Posts tagged ‘investing’
Investing in Pigs and Kidneys: Building a $100 Billion Empire and Revolutionizing Organ Transplants
How does one create a $100 billion empire while pioneering an endless supply of transplantable organs that could save millions of lives? The first step is launching a multi-billion-dollar satellite company (SiriusXM – SIRI). The next step? Founding a biotechnology company with nothing more than a high school-level biology education — all in a desperate attempt to save the life of your seven-year-old daughter from a rare heart disease that claims lives within three to five years.
This is the extraordinary path of Martine Rothblatt, CEO and visionary of United Therapeutics Corp. (UTHR), who began this journey 35 years ago.
Transforming Industries: From SiriusXM to Organ Transplants
Few individuals have singlehandedly transformed entire industries. One name that comes to mind is Steve Jobs – who revolutionized consumer electronics and laid the foundation for Apple Inc.’s (AAPL) meteoric rise to a multi-trillion dollar company before he passed away. While Rothblatt and United Therapeutics may not yet be household names, she is undeniably reshaping the healthcare industry and steering it toward a future of unprecedented, life-extending medical advancements.
How can these ambitious, world-changing goals be achieved? A whole aisle of books could be written about Rothblatt’s impressive lifetime accomplishments, but the unique investment opportunity for investors cannot be fully understood without appreciating the person that created United Therapeutics 29 years ago in 1996.
Rothblatt has accomplished more than most humans could in multiple lifetimes – here is a partial sampling of her achievements:
- Earned a Bachelor of Arts, a Juris Doctor (JD), and Master of Business Administration (MBA) degrees from the University of California, Los Angeles (UCLA).
- Finished her PhD at The London School of Medicine (Barts)
- Practiced law at the Covington & Burling law firm representing the television broadcasting industry before the Federal Communications Commission (FCC).
- Hired by NASA to seek approval from the FCC for NASA systems used to track and relay satellite data.
- Created the multi-billion-dollar satellite radio company SiriusXM in 1990 with the inspiration of physicist Gerard O’Neill, the same Princeton professor who motivated Amazon CEO, Jeff Bezos to create Blue Origin.
- Invented the Terasem Movement, an organization with the mission of human life extension that uses cognitive and artificial intelligence software. Terasem’s technology has created a lifelike robot (BINA48), which is modeled after her spouse, Bina Rothblatt.
- Pioneered EV (electric) helicopter transportation through the company’s Unither Bioelectronics division with the purpose of cutting energy consumption and speeding up organ delivery times.
The United Therapeutics Story
In 1996, while leading SiriusXM, Rothblatt faced every parent’s worst nightmare. Doctors diagnosed her seven-year-old daughter, Jenesis, with Pulmonary Arterial Hypertension (PAH) — a rare, devastating disease with no known cure. Determined to save her daughter, Rothblatt initially funded research grants totaling over a million dollars to a narrow group of five doctors studying the disease. When the scientists failed to find a cure, she took matters into her own hands.
With no formal medical background, she quit SiriusXM, immersed herself in biology, and founded United Therapeutics. Against all odds, armed with her mantra that “persistence leads to omnipotence,” Rothblatt’s relentless pursuit paid off when she discovered a cure. Today, decades later, Jenesis is 42 years old and thriving as a high-profile manager at United Therapeutics.
Addressing the Organ Shortage Crisis
United Therapeutics’ advancements in PAH treatment have allowed patients like Jenesis to live long, productive lives. However, many eventually require organ transplants – the company is already assisting hundreds of patients with lifesaving human lung transplants. Despite some progress, the current organ shortage crisis is staggering:
- Over 100,000 people are on the national transplant waiting list.
- More than 92,000 of them need a kidney due to kidney failure or End-Stage Renal Disease (ESRD).
To address the organ shortage, United Therapeutics recently made history last month when the FDA approved the first-ever clinical trial for its UKidney xenotransplantation procedure for kidney failure patients.
The severity of the organ shortage problem is clear-cut if you examine the numbers. In addition to the 92,000 patients on the kidney transplant waitlist mentioned above, there are approximately 500,000 additional ESRD dialysis patients not on the national transplant list. Roughly 10% of these ESRD patients die each year due to dialysis-related complications.
If you combine the wait list population with the dialysis patient population you get to a total of around 600,000 people total. Regrettably, the vast majority of these patients do not receive an organ. In fact, only 27,759 kidney transplants were performed in the U.S. last year. In other words, despite the enormous demand for transplantable organs, less than 5% of the addressable market have actually benefited from a new kidney.
The Future of Organ Transplants: Profitable Pig Potential
How can this massive undersupply of transplants be fixed? One word…pigs. With a very scarce supply of human donors, pigs may hold the key to solving the organ shortage. United Therapeutics has pioneered genetically engineered pig organs (xenotransplantation) by modifying 10 key genes to prevent immune system rejection. As part of the xenotransplantation trial, United Therapeutics has built multiple DPF (designated pathogen free) facilities that house the pigs carrying the gene-modified kidneys.
All of this may sound like science fiction, but the dream of xenotransplantation has already become reality. Just last November, a genetically engineered pig kidney was transplanted into a patient (Towana Looney) under a compassionate use basis granted by the FDA. With its new clinical trial now underway, United Therapeutics is planning to transplant up to 50 patients with modified pig kidneys in the coming months.
And UKidney is just the beginning. United Therapeutics has a deep organ transplant pipeline that extends beyond kidneys into livers, hearts, and lungs (see graphic below). The company is also working on the “holy grail” of transplants – 3D printed organs using the cells of organ recipients to build the tissue structure, which dramatically reduces or eliminates the risk of organ rejection.
If UKidney is successful, United Therapeutics and Martine Rothblatt will be one step closer to realizing the company’s vision of manufacturing an endless supply of transplantable organs.
Source: United Therapeutics
Investment Opportunity of a Lifetime?
Nothing in life is certain, and there are risks to making any investment, but betting against Martine Rothblatt over the years has been a major losing proposition. From an investment standpoint, the core PAH drug business is trading at an immense discount, and investors are essentially valuing the organ transplant business at $0.
Despite its groundbreaking advancements and tremendous profit growth, United Therapeutics has huge stock price appreciation potential. Here’s why:
Stock is Dirt Cheap: At $317 per share, the stock currently trades at roughly a 50% discount to the trailing S&P 500 Price-Earnings ratio (PE) – 13x P/E vs. 26x index P/E. In other words, the shares should be trading north of $600 (double the price), if United Therapeutics was afforded an “average” company P/E multiple. But United Therapeutics clearly is not an average company.
Over the last two years, the company has grown revenues +48% from $1.9 billion to $2.9 billion and seen earnings explode +64% higher from $15.00 per share to $24.64. The stock becomes even cheaper on a forward P/E multiple (11x P/E) if the company can meet 2025 Wall Street expectations of 15% growth in its EPS to $28.23. Its superior products, execution, and competitive moats should afford the company a significant premium, not a drastic discount. Short-term investors are missing the boat by ignoring the gargantuan market potential for the company.
Is it possible for a $15 billion company to reach a $100 billion market value? This is not difficult to imagine if the company can bring its innovative and revolutionary pipeline products to market and take its current revenue base of almost $3 billion to $16 billion (see graphic below). The company certainly will not reach $16 billion in revenues tomorrow, but if you applied an average market multiple to those projections, and the company were able to maintain its current profit margin profile, a $3,000 per share stock price would be well within reason, equating to a market value well above $100 billion.
Source: United Therapeutics
Many Irons (Catalysts) in the Fire: United Therapeutics is no one-trick pony. Besides the company’s organ transplant plans, and their core commercial PAH and PH-ILD franchise, which includes, Remodulin, Orenitram, and Adcirca, United Therapeutics has many more irons in the fire that can be catalysts for stock price appreciation over the next 12 – 24 months (see graphic below).
Here is a more detailed description of the drivers:
- New Markets for Core Drugs: Any biotech or pharmaceutical company is in the business of searching for new markets to sell its products. United Therapeutics has found that in both the IPF (Idiopathic Pulmonary Fibrosis) and PPF (Progressive Pulmonary Fibrosis) markets, which are two different forms of chronic lung disease that are characterized by the gradual scarring and thickening of the lung tissue, which is called fibrosis. These patients can be administered with modified formulations of its existing Tyvaso molecule. The revenue potential is huge if the efficacy data comes in as planned because the pools of patients suffering from these horrible, progressive lung diseases could more than double the size of the present addressable market. Data from the company’s TETON 1 (IPF), TETON 2 (IPF), and TETON PPF studies will be released over the next few years, starting as early as next quarter.
- Improved Drug Formulation: United Therapeutics is also waiting for groundbreaking data from a drug called Ralinepag, the first once-per-day prostacyclin pill that is an improvement over its existing drugs of Remodulin, Tyvaso, and Orenitram. The company is releasing the Ralinepag data from its ADVANCE OUTCOMES study next year, and if the data proves to be positive, this could represent another multi-billion dollar opportunity for the company and investors.
- Other Near-Term Catalysts: Although perhaps representing a less meaningful potential from a long-term revenue standpoint, the company’s Centralized Lung Evaluation System (CLES) program is awaiting an FDA decision this year – CLES is designed to expand the supply of donor lungs. Last, but not least, data from United Therapeutics’ microliverELAP study represents another sizeable revenue opportunity for liver transplants.
Source: United Therapeutics
Fly in the Ointment: Failing Capital Allocation Grade
United Therapeutics deserves an A+ grade for developing the critical, world-class therapeutics that serve the PAH and PH-ILD market and the massive potential pipeline in xenotransplantation and alternative organ platforms. However, the company receives a failing grade for the implementation of its capital allocation strategy. United Therapeutics holds an excessively bloated cash surplus on its balance sheet, which has exploded higher from $1.0 billion in 2015 to $4.7 billion in 2024.
Sadly, the problem is only getting worse, as the company is on pace to add more than $1 billion more to the cash balance this year, and in subsequent years. This is woefully inefficient and becoming an alarmingly growing percentage (approximately 30% currently) of the company’s market value. To put this issue into perspective, investors should consider the company has enough cash on its balance sheet to effectively fund two decades of capital expenditure requirements. Profitable companies in United Therapeutics’ hand-selected proxy peer group hold a much more responsible amount of cash, representing about 4% of their market values.
If you had $100k of annual spending requirements, would you negligently place $2 million dollars in a low-single-digit yielding checking account or multi-year CD at your bank, when you could responsibly earn a 10% or higher return by paying down credit card debt? This is what United Therapeutics is doing. The company is essentially burning shareholder money by letting cash sit idly on its balance sheet earning a pittance when it could be earning significantly more. Why invest in government Treasuries when you could invest in your own company, compounding at rates greater than 10%?
The solution is clear. Implement a meaningful share repurchase program that is immediately EPS-accretive with the company’s bloated mountain of cash and bring down to responsible levels that are consistent with profitable growth peers. And rather than limiting your share repurchase to a one-time accelerated stock repurchase (ASR) program, expand the buyback to be more open ended on top of immediate purchases. This strategy provides the company with the flexibility to opportunistically purchase shares at a discount when the share price is depressed – like now, when shares are down -24% over the last five months.
Unfortunately, my message appears to be falling on deaf ears. I was hoping to gain clarity through communications with the company along with a letter sent to management and the board of directors. In my letter, I attempted to remind management of the importance of upholding its rigorous corporate governance standards and exercise its fiduciary duty when it comes to the company’s allocation strategy. However, regrettably, up to this point, there has been no indication to the market or me that there is any urgency to take advantage of the massively discounted United Therapeutics share price that exists today.
READ RECENT LETTER SENT TO MANAGEMENT & BOARD OF DIRECTORS BY CLICKING HERE
Investors Should Not Miss the Forest for the Trees
Although the company receives a failing capital allocation grade from my perspective, investors should not miss the forest from the trees. United Therapeutics’ share price is currently trading at a gigantic discount, yet it boasts unparalleled profitability and a groundbreaking organ transplant pipeline.
This lack of appreciation for the shares is surprising given how wildly profitable the company is and its tremendous long-term track record of success. But the company is not sitting on its hands – United Therapeutics has ambitious plans to expand its current annual revenue base by more than five-fold from $3 billion to $16 billion due to full cupboard of pipeline products.
With Martine Rothblatt at the helm—a visionary with a track record rivaling Steve Jobs—the company is poised to revolutionize healthcare. The world is a better place due to Martine Rothblatt, and your portfolio will be a better place with an investment in United Therapeutics.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in UTHR, AAPL, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in SIRI or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
Par for the Course
Stocks have been in a multi-year bull market, but just as investors cannot earn positive returns every month, golfers also cannot achieve a hole-in-one or birdie on every hole, either. A challenging performance is exactly what happened last month when stocks recorded a bogey on the scorecard.
More specifically, this is how far out-of-bounds the major indexes were last month:
- S&P 500: -1.4%
- Dow Jones Industrial Average -1.6%
- NASDAQ: -4.0%
Technology stocks and the Magnificent 7 stocks felt the largest brunt of the force last month as tariffs and the impact of Chinese AI (Artificial Intelligence) competition gave investors heartburn as they digested the information (see New Year, New AI ERA & New Tariff Sheriff).
Tariffs – More Molehill Than Mountain
As mentioned, a large part of last month’s volatility can be explained by the policy uncertainty surrounding the impending tariffs on China, Canada, and Mexico. Despite the absence of new tariffs being implemented, in an attempt to lock in cheaper imported goods, U.S. corporations and consumers have been stockpiling foreign goods before prices move higher due to tariffs. The 25% proposed tariffs on Canadian and Mexican goods are set to be applied as soon as March 4th. A flat 25% tariff on imported steel and aluminum products is expected to begin on March 12th – these particular tariffs are expected to have a disproportionately negative impact on the automotive industry.
Regarding other proposed reciprocal trade agreements, the White House’s analysis on tariffs for all other countries (beyond China, Canada, and Mexico) is expected to arrive on the president’s desk on April 2nd.
All these proposed changes are having an immediate economic impact whether intended or not. Not only are consumers buying more overseas products now, as they brace for higher prices, but businesses are also shifting supply chains to countries outside of China, Canada, and Mexico, in hopes of finding temporary tariff loopholes.
The bottom-line is our country’s imports have been spiking up recently, especially in the first quarter. Imports by definition subtract from America’s economic activity, so if businesses and consumers are rationally stockpiling foreign goods before prices go up from tariffs, investors should not be surprised that GDP (Gross Domestic Product) growth is set to go negative in the first quarter (-1.5%), according to the Federal Reserve Bank of Atlanta.
This short-term spike in foreign product purchases should be temporary until the tariffs are officially put in place. Subsequently, demand for relatively cheaper U.S. goods should rise because foreign goods will be pricier. In other words, buyers may begin purchasing more American-made t-shirts on Amazon because those shirts could be cheaper than the Chinese-made t-shirts after the additional tariffs commence on China.
How large are these overall tariffs? When it comes to Mexico and Canada, the size of these countries’ imports is estimated at $918 billion (see the 2023 import breakdown below for the two countries). On the surface, this sounds like a very large number, and it is. However, if you consider the size of the U.S. GDP ($29.4 trillion), these tariffs will mathematically have less than a 1% impact on the direction of our country’s economic activity.
However, if demand for American products goes up after the tariffs begin, as mentioned above, then it is perfectly logical to expect the drag from imports can be diminished or possibly completely reversed, if consumers decide to buy more American goods.
Source: Visual Capitalist
Also worth noting, as I documented last month in my Investing Caffeine blog, imports only account for 13.9% of our country’s economic activity (see New Tariff Sheriff). So, while tariffs make for great scary headlines, the reality of the numbers paints a different picture. Overall, the uncertainty surrounding the discussion of tariffs is having a much larger economic impact than the actual tariffs themselves. In other words, what we are discussing is more molehill than mountain. We saw this same movie before during the administration’s first-term when tariffs did not crater the economy into recession or create disproportionately high inflation.
War at the White House
A geopolitical soap opera played out on global television last Friday during a meeting between Ukraine’s President Volodymyr Zelensky and President Trump in the Oval Office. The meeting was designed to be a celebratory signing of a minerals deal in which the U.S. would gain access to strategically important Ukrainian rare earth metals in exchange for continued U.S. aid and military support. A signed deal would increase the probability of a peace deal between Russia and Ukraine dramatically. What actually happened was a war of words at the White House, which resulted in Zelensky getting kicked out of the White House with no signed deal.
Both sides have economic and strategic incentives to reengage in peace and mineral deal negotiations, but if the U.S.-Ukraine relationship totally crumbles, Europe and the other NATO (North Atlantic Treaty Organization) countries will need to pick up the slack in their military and economic aid to Ukraine. Regardless, increased European support is required to stave off a broader incursion by Russia and Vladimir Putin into a wider portion of Europe.
Tariffs, the Russia-Ukraine war, and AI issues may have heightened investor anxiety last month, but long-term investors understand that annual -5% and -10% corrections in the equity markets are considered par for the course. In fact, over the last 12 months, the S&P 500 index has declined -5% five times, and -10% one time, yet the stock market is still up +16% on a trailing 12-month basis (see chart below).
Source: Trading Economics
Financial markets end up in the rough plenty of the time, which often results in performance scorecard bogeys. However, long-term investors and Sidoxia Capital Management clients have won more often than not because the benefits of American capitalism have created many more birdies and pars over time.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 3, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in META, NVDA, certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BABA or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
How to Profit from the Trump Crypto Wave
We were honored to have our white paper on the cryptocurrency market published by the California Business Journal last month. Please enjoy the article below.
Newly inaugurated President Donald Trump has wholeheartedly embraced the multi-trillion dollar cryptocurrency and digital asset industry. This is a seismic shift from the anti-crypto stance harbored by the previous administration. In the first week of his second term, President Trump not only appointed crypto-friendly Paul Atkins as the SEC Chairman, but Trump also named David Sacks as the first-ever White House Crypto Czar. If that was not a strong enough signal, Trump issued an executive order on his third day in the Oval Office, entitled, “Strengthening American Leadership in Digital Financial Technology.”
With this massive political and legislative tailwind behind the cryptocurrency industry, what is the best way to profit from this cryptocurrency wave? Is it just as easy as buying Bitcoin? Not exactly, if history repeats itself. Since Bitcoin was introduced in early 2009, the value of the cryptocurrency has fallen by more than -50% seven times. There have been many causes for Bitcoin’s historical volatility, including the hacking of the largest Bitcoin exchange in 2011 (Mt. Gox); China banning Bitcoin in 2013; and the COVID pandemic crash in 2020. Matters got worse for the cryptocurrency industry when FTX, one of the world’s largest crypto exchanges went bankrupt in 2022, and its founder and CEO, Sam Bankman-Fried, was subsequently arrested and convicted for fraud and money laundering.
Investing in a currency or asset class with that much volatility is very challenging. To compensate for volatility and risk, investors require the potential for higher returns backed by robust fundamentals. Unfortunately, to date, many of the broadest use cases for cryptocurrencies have been limited to illicit and illegal activities. There certainly are some speed and security advantages to the blockchain technology and the associated ledger structure of the major cryptocurrencies. However, the benefits have not been so clear-cut that Fortune 1000 companies and mass consumers have adopted it. A relatively small 15.5% of Americans (and 6.9% worldwide) are estimated to own a cryptocurrency, and a smaller fraction of that actually transact in a crypto.
Even though the practical use cases for cryptocurrencies over the last two decades have been extremely constrained, the speculative fervor surrounding this asset class has grown exponentially to the point there are over an estimated 10,000 cryptocurrencies that exist today, including speculative meme coins such as Dogecoin, the Trump coin, and other crude joke coins.
In my more than three decades of investing, I have repeatedly encountered extensive segments of the financial markets that would qualify as speculative bubbles, whether it was subprime mortgages and credit default swaps (CDS) in the 2008 Financial Crisis, or dot-com companies in the 2000 bursting of the technology bubble.
Today, in 2025, the current cryptocurrency wave definitely qualifies as another bubble. But depending on an investor’s time horizon, there is still potential to make significant profits during these frothy investment waves. For example, take Amazon.com, which was at the epicenter of the dot-com bubble as it saw its stock price crater approximately -95% in the 2000-2001 timeframe. Before Amazon’s stock collapsed, its price peaked at $5.65 per share at the end of 1999 – today, the stock price in 2025 has exceeded $240 per share (a more than 40-fold increase). Despite the bursting of the tech bubble, a tremendous amount of money has been made by long-term investors in Amazon and a select few other long-term technology winners.
I believe the same opportunity exists today in the cryptocurrency market. There are a few historical parallels that inform our crypto investment strategy at my investment firm, Sidoxia Capital Management. Let’s begin with the gambling industry that flourished in Las Vegas during the 1940s after the end of Prohibition. It was not the gamblers and speculators that made all the money, but rather the casinos, including some remaining today like the Flamingo and the Golden Nugget.
Currently, the dominant casino in the cryptocurrency industry is Coinbase Global Inc. (COIN). Coinbase is the 800-pound gorilla in the U.S. cryptocurrency exchange space, handling transactions that total more than $4 billion in daily trading volume across hundreds of cryptocurrencies, stable coins, meme coins and other digital assets. And the company is highly profitable with substantial growth. More specifically, the company has generated more than $5 billion in sales and greater than $1 billion in profits over the last year. Just like Las Vegas casinos make money off every gambler’s bets, so too does Coinbase make profits off every crypto speculator’s trades, whether those transactions in Bitcoin, Tether, Ethereum, or meme coins go up or down in value.
Another lucrative way for investors to look at the nascent cryptocurrency industry is to compare it to the California gold rush that occurred from 1848 – 1855. Hundreds of thousands of “forty-niners” (the peak year of gold rush immigration – 1849) flocked out west in hopes of discovering perceived limitless riches – an attitude held by many cryptocurrency purchasers presently. Unfortunately, it was not the forty-niners digging and panning for gold who made most of the money, it was the merchants selling all the picks and shovels to the gold rush speculators that profited the greatest.
The contemporary merchants in today’s cryptocurrency world are companies like NVIDIA Corp. (NVDA), the creator of the graphics processing unit (GPU) semiconductors that power the critical mining operations of cryptocurrencies like Bitcoin. The GPUs serve as the picks and shovels for crypto miners who receive rewards in the form of cryptocurrencies (i.e., Bitcoin) in return for performing computationally intensive calculations, which are necessary to verify transactions on a digital decentralized crypto ledger. NVIDIA GPUs have a broad range of applications beyond crypto mining, including data center applications for artificial intelligence (AI), video games, gene sequencing, virtual-augmented reality, and other large-scale markets. Over the last year, NVIDIA has produced more than $110 billion in sales and created more than $60 billion in net profits. Not only was NVDIA successful commercially, but equity investors were also rewarded handsomely last year with an appreciation of +171% in the share price.
There are plenty of reasons to remain skeptical about the euphoria surrounding the cryptocurrency industry, especially due to the lack of legitimate use cases across the avalanche of digital assets endlessly introduced. However, the pro-crypto wave of Trump regulations and policies allow plenty of ways for investors to profit from this digital gold rush, especially if you can find the winning crypto casino and leading merchant of digital picks and shovels.
By Wade W. Slome, CFA, CFP®, Exclusive to California Business Journal
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, COIN, IBIT, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
New Year, New AI Era & New Tariff Sheriff
The first month of 2025 started with a bang when newly-inaugurated President Donald Trump announced a groundbreaking AI (artificial intelligence) program led by business titan thought leaders called Stargate, which promises to spend a half trillion dollars on AI data center infrastructure projects and create hundreds of thousands of jobs. Just one week later, a wet blanket was placed on the Stargate euphoria when a Chinese AI upstart announced a technological breakthrough. Stocks moved lower on the last day of the month when Trump added insult to injury by confirming 25% Mexican/Canadian tariffs and 10% additional Chinese tariffs would be implemented immediately.
Regardless, positive economic and corporate data coupled with other pro-business fiscal policies (e.g., deregulation and lower proposed taxes) allowed the financial markets to finish the month with respectable gains. More specifically, the S&P 500 surged higher by +2.7%; the NASDAQ +1.6%; and the Dow Jones Industrial Average +4.7%.
DeepSeek = Deep AI Trouble?
Ever since OpenAI launched its ChatGPT language model (LLM) at the end of 2022, the global AI gold rush began. Just as the United States appeared to be dominating the AI race to global superiority, a bombshell was recently released, when a new Chinese AI upstart, DeepSeek, released a white paper claiming the company’s R1 large language model (LLM) rivaled competitors’ LLMs like OpenAI’s ChatGPT, Meta’s Llama (META), Anthropic’s Claude, and Alibaba’s Qwen (BABA) for a small fraction of the price spent by DeepSeek’s American rivals. The “DeepSeek Freak” caused a chain reaction of selling across a wide swath of companies (including NVIDIA Corp – NVDA) that have benefitted from hundreds of billions in AI infrastructure spending. The fear that Chinese AI competition may leapfrog U.S. companies, and potentially dramatically reduce AI-related capital expenditures caused the NASDAQ to almost fall -2% last week, and AI juggernaut NVIDIA shed more than a half trillion dollars in the company’s market value in a single day. Overall, U.S. stocks lost more than a trillion dollars in value on the day of the DeepSeek Freak unveiling.
Although investors were initially panicked by the DeepSeek revelations, not all of the Chinese claims have been substantiated. In fact, a just-released report by SemiAnalysis, a semiconductor research and consulting firm, states that DeepSeek’s costs for its R1 LLM likely exceed $500 million, much higher than the $6 million training costs stated in DeepSeek’s initial pronouncement.
Source: NBC News
New Tariff Sheriff in Town
While many investors were hoping for a delay in the implementation of President Trump’s tariffs on Mexico, Canada, and China, Trump decided to move full steam ahead with a February 1st start date. In 2023, Mexico was the U.S.’s largest trade partner and Canada was the second largest. These Mexican and Canadian tariffs are very broad based and impact many different industries, including autos, agricultural products, and crude oil. You can see the extent of the impact in the graphic below graphic below.
Source: VisualCapitalist.com
But what does this mean for the economy? In short, it will mean higher prices for U.S. consumers and businesses. The Tax Foundation, an 85-year-old, non-partisan, tax policy non-profit attempted to quantify some of the potential impacts from the proposed tariffs. The bottom-line findings from the Tax Foundation were that tariffs would “shrink economic output by -0.4% and increase taxes by $1.2 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $830 per US household in 2025.” Please, also see table below (Scenario 2).
Source: Tax Foundation
In addition to American consumers having to pay higher taxes and prices for tariffed import products, there will be an estimated -344,000 jobs lost and there could be unintended consequences from retaliatory tariffs imposed on U.S. exports (i.e., our goods shipped internationally will be priced uncompetitively). In fact, Canada and Mexico just jointly announced tit-for-tat tariffs on U.S. goods and services, which will hurt these U.S. sales abroad.
With all of that said, the bark of the 25% tariffs on Mexico and Canada, along with the 10% in additional tariffs on China could be worse than the actual bite. Especially, if Trump uses these tariffs successfully as a negotiating tool and provides foreign countries with significant exemptions.
It’s also important to keep the size of these tariffs in context. Imports of foreign good and services only represented 13.9% of the Unted States’ Gross Domestic Product in 2023. Of that small percentage of imports, Mexico, Canada, and China only represent a fraction of that. It’s true that imports subtract from our country’s economic activity, but even if tariffs on foreign goods lead to the consumption of more American manufactured products, those benefits will be somewhat offset by higher inflated prices that will pinch consumer wallets. The new year marks an exciting new era of AI and global trade, but with that comes many new threats and opportunities. Throughout our 17-year history at Sidoxia Capital Management, we have successfully navigated these pivot points, and we are excited about effectively managing through this current transitional period.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in META, NVDA, certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BABA or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
Time in the Market Beats Timing the Market
It was another great year in the stock market. But predicting the timing of a bear or bull market is more challenging. Fortunately for investors, the stock market is up a lot more of the time than it is down. More specifically, over the last century, the stock market has been up 73% of the time for one-year periods and 94% of the time for 10-year periods (see graphic below and Time is What Matters). That’s why investors’ time in the market beats the fools’ errand strategy of trying to time the market. The long-term, consistent upward trend in stock prices makes investing in the stock market akin to sailing around the world with a persistent tailwind for the whole trip.
Source: Capital Group and S&P 500 Index
Many people believe investing in the stock market is gambling, but 73% and 94% odds for stock market gains seem a lot better than the probabilities of making money in Las Vegas. I explored this concept further in one of my recent articles (see Elections Status Quo). Even with those favorable, lopsided odds, recessions do occur, albeit infrequently. As you can see from the chart below, since World War II, we have experienced a dozen recessions averaging 10 months in duration. And guess what? Successful post-recession recoveries have equaled 100% (12 for 12). Despite the short-lived bear markets, stock prices have appreciated more than 30x-fold since the end of World War II.
Source: Yardeni.com
2024 Predictions
There were plenty of pundits and talking heads who falsely predicted a recession in 2024, but the odds certainly worked in investors’ favor. For 2024, the S&P 500 index gained +23%, and this comes on the heels of a banner 2023, which was up +24%. Experiencing back-to-back +20%-years is a rare occurrence, which hasn’t occurred since the late-1990s. As we look into 2025, achieving three consecutive positive years in the stock market is not unprecedented, but as I mentioned earlier, predicting the timing of a down market can be tricky.
Case in point, predicting the outcome of stock returns, even with perfect information can be very daunting. What would have been your prediction of the 2024 stock market return, if I told you the following events were to occur this year (in no particular order)?
- Two assassination attempts on a presidential candidate
- An ongoing bloody war between Russia and Ukraine that reaches one million deaths
- Brutal Israeli-Hamas war in Gaza moves into its second year
- Nationwide Palestinian protests across college campuses
- Israeli-Hezbollah war commences in Lebanon
- Rebels in Syria topple the Assad regime
- A hotly contested presidential election triggering fears of a civil war
- A Baltimore bridge collapses killing six people and costing the overall economy upwards of $10 billion
- After crypto exchange goes bankrupt, CEO is sentenced to 25 years in prison for fraud
Most intelligently honest people would not have predicted a +23% return, but that is exactly what happened. As part of this extended bull market, some major stock market milestones were achieved: 1.) the Dow Jones Industrial average eclipsed 40,000; 2.) the main benchmark S&P 500 index surpassed 6,000; and 3.) the NASDAQ index temporarily triumphed the 20,000 level. The market took a breather in December (the Dow -5.3% and S&P -2.5%), so we have momentarily pulled back from some of these key levels.
What Next in 2025?
As I alluded to earlier, pulling off a three-peat in 2025 with a third consecutive year of gains may be a difficult feat, but not impossible. There remains some room for optimism. First of all, we have an accommodative Federal Reserve that has cut interest rates three times in 2024 (see chart below) from a target of 5.5% to 4.5% (see red line). Currently, expectations are set for the Fed to make another two interest rate cuts in 2025. All else equal, this should provide some mild stimulus for both borrowers and investors in 2025.
Source: Yardeni.com
Next, we have a new pro-business administration entering the White House that has promised lower taxes and less regulation, which should aid business profits. Tariff policies remain a wildcard, but if used judiciously for negotiation purposes, perhaps there could be more bark than bite from the rhetoric. Time will tell.
The 2024 chapter has closed, and we have started the 2025 chapter. Regardless of the outcome this year, history teaches us the time in the market is much more important than timing the market. This philosophy has served Sidoxia Capital Management and its clients well over the long-run.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 2, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
No Market Misgiving on This Thanksgiving
We’ll see if there is any gravy left for investors during the last month of the year, but so far 2024 has been a satiating feast that has stuffed investors. There has been a cornucopia of items to be thankful for, including the Federal Reserve, which is expected to provide some dessert this month in the form of its third interest rate cut this year.
Investors certainly can also be grateful for the performance of the stock market, which has had a phenomenal year thus far (see chart below):
• S&P 500: +26.5%
• Dow Jones Industrial Average:+19.2%
• NASDAQ: +28.0%
On a two-year basis, the S&P 500 results look even tastier: +57.1%
Why is there such a large appetite for stocks? For starters, we are coming off a fresh election last month, and the majority of Americans decided to vote for the new administration that has promised additional stimulative tax cuts, and deregulation. If these promises come to fruition, these changes could augur well for corporate profits and a rising stock market. Regardless of whether your candidate won or lost the election, investors can agree there is less uncertainty with an uncontested election, which is welcomed by all. In addition, the two Fed rate cuts that started in September have also buoyed enthusiasm.
What is less clear are the effects of President-elect Donald Trump’s tariff policy threats, which if enacted run the risk of increasing inflation, stifling global trade, and jeopardizing future Fed rate cuts. Combined, these negative side effects have the potential of significantly dampening economic growth. On the other hand, if the tariffs are only used as a negotiating tool with our larger trading partners (including China, Mexico, Canada, and Europe), the tariff discussion will likely have more bark than bite. Time will tell.
Dissecting Stock Performance & Valuations
A lot of pundits are pointing to an overheated market, but on a 3-year basis, returns are looking more normalized (+8.2% per year) because of the -20% hit on stocks during 2022. As you may recall, much of the 2022 decline was caused by the Fed slamming on the economic breaks with its fastest rate-hiking cycle in four decades (raising rates from 0.0% to 5.5%).
Objectively, stock values, as measured by the Price-Earnings (P/E) ratio of the S&P 500, are at elevated levels – registering in at approximately 22-times next year’s forecasted profits. As you can see from the chart below, the stock market is priced at levels not seen since 2001 and valuations are roughly double what they were at the lows of the 2008 Financial Crisis.
Source: Yardeni.com
A major reason for escalated valuations has been the concentration of performance in the largest seven companies, or the so-called Magnificent 7 stocks, which include, Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla. In fact, the index concentration is the highest it has been in more than a half century – even higher than at the peak of the 2000 Tech Bubble when Cisco Systems, Microsoft, GE, Intel, and Exxon Mobil were the five largest companies by market capitalization (see chart below).
The good news is the other 493 companies in the S&P 500 (I call them the “Absentee 493”) are priced much more reasonably. This bifurcated dynamic between the largest seven companies versus everything else, highlights the plethora of opportunities available to be harvested in Value stocks, Small-cap stocks, and Mid-cap stocks.
As is evident in the chart below, the S&P 500 index (red-line), which is skewed by the Magnificent 7, is about 30% more expensive than Small-cap and Mid-cap stocks, which are hovering near historically attractive valuation levels.
Source: Yardeni.com
Value stocks (blue-line) in the market look equally attractive (about 30% cheaper than the S&P 500), as can be seen in the chart below.
Source: Yardeni.com
As always, the future is uncertain, and risks abound for next year. But 2024 has been a blockbuster year and there has been plenty to be thankful for, especially the performance of the U.S. stock market.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 2, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, AMZN, MSFT, GOOGL, META, TSLA, NVDA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in CSCO, GE, XOM, INTC or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Past Elections Status Quo Means No Need for Woe
Scarier than Halloween, the current presidential election is causing people on both sides of the political aisle to be frightened by the idea of their candidate potentially losing. Uncertainty is generally petrifying to investors, resulting in downward pressure on stock prices, but with less than a week until election day, the stock market is providing more treats than tricks. Sweetness has come in the form of a stock market up +20% in 2024 (up 8 out of 10 months this year), and only off -3% from its record high reached a few weeks ago. For the month, investors experienced modest declines as they braced for the election results. The S&P 500 dropped -1.0%, the Dow Jones Industrial Average -1.3%, and NASDAQ -0.5%.
Regardless of whether the red team or blue team wins the presidential election, the good news is history reminds us the end result has little effect on the long-term results of the stock market. As you can see from the chart below, over the last century, stock prices have gone up under both Republican and Democrat presidents. As Mark Twain famously stated, “History doesn’t repeat itself, but it often rhymes.” If that’s the case, past elections teach us, there is no need to fear the status quo of a Republican or Democrat president.
Source: Yardeni Research (Yardeni.com)
More recently, over the last 26 years, the stock market has been up significantly under each president, regardless of political party. Here are the results of the S&P 500 under the last three presidents:
- President Barack Obama(November 4, 2008 – November 8, 2016 – Democrat): +137%
- President Donald Trump(November 8, 2016 – November 3, 2020 – Republican): +51%
- President Joe Biden (November 3, 2020 – Present – Democrat): +63%
No matter who wins the White House, they will be inheriting a relatively strong economy. Consider the following tailwinds benefitting the new president:
- Strong Economy: The broadest measurement of economic activity, Gross Domestic Product (GDP), registered a healthy +2.8% growth rate for Q3
- Resilient Jobs Market: The just-reported unemployment rate of 4.1% today is representative of a strong but slowing job market. The unemployment rate has climbed modestly since troughing in 2023, but unemployment is still relatively low compared to historic levels much higher.
- Declining Inflation: As I pointed out last month (see Rate Cut Adrenaline) inflation has been on a fairly consistent downward trajectory over the last two years, which has allowed the Federal Reserve to cut interest rates by 0.50% in September. Moreover, based on the current economic environment, the Fed has signaled more stimulative interest rate cuts are likely ahead – economic strategists and pundits are predicting another 0.25% cut at the next Federal Reserve meeting that occurs over the two days following the elections.
- Record Corporate Profits (see chart below): The United States economy is the envy of the world, and the reason why is evident by the 65-year chart below showing record corporate profits and GDP. If you were an entrepreneur, where would you choose to start your company? China? Japan? UK? Russia? There’s plenty of room for improvements in our country’s policies, but there’s a reason the U.S. dominates in creating the largest and most profitable multi-trillion companies in the world.
Source: Calafia Beach Pundit
One area for improvement in the U.S. revolves around our fiscal debt and deficits. Our government simply spends too much money and doesn’t collect enough (tax receipts) to cover those expenses (see chart below). Another lesson to learn from our government’s excessive spending over the last four decades is that the glut of expenditures can’t be blamed on any one political party – the slope of spending is consistently up and to the right for all serving politicians.
Source: Calafia Beach Pundit
As I have mentioned in the past, stocks do not perpetually move up forever. However, regardless of the election outcome, we know from history that up-markets (bull markets) occur about 85% of the time, if we look at the last 100 years (see chart below). Analysis by Dimensional Fund Advisors shows that from 1926 – 2023, bull markets have lasted 994 months versus much shorter bear markets of 177 months.
Source: Dimensional Fund Advisors
It is very possible that stock prices may take a breather or correct under various election outcomes, but if we follow the historic status quo, there will be no long-term reason for woe.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Fed Injects Rate Cut Adrenaline
There were a lot of injections, of the COVID vaccine variety, four years ago, but now the Federal Reserve is injecting some financial adrenaline through stimulative interest rate cuts. Expectations are for seven more -0.25% cuts over the next 12 months, but this cycle started two weeks ago when the FOMC (Federal Open Market Committee) initiated a larger -0.50% reduction in the benchmark federal funds rate target (see chart below). For now, investors have enjoyed the boost of adrenaline, which should help lower consumer interest rates on things like home mortgages, credit cards, and car loans.
Source: Yardeni.com
For the month, the S&P 500 climbed +2.0%, the Dow Jones Industrial +1.9%, and the NASDAQ index +2.7%. The monthly gains are adding to a 2024 that is shaping up to be a potentially banner year. With one quarter left in the year, the S&P has catapulted +21% higher, the Dow Jones Industrial Average +12%, and the NASDAQ index +21% for the first nine months.
Economy Strong, So Why Cut Now?
Before the Fed’s last action a couple weeks ago, the last Fed rate cut occurred in 2020 (a -1.50% cut) in the midst of a global pandemic with the aim of boosting financial activity while the brick-and-mortar economy had effectively been shut down. But compared to today, the economy is performing much better. Second quarter GDP growth came in at +3.0% with 3rd quarter GDP growth forecasts coming in at +3.1%.
So, if things look so great, why would the Fed be cutting rates to stimulate the economy now? In short, inflation has been coming down (see chart below) from a peak of 9.1% a couple years ago to 2.5% last month (near the Fed’s long-term 2.0% target). And although the current unemployment rate is low at 4.2%, it has nevertheless weakened and climbed substantially from a 3.4% level last year).
Source: Trading Economics
China Chugs Higher
While the U.S. economy has been leading developed countries during the post-COVID recovery period, China’s financial system has been struggling due to a collapsing real estate market and deteriorating consumer spending. As a result, the Chinese stock market has been drastically underperforming other foreign markets, until Beijing just recently announced a number of stimulus initiatives last week in hopes of buoying economic growth closer to its 5% target.
Here are some of the Chinese government measures:
- China plans to issue 2 trillion yuan in special sovereign bonds
- China’s central bank cut its reserve requirement ratio by 50 basis points
- Fiscal policies to focus on increasing consumer subsidies and controlling government debt
- Shanghai, Shenzhen plan to lift key home purchase restrictions
Investors cheered the announcements by binge-buying Chinese stocks, as you can see from the CSI 300 China index, which rocketed +21% higher last month – the largest monthly gain since 2008.
AI Revolution Continues
While economic headwinds and tailwinds continue to swirl, the AI (Artificial Intelligence) revolution has persisted in the background. While some traders have solely focused on AI juggernaut NVIDIA Corp. (NVDA), which has steamrolled its way into becoming a three trillion-dollar valued company, there are other tech titan companies like Oracle Corp. (ORCL), which are also riding the AI wave. Just last month, Oracle’s billionaire founder, Larry Ellison, stated, “We have 162 data centers now. I expect we will have 1,000 or 2,000 or more data centers…around the world.” Each large-scaled data center can cost in the hundreds of millions or multi-billion-dollar range. With hundreds of billions (if not trillions) of dollars to be spent on the multi-year AI infrastructure buildout, as you can imagine, there is a large, diverse ecosystem of other companies that stand to benefit. At Sidoxia Capital Management (www.Sidoxia.com), we have identified a wide swath of AI investments that have benefited our investors and stand to do so in the future.
Flies in the Ointment
By simply judging the performance of the U.S. stock market, one might think there is nothing for investors to worry about. But as is always the case, there still remain some flies in the ointment. With a tight, hotly-contested presidential election just one month away, coupled with escalated wars in the Mideast and Ukraine, future volatility or a correction in the stock market should come as no surprise to anyone, especially in light of the rich gains already registered this year. Another concern is the risk of rising inflation, which could rear its ugly head again if the Federal Reserve misjudges its rate-cutting program and overheats the economy.
Normally, interest rate cuts are reserved by the Fed for periods when the economy is headed towards a recession or there are major systemic disruptions in the financial system, which affect market liquidity and/or bank lending. That’s not the case today. Thanks to declining inflation and a robust but weakening job market, the Fed has been equipped to provide investors with a healthy injection of adrenaline through an early round of interest rate cuts, which has contributed to the powerful stock market gains. So far, the adrenaline is doing its job.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including AMZN, MSFT, META, GOOGL, NVDA, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Another Hot Month, Another Fresh Record
Summer is coming to a close, but the weather is not the only thing that remains hot. The stock market has been scorching hot as well. Both the S&P 500 and Dow Jones Industrial Average blazed to all-time record highs last month. In fact, both of these indexes have risen seven out of eight months this year, including gains in the last four consecutive months. More specifically, the S&P 500 was up +2.8% last month and +18.4% this year, while the Dow Jones has advanced +1.8% for the month and +10.3% for the year.
How can this surging bull market be in existence while undergoing a war between Russia and Ukraine; military conflict in Gaza; a nasty Japanese Yen Carry Trade unwind; a highly divisive upcoming presidential election; a weakening economy; and rising unemployment (see chart below)?
Source: Calafia Beach Pundit
For all investors and traders, there is never a shortage of issues to worry about, even when times are good. However, despite the long laundry list of concerns, there are plenty of opposing tailwinds supporting the upswell in stock prices, starting with growing record corporate profits with strength forecasted through 2026 (see chart below).
Source: Yardeni.com (Yardeni Research)
Another factor underpinning the strength of stocks has been the decline in the inflation rate. The latest headline inflation rate (CPI – Consumer Price Index) fell to 2.9% in July, and if you exclude shelter costs, inflation has fallen below the Federal Reserve’s 2% target rate.
Source: Calafia Beach Pundit
Conversely, the story was quite different in 2022 when the Federal Reserve began its crusade against out-of-control inflation (see chart below) by starting its first of 11 interest rate hikes that spanned from January 2022 through July of 2023. The net result was a stock market that tanked -19% in 2022. More recently, the Fed has clearly signaled that inflation is more under control with traders predicting a 100% probability of a -0.25% or -0.50% cut in the targeted Federal Funds interest rate on September 18th. The Federal Reserve Chairman Jerome Powell gave a dovish speech at the annual policy meeting in Jackson Hole, Wyoming strongly portending September action – the first cut in four years since the pandemic.
AI Arms Race on Spending
Another dynamic contributing to new stock market record highs is the boom in AI (Artificial Intelligence) spending by the technology behemoths like Amazon.com Inc. (AMZN), Microsoft Corporation (MSFT), Meta Platforms Inc. (META), and Google – Alphabet Inc. (GOOGL). As I have been talking and writing about for some time (see World of AI), there is an arms race in spending to create the next, latest-greatest large language model (LLM) like ChatGPT. The goal is to bring more efficiency and accuracy to businesses and provide consumers more pleasure and time savings at both work and home. As you can see from the chart below, the four colossal technology companies previously mentioned are currently on a run-rate of spending more than a mind-boggling $200 billion annually, much of that going to the king of AI GPU (Graphics Processing Unit) manufacturing, NVIDIA Corporation (NVDA).
Why are companies spending so much on AI? Because they agree with NVIDIA CEO, Jensen Huang, who last week stated, “Generative AI will revolutionize every industry.” Despite all the spoils migrating to NVIDIA, traders were still looking for warts on the AI supermodel when they reported 2nd quarter results last week. Nonetheless, NVIDIA still delivered its 5th consecutive quarter of greater than 100% revenue growth, while generating revenues of almost $100 billion over the last 12 months – not too shabby. Although greedy investors wanted more, the stock was still up +2% for the month and +141% so far this year.
Source: Sherwood News
While economic, political and geopolitical concerns have been boiling over around the world, the stock market continues to sizzle higher. Declining inflation and interest rates, escalating business profits, and spiking artificial intelligence expenditures across corporate America have kept stocks cooking to record highs. It’s been a sweltering summer but not yet too hot for investors to get roasted out of the stock market kitchen.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 3, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including AMZN, MSFT, META, GOOGL, NVDA, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
The Great Rotation
There are many styles of investing, and many ways to make money in the stock market. Just like the styles of men’s ties or women’s dresses come in and out of fashion, so too do the styles of investing. Some stick around for a long time, while other fads flop in short order, leading consumers to rotate into new fashions. I’m still waiting for my Bermuda shorts and pleated pants to come back in style. At this year’s Olympics, the broad array of styles has been on full display.
Growth & Tech in Style
The stock market has been on a one-way freight train riding on the coattails of large capitalization growth stocks, primarily technology stocks, especially those associated with technology and artificial intelligence (AI). You can see the dominance of the Growth style over Value in the 30-year chart below.
Source: Yardeni.com
When the blue line is sloping upwards, that means Growth stocks are outperforming Value stocks, and when sloping downwards, Value stocks are outperforming Growth Stocks. For most of the 1990s, Growth was dominant, and ever since the aftermath of the 2008 Financial Crisis, Growth stocks have once again overshadowed Value stocks a majority of the time (2022 being a short-lived reprieve for Value stocks).
This mega-Growth trend reversed last month (at least temporarily), and investors decided to rotate out of large winners into the previously shunned areas of the market, including Small Cap and Value stocks. You can see in the chart below that Small Caps (S&P 600) have underperformed Large Caps (S&P 500) over the last six years.
Source: Yardeni.com
Is this rotation sustainable? At this point, I’d say it’s too early to tell, but during periods like these, when Wall Street darlings like NVIDIA Corp (NVDA) suffer a large hit (e.g., down -17% for NVDA since the June peak), diversification benefits are pushed to the forefront. The lesson of the year 2000 technology bubble bursting taught a generation of investors that getting overly concentrated in a single sector of technology stocks can be seriously dangerous to your wealth and financial well-being. By selecting a diversity of eggs in your basket, like Value and Small Cap stocks, you can protect your nest egg when there are substantial rotations like we experienced last month. Diversification is a core tenet of our investment philosophy at Sidoxia.
In order to place the recent rotation in perspective, let’s look at how a range of indexes performed last month. The Dow Jones Industrial Average increased a hefty +4.4%, while the S&P 500 finished up modestly +1.1%. As investors rotated out of technology (-3.3% – Technology Select Sector SPDR Fund / XLK), a good chunk of those sales rotated into small cap stocks (+10.3% – iShares Russell 2000 ETF / IWM) and value stocks (+5.1% – iShares Russell 1000 Value ETF / IWD).
Despite concerns over global geopolitics, political election madness, and a slowing economy, investors are more focused on the positive prospect of future interest rate cuts by the Federal Reserve, starting in September with a probability exceeding 90% (see chart below).
Source: CME Group
Some investors got caught up in the dizzying rotation last month, but timing these rotations is nearly impossible and one month does not make a long-term trend. Rather than getting caught up in a fool’s errand, make sure your investment portfolio is diversified and built to withstand volatile rotations.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including NVDA, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
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