From Holidays to Market: Launching a New "Underpriced Growth" Portfolio
September 8, 2024 Update
I’m back from my holidays in the USA where I had the chance to see many of the brands from the companies that I trade. A journey I enjoyed a lot.
I’m starting a brand new portfolio. More on this below.
Now let’s get back to the markets.
MACRO
Liquidity: M2 has started to grow again, although at a low pace. Yet M2 stopped declining back in April:
The worst in terms of monetary restriction should be behind us.
CREDIT
Although the consumer in the US is suffering as demonstrated by Credit Card delinquencies (very high by historical standards) and Personal Saving rates (very low by historical standards), financial conditions have been improving and are away from alarming levels:
With the FED lowering interest rates soon, we should avoid any form of credit crunch, hence a market stock crash.
INFLATION
It has been declining since March:
Current nowcasting points to a 2.56% print for AUG and 2.35% for September, which means that the job for the FED to tame inflation should be over.
As you know, the worries of the market are around recession fears again. We had a mini crash back in August fueled by recession fears.
I have mentioned in the past how the best scenario for stocks, historically, is when the FED cuts interest rates with no recession. The worst scenario is a FED in panic mode, cutting fast to avoid a recession. We are back again to the discussion about whether we are going to have a soft landing, no landing, or hard landing (=recession).
The market will interpret any bad data as a sign of a hard landing and will sell off.
There is no question that the FED is moving in the right direction, yet is to be seen if they are late or not to save the economy from a recession.
My take is that we are consolidating from an anomaly (pandemic) and we’ll need more time to get back to more normal business cycles.
GDP GROWTH
Looking at the data that we have at hand, the economy does not look like is entering an imminent recession:
Then, looking at the New York FED Nowcasting indicator it stands at 2.6% for Q32024 and 2.1% for Q42024.
Right now, it is difficult to say that a recession is around the corner.
SEASONALITY and VALUATIONS
September is historically a bad month for stock as shown below and the start of this September is confirming it.
Looking at seasonality only, we should expect a sideways or negative market till the end of October and close strongly in the last 2 months of the year.
The last macro aspect I want to consider is valuations. Is the Market undervalued, undervalued, or fairly priced? The data I look at suggests that we are between being fairly valued and slightly overvalued.
Typically crashes occur when we are in clearly overvalued territory which is not the case.
MY TAKE
The backdrop for stocks remains good until proven otherwise by very bad economic data, which is not apparent yet.
Considering valuations and economic fears of a recession is difficult for stocks to go up in a straight line.
The SP500 is up 14% YTD and the NASDAQ is up 13%: very good results so far.
In an election year, we can expect volatility between now and the election resolution.
It is time to be ready with your watchlist to jump into strong names at a discounted price.
THE INDEX
The Nasdaq does not look good as both the 10-week and 20-week moving averages are now pointing down. Yet, the 40-week moving average is about -3% from current levels and should be an area to watch closely if we get there. Let’s see how it develops.
SECTORS & INDUSTRIES
Interest rates sensitive sectors like Real Estate have been doing well. Regional banks also, because of the improved risk profile. then Gold and Consumer defensive have been performing well, reflecting current recession fears.
PORTFOLIOS
I’m starting a new portfolio. More on this below. First,let’s get to my Momentum Portfolios:
10X LARGE CAP MOMENTUM
Not much to share here. I’m still in ZETA 0.00%↑ that has held well the storm so far. I’m not touching anything here.
10X SMALL CAP MOMENTUM
Also here, my CMPO 0.00%↑ position has held well the storm. I slightly raised my Stop Loss. I’m not adding anything here as I want to close this portfolio as soon as I’ll be kicked out from CMPO.
MY 7 PICKS FOR 2024 PORTFOLIO
The 7 stocks I picked on Jan 1st and intended to be held for the entire year are at +39% on average right now, still clearly beating the SP500 by a factor of 2.78 times:
ZETA 0.00%↑ is the clear winner at this point with APP 0.00%↑ and NVDA 0.00%↑ above the 100% mark YTD.
Let’s see how it develops.
MY NEW PORTFOLIO: UNDERPRICED GROWTH
Going forward, I want to keep one Momentum Portfolio with a maximum of 5 names at any time, also, I want to have a mid-term portfolio with positions that I can keep for several months up to over a year.
My focus will be on undervalued businesses that are growing fast with revenues >10% YoY and ideally above 15% YoY coupled with improving profitability and investing fundamentals.
I have created a watchlist of companies that fit that criteria.
Also, I have created a document to summarize my strategy.
I’m starting with a 100k portfolio, now fully in cash.
Below you’ll see the entire strategy and you’ll notice right now I cannot buy anything as per my own rules: the 20-day simple moving average of the SP500 is trending down and that does not allow me to buy stocks. That is the minimum market trend requirement before buying any stock.
UNDERPRICED GROWTH Investing StrategyÂ
Objective:
To build a portfolio of fast-growing, undervalued companies that are expanding their assets, growing profitability, and demonstrating consistent earnings growth. The strategy focuses on disciplined entry and exit points, risk management through stop losses, and regular portfolio rebalancing to optimize returns.
Key Principles:
Growth Focus: Target companies with a minimum of 10% YoY growth, ideally above 15% projected growth for the next two years (Revenue Forward).
Valuation: Invest in companies that are undervalued and expanding as shown by YoY asset growth.
Profitability: Ensure that companies are profitable and improving profitability consistently.
Technical Analysis: Use technical indicators, such as 10-week, 20-week and 40-week simple moving averages (SMA), to time entries after stocks have formed a base for at least four weeks.
Breakout Strategy: Consider breakouts as an additional buy setup, but only if the risk-reward ratio remains solid. Avoid chasing too stretched stocks and wait for some consolidation if necessary.
Risk Management: Implement a wide hard stop loss (15-25%) and adjust it over time to protect capital. Tighten stop losses in case of adverse market conditions or if the stock becomes too extended from key moving averages.
Rebalancing & Monitoring: Rebalance the portfolio quarterly, keeping an eye on macroeconomic factors and adjusting positions based on the evolving market environment.
Key Rules Summary
Growth Criteria:
Target companies with a minimum 10% YoY growth.
Focus on companies with over 15% projected growth for the next two years.
Valuation Check:
Invest in undervalued companies with expanding assets (YoY asset growth).
Profitability:
Ensure companies are profitable with consistent earnings growth.
Technical Entry Points:
Buy stocks after they’ve been forming a base for at least four weeks.
Ideal entry is when the stock touches the 10-week or 40-week SMA.
Breakout Consideration: Enter positions on breakouts only if the risk-reward ratio remains solid. Avoid chasing stocks that are too stretched and wait for consolidation if necessary.
Position Sizing:
Initial capital of 100k USD
Invest in positions in thirds or halves.
Stop Loss Strategy:
Set initial stop losses at 15-25% to minimize being shaken out too often.
Adjust stop losses to target an average of 7-10% loss on exited positions over time.
Tighten stop losses if the stock becomes too extended or if the market turns negative.
Profit-Taking:
Take some profits if a stock goes parabolic (sharp upward move).
Take profits if the stock is significantly extended from key moving averages.
Market Conditions:
Monitor SP500 or NASDAQ for signs of a market downturn.
Cease new purchases and tighten stop losses if the 20-day SMA declines and the 10-week SMA turns down.
Portfolio Structure:
Targe 10 positions.
Rebalance quarterly.
Review Weekly to consider buys, sells and/or update stop loss levels.
Quarterly Portfolio Review Checklist
Portfolio-Level Assessment:
Overall Growth & Valuation:
Are all portfolio companies still meeting the growth and valuation criteria?
Are there any companies that no longer meet the required YoY growth or have become overvalued?
Market Conditions:
Review macroeconomic indicators (interest rates, inflation, GDP growth).
Assess overall market direction (SP500, NASDAQ) and adjust stop-loss strategies if necessary.
Portfolio Rebalancing:
Ensure the portfolio is diversified across different sectors.
Check that the number of positions remains within the 10 limit.
Adjust position sizes based on new assessments.
Position-Level Assessment:
Growth Consistency:
Is the company still growing at the expected rate? (Check latest earnings reports)
Review asset growth and profitability improvement over the last quarter.
Valuation & Technicals:
Is the company still undervalued, or has it become overvalued?
Assess the stock’s position relative to key moving averages (10-week, 40-week SMA).
Consider if the stock is too stretched and whether consolidation is needed before making any decisions.
Stop Loss Adjustments:
Adjust stop losses based on the stock’s current performance.
Tighten stop losses if the stock has become extended or if fundamentals have deteriorated.
Profit-Taking Considerations:
Evaluate if the stock has gone parabolic or is significantly extended from key moving averages.
Decide whether to take partial profits or exit the position.
Earnings & Fundamental Changes:
Review any changes in the company’s earnings trajectory or fundamentals.
Determine if these changes warrant a reevaluation of the position.
Tha’s all for the week!
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Important: This is not investment advice. Consult a licensed financial advisor before making any investment decision.