As market volatility continues, I wanted to take a minute to share some thoughts. Also, a handful of the companies on my Dunk list have released their earnings results this week.
Yesterday, equity markets began on a down note following Meta’s profit report last night, which spilled over and negatively impacted Tech and related names. As the day progressed, the indexes kept bleeding down and closed near their lows. Not a fun day for any investor who had long exposure, but I wanted to remind investors that price action like yesterday, which was extreme and overdone in some areas based on my analysis, potentially creates opportunities for ideas that have gone on sale.
With that being said, I wanted to reiterate that my two main big picture views for the equity market and positioning have not changed despite the ongoing turbulent price action.
- 1H22 is likely to be challenging
- However, we do not see this choppiness as an end move, but a healthy pause/consolidation within a bull market that sees equity indexes higher at year end compared to where they started
On a sector basis, I continue to recommend above neutral positioning in Technology, Consumer Discretionary, Energy, and Financials and below neutral exposure for Utilities and Staples (please see the FSI Sector allocation update).
I have lots of individual single stock names that my work is flagging as favorable and have highlighted ten in my Dunks list (see Dunks section on FSInsight). Unfortunately for timing, the launch of this new product happened to coincide with the beginning of a more volatile period for the equity markets. So, I have my work cut out for me to select and highlight market-beating stocks.
As a reminder, the selection of my single stocks is derived from a proprietary quantitative model that I have been successfully using and providing ideas for my institutional clients for nearly two decades. The goal of my process is to recommend stocks that, based on certain key indicators and historical precedence, have a high probability of outperforming the overall equity market. Although I attempt to make every effort to make sure that every highlighted name is a winner, my model does not have a 100% success rate, and there will be times when things do not go as expected. Importantly, however, my research shows that, over the longer term, if investors follow my approach and recommendations with a rigorous discipline, there is high probability of achieving returns that exceed the benchmark indexes.
Over the years, I have described my process to clients and used the casino card game of Blackjack to help illustrate things. In playing Blackjack, if one gets an 11 in their first two cards, the odds of a potential win for that hand is quite high. Indeed, players will even try to double their bet because the setup is in their favor to do so since increasing their bet relative to the risk taken is advantageous.
Although the potential outcome is tilted towards a win, the next card received can always be the low probability and hated ace (worth one) that leaves the player with an undesirable 12 total. The player was hoping and playing the odds for a ten or face card, which is also worth ten, that would give them the highly desired 21 total and a likely win. Now, on any one hand, this negative outcome can occur, but the longer the game is played and this strategy of doubling one’s wager when they have 11 is used, the odds are in their favor, and the expected outcome is quite favorable. Thus, positioning yourself for a high probability event over and over has an expected outcome of many more wins than losses.
Let’s now apply this to the recent action in equity markets and to the names on my Dunk list.
All the names that were put on the Dunk list were “11”s based on my research. PayPal (PYPL -2.78% ) reported earlier this week and its results exceeded expectations, which is what my model had forecasted, but the stock got hit very hard and its stock price subsequently fell quite a bit. This outcome was certainly unsatisfying and not what my work was looking for. What happened? During the earnings call with Wall Street Analysts, company management provided disappointing forward guidance and investors did not like what they heard. With its stock down over 40% before the earnings report, PYPL -2.78% already had a lot of bad news priced in and now my work suggests the additional sell off is overdone. For now, I am going to stick with PYPL, but for process it is under evaluation to get replaced.
On the opposite end of spectrum, AMZN -1.94% also announced its quarterly profit results last night. My model was also signaling that the expectations for the company’s report were quite low and there was a high likelihood that the stock would react favorably to the release. With AMZN -1.94% ’s stock price acting poorly year to date, combined with an exaggerated 7% decline during the day’s trading session, the name was poised for reversal. Well, AMZN -1.94% announced not only “less bad” results, but the news was quite good (see summary details below), and the stock has rallied over 14% in after-hours trading. It opened at $3112.13 which was 12% higher than where it closed yesterday. Clearly, earnings were more in line with what my model had been forecasting and show why the stock is on my Dunks list.
In conclusion, I hope this walk-through sheds some additional insights into how my process works. My proprietary, data-driven, and quantitative approach is not infallible, but over time the historical trend has been that there are many more successful outcomes than not. Please note that I will be doing an official Dunk’s update in a couple of weeks, so be on the lookout.
AMZN Earnings Report Summary
Amazon (AMZN -1.94% ) reported blowout earnings on Thursday evening as revenue was largely in line with analyst expectations, but it significantly beat on EPS, partially aided by a nearly $12 billion gain in its stake in electric vehicle (EV) company Rivian (RIVN -0.65% ). AMZN had much less of a setback from rising costs of labor and inflation than expected and gave better forward guidance than it has provided in past quarters.
In addition, the company nearly doubled net income YoY. AWS had its best quarter ever and grew at a rate of 40% YoY. This is notable because this high-margin, high-growth segment is accretive to earnings compared to other lower-margin segments. Many had expected that AMZN’s high-growth advertising segment would be negatively affected after the dismal results from Meta/Facebook. However, this area strongly outperformed expectations as well.
