10 signs of exuberance (NOTW#93)
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Both indices were up this week again, although today I put my “pessimistic” hat on and brought 10 signs of exuberance. I believe that, despite significant optimism in certain pockets of the market, the environment is the exact opposite in other pockets. I discuss what industry I am “overexposed” to and why.
Without further ado, let’s get on with it.
The new portfolio management tool
This week I unveiled the Portfolio Management Tool. I’ve been working for a while on a dashboard app for Best Anchor Stocks and it finally “saw the light” this week (albeit in beta version). The app includes:
A risk/IRR matrix to understand at a glance how the portfolio is positioned and to help an investor maximize the portfolio’s risk-adjusted return
My portfolio with weights, returns…
A transaction log that includes all the transactions and the activity over the last 3 months
The portfolio’s industry and factor exposure
The watchlist and how it’s evolving
An event calendar with all the relevant events for the portfolio companies
The tool is not finished and I expect to continue adding (useful) features. The next thing I’ll be working on is a way to be able to see all the valuation models in one place.
I also held a webinar for subscribers this week, focused among other things on explaining how the tool works. The webinar has been already published in case you missed it.
Articles of the week
I published two articles this week. The first one was Deere’s earnings digest.
The company reported acceptable earnings but the market did not like them much. I don’t think the Deere thesis is a one-quarter thesis, but there’s no denying that the stock had run a bit ahead of itself.
The second article of the week was an article in which I shared the 4 companies that I bought this week.
I also included two honorable mentions that I’d had loved to add to but for which the conditions I am looking for are not yet satisfied. I still have a bit of cash and don’t rule out having even more cash if I trim some high-flyers in the portfolio. I know Peter Lynch would say that one shouldn’t trim the flowers to water the weeds, but there are certain themes that seem to have grown ahead of themselves and others that have been left considerably behind.
Market Overview
Both indices were up again this week:
Even though indices are at ATHs showing no signs of slowing down and the fact that I believe that AI is a real disruptive technology that’s here to stay, I do think that there are several signs of exuberance in the market. Let’s go over some of these:
Hyper-concentrated portfolios around one theme: every time one starts to see that investors are concentrating their portfolios around one theme (crazy that some actually think that holding 20 names in the same factor is being diversified), watch out. I’ve also seen a considerable amount of one-stock portfolios, which is also a sign that risk management is nowhere to be seen.
Leveraged thematic ETFs everywhere: several leveraged ETFs have appeared around topics like AI, memory chips, optics…This is never usually a sign that valuations are low, but who knows!
Sell side upgrading companies based on 13Fs: the actions of a very prominent AI investor (who some people claim is the Cathie Wood of the current generation, although I don’t necessarily agree with this) are clearly influencing sell side price targets, which not only is a sign that things are hot, but also doesn’t say anything good about the professionalism of some sell-side analysts.
YTD screenshots daily (and investors being “humble”): this might actually be one of the most solid indicators. We are seeing a constant flow of people sharing their YTD returns which in some cases are astronomical (upwards of 1,000%). This would be, in and of itself, a strong sign, but the best people are those who are up 30% YTD and say that “it could be better.” Return expectations are out of the charts, and this is also visible in the following “topping” signal.
Stocks that are up 20% YTD categorized as “not moving“. Return expectations are so high that AI-stocks that are up 20%+ YTD are categorized as “stale” or a source of opportunity cost. People are in for a rough surprise when stocks eventually stop returning 100% every month!
13Fs moving stocks double digits: when prominent AI investors reveal new AI positions in their 13Fs or other regulatory fillings, stocks are moving 10%+. This is not a sign of a healthy market.
People believe that under no circumstances can the AI trade falter: despite all these signs, some people believe that AI is unstoppable and that it can only go up. The reality is that, despite AI being very real, the AI trade can falter anytime and there are many ways that AI slows down that have little to do with the technology per se. Of course, this doesn’t mean it has to happen but it does show that many are not even considering the potential risks.
PTs based on “vibes”: Price targets are being updated based on questionable 2030 multiples. The only thing you need to enjoy such optimistic multiples from the sell-side is being categorized a “bottleneck.”
Luxury car dealerships in Korea are full: memory chips are doing so well that Korea is experiencing an incredible wealth effect. This in and of itself is not a sign of anything, but definitely not a sign of a bottom!
All the AI/space companies considering an IPO: this is always a strong indicator that things have run ahead of themselves.
None of these constitute a top in and of themselves, but all together I do think they do demonstrate that some things might have run ahead of themselves. Maybe I am very wrong and AI still has legs and stocks will continue going up 20% per week, but what does not seem sensible is to have 100% exposure to AI, more so considering the above and the fact that there are other sectors/industries that have fared poorly and seem very attractive. One of these sectors I believe is healthcare. This is something I’ve discussed several times in the past, but the healthcare industry…
Is trading at trough multiples on trough earnings after the pandemic
Is accelerating top lines
Is pretty resilient to any king of economic environment
Enjoys a positive skew to AI (more discovery leading to more volumes down the line)
This doesn’t mean that the entire healthcare industry is attractive and we’ll most likely need a rotation for stocks to do well, but I do believe certain pockets are very attractive and this is the reason why my portfolio is significantly exposed to the topic (the entire weight is 94% because the rest is cash):
We are seeing some early signs of this rotation to industries like healthcare and software, but who knows how long it will last.
The industry map was mixed this week:
Source: Finviz
The fear and greed index remained in greed territory:
Source: CNN
My purchases this week
Like I discussed above, I added to 4 companies this week. I added to…
Two software businesses
An entertainment business
A healthcare business
So, pretty varied: