Crushing the S&P 500: Momentum Plays, Undervalued Growth, and the ARKK Challenge Results
December 1, 2024 - Update
November delivered a robust +6% gain for the S&P 500, marking a highly profitable month. Year-to-date, the index is up an impressive 27.9%.
Historically, December has a 74% likelihood of being a positive month based on data since 1950.
My Take
The markets are in a healthy place, with key moving averages trending upward. This momentum could support a continued rally into the new year.
From a monetary perspective, the U.S. environment remains favorable. M2 data (as of October 2024) suggests a slightly dovish monetary policy, and easing credit access is a boon for businesses.
Inflation appears manageable, with a November nowcast of 2.7%, marginally higher than October's 2.6%. Oil prices (Brent) at $71 per barrel—near yearly lows—further support inflation expectations, as lower energy costs reduce price pressures.
The Fed seems committed to a gradual easing of rates, slower than anticipated but still trending downward. This measured approach bolsters market confidence while supporting economic activity.
While valuations are elevated, they remain reasonable given earnings growth expectations of 20% for 2025. If realized, this growth should sustain current valuation levels.
Potential policy changes, such as tax cuts and spending reductions under the Trump administration, could enhance corporate profitability without significantly affecting inflation. However, geopolitical risks remain a concern, and resolutions to ongoing conflicts would be welcome.
After 2024's strong rally, a market correction is possible. Corrections are natural and often present opportunities to accumulate quality assets at better prices.
Key Themes to Watch
Earnings Recovery: The anticipated 20% earnings growth for 2025 could drive gains, particularly in technology and healthcare.
AI and Automation: These transformative trends are fueling corporate reinvestment, benefiting technology, industrials, and consumer discretionary sectors.
Credit Stabilization: Easing credit conditions should support capital-intensive industries like infrastructure and energy.
Sector Rotation: A shift toward undervalued or defensive sectors, as well as opportunities in mid and small-caps, could emerge after 2024’s rally.
Global Supply Chain Investments: Renewed investment in aging infrastructure and logistics could create opportunities in materials and renewable energy.
My Outlook
The markets are well-positioned for growth in 2025, though a pullback or consolidation in the near term is likely—and healthy. Such pauses provide opportunities to rebalance and increase exposure to sectors benefiting from easing credit and reinvestment trends.
Inflation remains under control for now, but shifts in Fed policy or fiscal changes could alter the outlook. Staying disciplined and nimble will be key to navigating the next phase of this market cycle.
Portfolios
1. My 2024 7 Picks Portfolio (link to portfolio spreadsheet)
This portfolio, launched on January 1st, 2024, uses my stock-picking methodology to test if it can outperform the S&P 500.
Performance: Up +146% YTD, beating the S&P 500 by 5x.
Highlights: Applovin, Nvidia, and Zeta are the standout performers. However, Zeta recently underperformed due to a short report questioning its practices. I plan to exit at year-end.
Luck or Strategy? Semler's gains came from its investment in Bitcoin, which I didn’t anticipate.
Recovery: Evercommerce and Bumble have been rebounding in recent months.
I’ll wait to see how the year concludes.
2. 10X Underpriced Growth Portfolio (link to portfolio spreadsheet)
Launched mid-September 2024, this real-money portfolio focuses on undervalued growth companies.
Strategy:
Focus on Undervalued Growth: Companies with >10% YoY revenue growth, undervaluation, asset expansion, and improving profitability.
Technical Entries: Purchases are made after a base formation and near key moving averages or favorable breakouts.
Risk Management: Wide initial stop losses (15-25%), adjusted over time based on market and stock performance.
Rebalancing: A target of 10 positions, reviewed quarterly, with weekly updates to stop losses and market adjustments.
Market Awareness: Monitors macroeconomic factors and halts purchases during negative market signals.
Performance: Up 31% (+2569% annualized), driven by Applovin (APP) and SoFi Technologies (SOFI).
Next Steps:
Buy: 380 shares of Arcutis (ARQT) at $13.10 (Stop Loss: $9).
Rationale: Arcutis is a fast-growing biotech company with a projected revenue growth of 317%.
Here is the weekly chart of Arcutis:
3. 10X MOMENTUM PORTFOLIO (link to portfolio spreadsheet)
This portfolio, now fully invested, focuses on momentum stocks.
Performance: Up 63.5% on open positions. Highlights include Rocket Lab (RKLB) with a +265% return in 2.5 months (+49,871% annualized).
Current Value: $33,350 (up 233% in under two years) vs. $10,000 initial investment.
Comparison: Outperformed the S&P 500's 46% gain over the same period by nearly 5x.
4. Best of ARKK Portfolio (link to portfolio spreadsheet)
An experiment to outperform Cathie Wood’s ARKK fund using my stock selection process applied to ARK holdings. (Original post here: Can I Beat Cathie Wood Picking 10 Stocks Among Her Holdings?)
I want to see if I can outperform the ARKK fund managed by Cathie Wood by applying my stock selection process to ARK's holdings. The experiment involves creating a portfolio based on specific financial criteria, scoring stocks on growth, profitability, and value metrics, and regularly updating the picks.
Stock Picking Process:
Stock Universe: Started with the 120 ARK holdings.
Filters: Narrowed to 52 stocks with >15% revenue growth, >$100M in revenue, and >$75M market cap.
Fundamental Analysis: Further refined to 16 stocks based on profitability, asset growth, and valuation.
Top Scoring: Selected 11 stocks based on a scoring model considering growth, profitability, and investment metrics.
Portfolio Creation: Allocated $10,000 equally across the 11 picks.
How is the portfolio doing?
Performance: Up 39% (+21,532% annualized), outperforming ARKK's +22.4% by 16.5 percentage points.
ARKK has been performing well with a return of +22.4%. However, my stock-picking process appears to be working, as I am outperforming ARKK by an additional 16.5 percentage points.
While it’s still early in the experiment, which began on October 15th, I wanted to backtest my approach to evaluate its effectiveness.
To do this, I created 10 hypothetical portfolios, each containing 11 randomly selected stocks from the same 120 ARKK fund holdings. Here are the results:
Average return of the random portfolios: +14.5%
Best-performing random portfolio: +25%
Worst-performing random portfolio: +3%
ARKK performed well compared to the average return of the random portfolios (22.4% vs. 14.5%).
Most importantly, my hand-picked portfolio not only outperformed ARKK but also beat the average return of the 10 random portfolios.
Conclusion: At this point, either I’ve been very lucky, or my stock-picking process genuinely has an edge.
Below is a screenshot of all 10 random portfolios:
Final Thoughts
The week has been strong across all portfolios. Let’s see how December shapes up!
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Important: This is not investment advice. Please consult a licensed financial advisor before making any investment decisions.
Disclosure: The content has been reviewed using artificial intelligence to enhance readability and ensure grammatical accuracy.