Below is an excerpt from the I/O Fund team on what to expect for the upcoming earnings season. We hold quarterly webinars before the earnings season kicks off to discuss our positions and what we are looking for from earnings results. In the webinar, we also identify trends/catalysts that we are eyeing to fill our new idea pipeline.
The webinars are not an earnings call or prediction, as anything can happen during an earnings season. It’s an opportunity for us to go over our fundamental research with our members.
Below are two clips from the Portfolio Manager, Knox Ridley, and Lead Tech Analyst, Beth Kindig, where we share highlights with our Essentials Members. For the full webinar including the IOF portfolio, consider upgrading to the Pro or Advanced tiers. Information can be found here.
Clip One: Broad Market and Themes
Portfolio Manager Knox Ridley provides an overview of the broad market. He says that following the bond market is the best way to understand how the economy is performing. The shorter the duration of the yield curve, the more is determined by the FED policy. The 3-month yield went to new highs and it suggests that the FED will raise interest rates in May. The 2-year yield did not follow, meaning that after this hike, most likely the FED will pause. The FED always follows the bond market. Looking into the financial sector, not just the regional banks, even global banks charts are concerning.
Bitcoin is an important them to watch, and the IOF had held exposure here since 2019. We do this with technical analysis and have been able to carefully add at bottoms while taking gains near the top.
Most people think that Bitcoin is correlated to high beta tech. However, this is not always true. When the recent bank failures happened, Bitcoin started to rally. Knox points out that Bitcoin was created in 2009 for the inherent faults in centralized money. If banks fail and Bitcoin continues to rise, we are going to invest in this trend.
Knox also discusses that energy futures appear to be breaking out. If Gas gets above $3, then the setup to new highs will be triggered. Gasoline prices were the sole cause for a lower-than-expected CPI. He has a buy plan for this.
Clip Two: Our Strategy and Trends We Are Watching
Lead Tech Analyst Beth Kindig believes that we are still in a “needle in a haystack” environment for tech stocks, which means there are few high-quality tech stocks in the new macro. What has helped our portfolio is to be focused on those that meet strict criteria, which has helped us hold higher allocations, and has resulted in better returns.
Fundamentally, on a revenue and earnings basis coming out of Q4, Beth firmly states we have not bottomed, rather the market is front running the bottom. It’s true the market is forward-looking yet Q1 will determine if the market is correct (and there will be a H2 rebound) or if the market is too early, and the rebound is further out for the tech industry.
Semiconductors are an exception in this regard because semiconductors have a lot of visibility. You can more easily track that supply is coming back online, and that demand is filling a backlog. For other verticals, we will approach the earnings season with an open mind while waiting for evidence that cloud or ad-tech, for example, are bottoming in terms of revenue growth and/or bottom line growth.
Trends we are watching:
- The Inflation Reduction Act is a trend we are closely following. We want to drill down and ensure that the companies that are participating in this trend are expanding their margins.
- Our thesis on Bitcoin is that when there was economic uncertainty in the past in Japan or Venezuela, those countries flocked to the safe haven of Bitcoin. Our initial report on Bitcoin said that providing safe haven for people’s financial security should be worth much as an iPhone, any e-commerce platform or a search engine. The addressable market for Bitcoin is quite large, like any other tech company. Our more recent write-up on Bitcoin can be found here.
- Google Antitrust lawsuit is the second biggest lawsuit and there are a lot of small-cap and mid-cap companies that are going to benefit from the breakup of the monopoly. We share more stock picks on this trend with our Advanced and Pro Members.
- AI/ML is another trend that we are closely watching.
Conclusion:
We are pleasantly surprised to see our defensible portfolio perform so well during the rally while reducing risk should the market turn. Nvidia and Bitcoin were the two top performers across the tech industry in Q1 and we held this stock and asset at a high allocation. There were many others that returned 30% or more this past quarter.
In addition, we use an automated hedge so we can hold quality positions at high allocations more comfortably during any downward swings.
Biggest takeaway is the H2 rebound needs to be confirmed in the upcoming earnings, and our Essentials Members should keep in mind there are very few strong tech stocks right now. What we mean by this is that earnings results for Q4 almost-across the board showed a deceleration on the top line and a worsening bottom line. Our strategy is to invest in those that are outliers in this regard, that are able to report with real evidence an improvement in the top line, bottom line or both. We will be patient and wait on any that are not able to show a reversal on the deceleration.
Last quarter, our webinar clips pointed toward the semi rebound being investable and Knox had provided an Essentials report that clearly stated the semis were most likely to lead the next bull market. Although we are not convinced the Q1 bull market will sustain, this analysis we provided for our Essentials Members could not have been more spot-on in terms of helping our readers prepare for the next leg up. We hope to continue to bring you top-notch information that silences the noise for more focused, and beneficial investment decisions.
Please note, we are very different compared to other research services since we run a top-performing audited portfolio (this has led to 174% better returns compared to Ark and results that are double the Nasdaq in the same time period). We do not publish a flurry of stock tips or information to our Members as we feel this works against an investor to chase new information rather than to remain focused on a couple of high quality positions. We are here to make money as investors, not to be entertainers or marketers.
Instead, what we offer is active management – where are we adding?, when are we taking gains?, and why?. We manage roughly 10-15 positions for Pro/Advanced in the same manner and we strongly feel being focused is what will make a choppy 2023 successful.
In addition, we provide broad market information, which cannot be underestimated in terms of its importance. In fact, we place this information above our stock tips as broad market is truly in the driver’s seat right now. We want the broad market aligned with our portfolio decisions. This helped us buy at the October bottom and it has helped us remain in a wait-and-see mode going into Q1. Notably, we notified you that we took gains in NVDA and AMD as “bird in hand is worth two in the bush” when it comes to a tech rally. These are high conviction positions for us and you’ll know when we start to buy again.
Thank you for your Membership and we look forward to keeping you updated on how we are managing key positions and the broad market for 2023. We know you have a choice in services, and we sincerely appreciate you being part of the IOF Community.
Beth, Knox and Royston
Recommended Reading:
Q1 Webinar Highlights
Semiconductor Stocks Continue to Outperform Value
Bitcoin Vs Banks: Here's Where the Price Goes Next
NVIDIA Showcases AI Breakthroughs, Omniverse Platform, and New Partnerships at GTC 2023
