts to predict the market. We think that’s a nearly impossible task. We simply keep an eye on various, opposing scenarios while providing stock tips we think are relevant in the current environment.

Bull Count

The level I’ve been watching is the S&P 500 at 3200. The market powered through this and has overtaken 3300. This means the bull market could take us up to 3800-4000 region. This is based on basic Elliott Wave analysis where the 5th wave, more times than not, reaches the length of the 1st wave, or an extension of that wave, which we see time and time again.

My rational for such a position is based on the global loose monetary policy seen by central banks. Not only are dozens of central banks cutting rates, but the Federal Reserve publicly said the goal is to keep the expansion alive, and they are using tools used to re-stimulate an economy from a recessionary position. In other words, they are going all-in on keeping the expansion going.

Also, it’s worth noting that an accommodative Fed has historically been great for MOMO stocks. As long as inflation stays muted according to the CPI, and central banks stay accommodative, I will stay long tech with rising stops to match rising gains.

Another point of encouragement is that a record level of cash is still on the sidelines, waiting to come back in. Furthermore, one trading platform shows 69% of clients are short the S&P 500 today. As these shorts cover their losses, it will force more buying, which will force more covers. Massive levels of shorts can propel a market, and this pattern will continue until the shorts give up, which can be propelled forward if cash on the sidelines moves in because of FOMO.

So, long term, I am bullish and slow-tilting my portfolio towards a more aggressive stance. However, in the medium term – i.e., a few weeks to a month out – I am expecting a local top to take us back at minimum 3%-5%, at which point I’ll look to allocate more of my cash. Tech has led this market and I believe it will continue to lead throughout the expansion.

Flashing Bear Signals

I’m going to expand on this more next week, but the current market environment is not without some flashing signals. It’s important to understand the backdrop in which we are investing and also where we are in the current market cycle. 

 In a nutshell, these are:

  • The yield on the 2-year treasury and on the 10-year treasury have inverted. The inversion occurred in August of 2019 and the average time period before a recession following an inverted yield curve is 18.5 months.
  • According to the ISM, manufacturing peaked and has been in a steady decline since late 2019. Once again, this trend has preceded every recession, and about 31 months after the cycle peak, on average, a recession follows. So far, the ISM peaked in summer of 2018.
  • The Conference Board Leading Economic Index (LEI) is at the zero line. This is at its lowest level in over a decade. To be clear, it has not crossed yet, so it’s worth watching. I’ll expand more on this next week.
  • After several years of zero percent interest rates, corporate debt is at historic and unsustainable levels totaling over $10 trillion total, or 47% of our national GDP. Fifty percent of investment grade debt is in the BBB ratings.

I’ll go more in-depth next week on those signals. The way that I protect my gains is to have trailing stops between 10-30%. If I hit my stop on a stock that I like, I will re-enter once the price has stabilized. A recent example is when I exited Zoom at $68 and got back in at $62. This is a small-scale exit, whereas Nvidia’s crypto bust was a larger-scale exit. My gains were protected and I simply re-entered once the price stabilized again. This is the only way I’ve found that I can stay in the market when there is a lot of noise towards the end of a market cycle.

Technical Analysis:

By Knox Ridley

Alteryx (AYX)

After about a 40% drawdown, Alteryx has dragged along the bottom of the long-term trend channel, which is highlighted by the blue dotted lines. The move up appears to be overlapping, and therefore corrective in nature, with the final C-wave unfolding in a 5-wave pattern, which I’m targeting the 127.2% extension around $133. I’m treating this as a corrective move, and holding off on adding to my current position until:

(1) we break $133 with heavy volume, at which point I’ll hold this position with a very tight stop until we clear new highs. If this happens, we will be in the heart of a 3rd wave, and the bottom for wave-2 will be in.

(2) AYX stalls in the coming days/weeks, and retests the $100 level. If this support doesn’t hold, I’ll look to pick up more shares as we approach the C-wave target box that I outlined in the chart above.

Roku (ROKU)

I’ve been patiently waiting to pick up more Roku sub-$100, and the set-up is in place for this to happen. Roku has tested the $127 support level 3 times, and each time it has corrected from $127 with less momentum and lower highs.

It’s currently trading just under the Volume Weighted Moving Average, which I anchored at the all-time high (in red). This average factors in volume from a critical moment. This week, the bears are in control. Furthermore, the price is below the 55-day exponential average, which is a great measurement of the overall trend.

Also, look at the internals (MACD, RSI). They have both broken their respective trendlines and are heading lower. I take this as a warning.

But, most importantly, the final C-wave set up is intact. Corrective waves (second waves and 4th waves) unfold in 2 moves (A down, B up, C down). There are several rules patterns that we see over and over. One of the most notable is that the C wave will almost always unfold in an impulsive, 5-wave structure, which on lower time frames will have its own smaller degree 5-wave structure.

We have a 1-2, (i)-(ii), i-ii setup right at the $127 support. If $127 is broken, we will be in the 3rd wave lower. Based on basic Elliot Wave, I’m expecting this move to terminate around $100-$95, at which point, I’ll look to add to my long-term position. Just to be clear, I’m still expecting Roku to reach $200 by 2021. 

However, it’s worth noting that Roku has held the $127 support, and though the signals are suggesting that it could head lower, Roku has a tendency to move fast against bears. On a long-term basis, $127 is not a bad price to pay for this stock, based on what we are projecting for 2020.

Also, if Roku can break out on heavy volume in a 5-wave move up from $127 upwards, while the internal indicators break their downtrend (look at the green arrows), I’ll scrap this bearish set-up, and look to go long from higher levels.

Qualcomm (QCOM)

QCOM is approaching a cluster of resistance. The red box highlights a strong concentration of significant Fibonacci prices. Rarely do you see a concentration like this. QCOM will either break through on heavy volume, which would be an indication to go long, or it will break down from current levels. If we break down, I’ll be looking to add to my position in the green target box between $80 and $62.

Alibaba (BABA)

Since Alibaba broke out, we have clearly been in a 3rd wave uptrend. For anyone curious what a 3rd wave feels like, this is it – an uninterrupted bull train, where the price stays above the 10 and 20-day EMA. I’ve put my targets in the chart above as well as significant resistance zones as we continue upwards. We should have pullbacks along the way.

Twilio (TWLO)

Twilio has shot straight through the 200-day SMA and found resistance at the 61.8% retrace level around $123. If Twilio can break this region, I will likely begin layering into Twilio. I will want to see it break through the $135 region for a final confirmation that the 2nd wave is over. However, a move up like we’ve seen in Twilio, breaking the 61.8% retrace is worth noting.

Zoom (ZM)

So far, Zoom is playing out as planned. After topping out in its first wave, it retraced nearly the entirety of that move in a very deep second wave. Since then, it’s provided us with a 1-2 setup, and is now powering up towards its AVWAPS. We picked up shares in the low $60s with a stop at all-time lows. As long as this level holds, I’m expecting new highs this year for ZM. If it can power through the above AVWAP in blue, that will be a strong showing of strength, at which point I’ll add more to my position.

Top Momentum Stocks Affected by Cash Rotation in Q3

Posted on by io-fund

It has been a difficult quarter for many top momentum stocks like Slack (WORK), Veeva Systems (VEEV), Alteryx (AYX) and Zoom Communications (ZM). The companies have continued to execute well but their stock prices have declined. These companies reported better-than-expected third quarter earnings, impressive growth, and boosted their forward guidance.

In an analysis in MarketWatch this week, I reviewed why Momentum stocks are down and I look beyond the assumption it’s due to a “value rotation.” Instead, as I point out, there is a lot of volume that suggests institutional selling directly after earnings reports. This volume in momentum stocks exceeds what we saw during the Q4 sell-off.

Overview of Momentum Stocks Following Q3 Earnings:

Many YTD gains have been erased as investors rush to value stocks. Indeed, value stocks, as gauged by the iShares S&P 500 Value ETF (IVE) have started to outperform momentum stocks as gauged by the iShares Edge MSCI USA Momentum ETF (MTUM). While it is true that some investors have moved to value stocks like Caterpillar (CAT) and Target (TGT), the real concern is that many investors are rotating to cash.

In January this year, WSJ reported that investors were increasing their cash holdings at the fastest pace in a decade. In July this year, CNBC reported that the wealthy were moving to cash. Just recently, a report by DataTrek showed that this trend was continuing. The report found that there was $3.4 trillion in US money market fund in October 2. This was 14% higher than in January this year.

Narratives Driving the Momentum Market

A common narrative is that the best momentum stocks and companies are overvalued. When you look at price-to-sales and price-to-earnings, it is true they are at record highs. However, as I had pointed out in a separate analysis on MarketWatch, cloud software has also been reporting record high revenue growth. There is not a divergence between valuations and revenue that you typically see in bubbles; they’ve been aligned.

Most certainly, if the market decides to reward profitability over growth, we will see lower price-to-sales across cloud software.

Another narrative is that these companies will be affected by the soft spending on IT. In reality, IT spending in the United States and internationally has been increasing as evidenced by the increasing sales reported by AWS, Azure, and other IT-related companies (although percentages have declined due to the law of large numbers). A report by Gartner has said that IT spending will rebound by 3.7%, driven by increased spending in enterprise software spending. IDC has also forecasted that IT spending will continue to increase.

Alteryx: Momentum Stock

Many momentum companies have continued to see impressive growth. A good example of this is Alteryx (AYX), a company that offers data science solutions to companies. The company’s stock has declined by more than 21% in the past three months. Yet, Alteryx is a rare company. It is a fast-growing company, a market-leader, and one often has positive EPS.

Also Read : Alteryx Stock Price

In the most recent quarter, the company’s revenue grew by 90%. Net income grew to $16 million. The company also boosted its forward-guidance. It now expects to make between $389 million to $392 million this year. This is an annual growth rate of between 53% to 55%, but on the other hand, AYX management tends to be conservative.

In the above chart, the large volume spikes coupled with noticeable price movements suggests institutional positioning. We see sell-off volume (red spikes) is much higher over the last two months than during the Q4 selloff.

Alteryx’s shares were down in the days after the strong earnings report.

Roku

Roku (ROKU) is another company that saw some irrational sell-off. Revenue of $360 million rose by more than 50% and the company raised its outlook for the year. It expects its revenue to grow to about $1.106 billion, or 46% YoY. This is impressive growth for a company that has a strong runway for growth as I wrote before. Although Roku recovered, there was still high volume after the earnings report.

Also Read : Roku Q3 Earnings

The above chart also shows large volume, suggesting institutional positions. We see the sell-off volume is much higher than during the Q4 selloff.

Zoom Video (ZM) is another example. The company’s stock tanked and is now trading 30% below its all-time high. You would think that ZM had a very bad quarter. In reality, the company reported that revenue grew by 96% to $146 million. The company’s clients with at least 10 employees grew by 76%. Also, the company increased its Q3 guidance to between $155 million and $156 million.

I also covered Veeva in the MarketWatch analysis. Veeva Systems’ operating margins have expanded from 17% in 2016 to 27% in the most recent quarter. Veeva beat on earnings with 55 cents per share compared to estimates of 48 cents per share. Company full year guidance also exceeded analyst estimates. Veeva is also strong on cash flow, increasing from $40 million in 2014 to almost $400 million in the most recent quarter. The company has $1.4 billion in cash reserves and no debt. Despite this, Veeva’s stock price has dropped 12% from its 3-month high of $168.42 and was immediately down 3% after earnings in late August.

Pinterest, too, had a minimal miss and lost $3 billion in market cap.

While these momentum stocks have been hammered, investors have cheered slow-growing companies like Apple (AAPL) and Intel (INTC) due to buybacks. Apple’s stock price has risen by 25% in the past three months and is now near its all-time high. The company had revenue growth of negative 2% year-over-year.

Way Forward for Momentum Stocks

In a previous analysis on MarketWatch, I had cautioned investors to know their winnersknow their winners as the market clearly did not have a method for differentiating beyond traditional valuation metrics. The safest way to trade tech stocks is to align investments with an overall macro technology trend in addition to fundamental analysis (the macro trend will prevail), and to have an exit strategy, such as a trailing stop, for risk management. 

We’ve seen some stocks quickly recover, such as Roku, and others that haven’t rebounded, such as Veeva and Alteryx. Even the more solid recoveries suggest they are boosted by momentum and swing traders as they remain between support and resistance, as well as retail investors, as implied by lower volume. 

The true test will be the upcoming cloud-software earnings reports to determine if the pattern will continue.

An earlier version of this article appeared in MarketWatch on November 21st, 2019 entitled Momentum stocks are down, but not for the reason you may have thoughtappeared in MarketWatch on November 21st, 2019 entitled Momentum stocks are down, but not for the reason you may have thoughtMomentum stocks are down, but not for the reason you may have thought

Quick update: Oct 11th

Posted on by io-fund

Hope everyone is looking forward to a nice weekend. Some of my neighbors have been without power for a few days due to PG&E shutting down preemptively on the two-year anniversary of the Paradise fire. That company is looking very troubled these days.

We sent  out the BABA report last night. Had a nice boost this morning. The valuation there is fairly cheap compared to its peers (for obvious geo-political reasons). I like the areas they’re moving into beyond B2C eCommerce which is B2B eCommerce and cloud.  There’s a high probability that there could be some momentum here, in my opinion.

Chainlink is up about 60% in the last couple of weeks, and along with Knox’s technical analysis both in the PDF and the forum, I think that one played out nicely with many of our readers getting in around the $1.60 mark. About a month later, it’s at $2.75.

Slack got a big boost today due to coverage that 37 hedge funds have initiated positions. Stock is trading up 9%.

I have an Op-Ed coming out next week in MarketWatch on Netflix. I actually like this company for a very long buy-and-hold but it’s going to get beat up for awhile. Knox will give you some ideas on a dirt cheap price and I will not be initiating a Netflix position myself until I get it dirt cheap. Too much risk due to market perception. 

The Op-Ed on Netflix covers the slow proliferation of OTT globally and how Netflix is set up to be the leader as we hit global saturation between 2030-2040. This is the decade when the world will have broadband (we are at roughly 50% access to broadband right now with most of that percentage being very slow speeds).  

I believe Netflix could have 1-3 billion subscribers if you figure 50-70% penetration in developed countries and 20% penetration in developing countries with 10 billion population in the 2030 decade. I have a lot of statistics in the upcoming analysis that supports this. But, this stock is going to get really beat up, in my opinion, and I’m on the sidelines for now. It’ll be on my market crash and/or recession shopping list. I’m really curious to see what Knox says on the rock bottom price, as well. He’ll have that for you next week. 

Have a great weekend, Beth 

General Update: September 20

Posted on by io-fund

Most of my readers know that I’ve been critical of Uber and Lyft since before either went public. I have a decent repertoire of analysis on these companies dating back to March 14th (see below at end of this update for quick reference). This was at the height of the IPO exuberance when many Wall Street experts predicted these IPOs would be a success.

I updated my thoughts in a new article published today on MarketWatch. I’m writing some additional analysis for my premium readers, including why I think Uber is the weaker company due to it’s contribution margin and a few other key metrics. Knox is going to publish some TA on where he thinks these companies will ultimately end up. 

I’d like to point out that during the cloud software sell-off, we were working hard to provide our readers with a few good ideas. We published on Workday, Zoom, Slack and Okta. Three of these we nailed on what support would be (Zoom, Slack and Okta), and continue to believe Workday will come back to the levels in our scenarios. We were pumping out the information as we wanted to give our readers a few stocks we thought would hold support and warn on the one stock we were concerned about (Okta). Keep in mind, we wrote on Okta before anyone could have predicted the cloud software pullback. 

We are not financial advisors, rather we work hard to pick the right stocks through tech industry analysis, and to follow this with the right entry. Nobody is right 100% of the time, and we won’t be either. But, it doesn’t hurt to point out when our hard work pays off. Knox especially hit a few home runs on TA this month. 

To summarize:

  • Our chart for Zoom on Sept 5th called for a 61.8% retrace to $78.00 – the stock hit exactly this number on Sep 9th and bounced back. We stated we’d love get the stock at this price in the PDF and chatted with some readers on the forum about entry here.
  • On Slack, which was a blog update on Sept 4th, we called for a $25 support range or a $10-$12 billion valuation when Slack was priced at $31. On Sept 9th, we hit $24.92, and even this volatile stock that has negative market sentiment, has held support for about 10 days.
  • On Okta, we published a technical chart showing a retrace to $104 when the stock was priced between $127-$133. This was a bold call at the time. Alternatively, Knox suggested any Okta  bulls to wait until the stock broke $142 as buying pressure was slowing down and there was higher probability the stock would go through a pullback. 
  • Workday hit the $172 support that Knox wrote out in the scenarios on August 28th. We are still waiting to see if we can get the $190, although this is taking longer than expected due to the cloud software pullback. Workday has a financial analyst day planned for October 15th. I am curious to see if they will debrief the financial analysts on their machine learning strategy and progress there. I’m not sure the financial markets are fully aware of Workday’s strategy with ML.  I’ve been seeing this at tech conference keynotes over the past few months and feel I am ahead of momentum here. 
  • Regarding Roku, we had quite a few readers ask us about Roku when momentum pushed the price into the $160s. We encouraged them (frequently!) to wait for a better entry. I like $120 but Knox has other ideas in the $100-$111 area. He’s working on this update. In short, with the recent shift in momentum names, we want to see how price reacts in September. Anyone who has followed Roku longer than a year knows that a %10 up/down day is very normal. Stay tuned. p.s. You’re also aware this is one of my favorite trends in tech in the short-term (connected TV ads), and why I like Roku over a few of the others in the space, so keep that in mind. This is available under the PDFs for anyone new to the site. 

Of course, this is anyone’s game. It could all change tomorrow. Stay nimble! We do put trailing stops on our positions right now in the event there is a sudden reversal. Nvidia at $290 is a perfect example. We were able to ride this up and take gains when we hit our stop and re-evaluate and re-enter at new support a month or so later. Note: We haven’t built our full position in this stock just yet. 

I typically will lean towards a stop of 20-25% in this market environment. After that, I re-evaluate before I enter again. However, high conviction stocks like, Roku, which we’ve owned with a cost basis of $29 for over a year, we will hold with no stops, as long as the story remains unchanged. 

I’m headed to a few tech conferences: AdvertisingWeek in NYC and Strata Data Conference this week and TechCrunch Disrupt the following week. AdvertisingWeek should help me understand where we are in ads, especially with connected TV ads (don’t want to miss any small caps) and programmatic. Strata Data Conference is all about machine learning and big data. Lastly, TechCrunch is second to none for the startup ecosystem, which eventually grow into successful IPOs. 

I’ll drop the Uber and Lyft PDF by Monday at the latest. We are working on a new Roku chart too.

Have a great weekend! 

Previous analysis on ride-sharing:

Lyft: Risky Valuation and No IP 

Uber IPO: Record-Breaking for All the Wrong Reasons

Uber Stock: Q1 Earnings

Uber and Lyft: Unprofitable Powerhouses

Uber and Lyft: Dead End (published today)