Hi reader,
Both indices enjoyed very positive performance this week, driven by a handful of companies. This has been the case for quite some time, but instead of complaining, we can learn quite a bit from the indices. I also discuss what I think about companies that don’t provide analysts with financial guidance.
Before jumping into the market commentary, let’s take a look at the articles of the week.
Articles of the week
I uploaded two articles this week, both exclusive for paid subscribers. The first article was Intuit’s earnings digest:
The company is, together with Adobe, one of the few software companies that has managed to beat and raise during the most recent earnings season. I believe this demonstrates that…
The company owns its destiny
It provides mission-critical products
The second article of the week was the first part of the analysis of the company I added most recently to my portfolio. I shared the brief investment thesis for free in that article:
If you want to have access to all the content you can subscribe using this link (I am honestly overwhelmed by the reception the paid subscription has had, so thank you for that):
Next week I will upload the second part of this analysis. The week after that I will upload two articles:
A deep dive on one of the companies in my portfolio (80+ pages discussing pretty much every aspect of a company that has not fared well year to date)
A free article that will be accompanied by a podcast that I am recording next week
Market overview
The markets were significantly up this week. The Nasdaq rose more than 3%, whereas the S&P 500 rose more than 1.5%:
It’s pretty astonishing how the index's performance is getting increasingly skewed toward the performance of a handful (or even less) of companies. A good chunk of the indices’ gain year to date can be attributed almost exclusively to Nvidia, which is up 166% year to date and more than 9% this week. Rather than criticize it, I believe this is precisely what portrays the strength of the indices. These are rarely rebalanced (i.e., they don’t trade often), and by definition they apply Peter Lynch’s advice:
Don’t cut your flowers and water your weeds.
Winners typically end up making a higher proportion of the index, and they tend to keep winning. If they don’t, their weight diminishes, and indices are automatically rebalanced. In my opinion, there's quite a bit to learn from indices as individual investors. Of course, there’s a flip side: if the companies that make up a significant portion of the indices do poorly in the coming years, then the indices are in for a rough awakening. Do I think this will happen? I honestly have no clue because I have not studied Nvidia, Apple, and Tesla (among others) in depth. Still, I believe that instead of complaining that a handful of companies are driving the performance of the indices, investors may be better off learning from them and applying the lessons to their own behavior.
Changing topics…this week, I uploaded the following to Twitter, asking for companies that satisfied two conditions:
They don’t provide guidance
They have a significant amount of insider ownership, or the founder is still involved
I received a fair amount of replies and decided to build a dashboard in Finchat to understand the correlation between a company satisfying these conditions and positive long-term performance. I shared the list in another tweet and came out with some interesting findings:
Over a 3-year performance period, 12/21 companies, or 57%, managed to beat the S&P 500
Over a 5-year performance period, 14/21 companies, or 66%, managed to beat the S&P 500
Over a 10-year performance period, 15/21 companies, or 71%, managed to beat the S&P 500
This data seems to point out that both characteristics are correlated to positive performance, especially over long periods. Of course, there are important limitations to this exercise. The first one is that the sample size is extremely small. The second one is that the small sample is skewed positively, meaning that I doubt people will reply with a company that has enjoyed terrible performance in the past.
The exercise, however, got me thinking…is guidance good or bad? I don’t have a strong opinion on the topic because I hold companies that provide guidance and companies that don’t, but I am honestly getting increasingly comfortable with companies that don’t provide guidance whatsoever. Many believe such companies are opaque, but I believe this opacity should not be worrying so long as the company/management team has an excellent track record of capital allocation and operational excellence. If anything, no guidance demonstrates management humility (to an extent) as they imply they don’t know what will happen.
Providing guidance has several downsides, the most important being that management can become short-term oriented in trying to meet it. I am currently reading ‘Financial Shenanigans,’ and it’s pretty crazy how a significant proportion of all accounting frauds relate to a management team willing to meet a short-term target. That’s a significant risk that companies that provide no guidance and have a significant owner don’t have to bear, at least not to the same extent. I am currently analyzing a company that satisfies both conditions and honestly, after reading the earnings calls of the last 8 years, I am liking a lot what I see.
The industry map clearly portrays the divergence between the performance of the Mag 7 and the rest. Pretty much everything was red, but the largest companies in the world were significantly green:

This is also one of the reasons why I said a couple of weeks back that people that claim that “all stocks are expensive” are missing the big picture. With market at all time highs there are companies that are very expensive, others that are fairly valued, and others that are very cheap. Falling into generalizations is never a good deal when it comes to investing.
This can also be seen in the fear and greed index. Despite the indices being at or close to all-time highs, the fear and greed index dropped to fear territory:

Note that one year ago, this indicator was at extreme greed. Have companies or the macro landscape changed so much over that period? I’d say neither have, which demonstrates how sentiment and fundamental performance can dislocate occasionally.
That’s all for this week, the rest of the content is reserved for paid subscribers.
Have a great day!