Momentum Portfolios Soar: Inside My 137% Growth Strategy
October 20th, 2024 Update
MACRO
Financial conditions keep improving. GDP for Q3 is expected at 3% and at 2.6% for Q4 2024.
Liquidity is improving (M2) so I don’t see crashes in the near term because of economic conditions.
Elections are the main variable on the table.
INDEXES
The Nasdaq closed at all-time highs with the weekly MACD crossing the signal line, indicating positive momentum.
A very similar chart for the SP500:
This is the 6th week of positive returns for the Sp500, now at all-time highs. All moving averages have a positive slope pointing upwards.
EARNINGS SEASON HIGHLIGHTS
Earnings season has started so it is good to understand how is it going so far.
1. Overall Performance vs. Expectations
The third quarter earnings season for the S&P 500 has commenced with mixed results. A higher percentage of companies are reporting positive earnings surprises compared to recent averages; however, the magnitude of these surprises is smaller. Additionally, analysts have significantly lowered Earnings Per Share (EPS) estimates for companies in three key sectors since September 30. Despite these challenges, the index is showing year-over-year earnings growth for the fifth consecutive quarter, although this growth rate is the lowest since Q2 2023 at -4.2%.
2. Sectors Beating Both Revenue and EPS Expectations
Financials, Health Care, Consumer Staples, and Information Technology are the standout sectors that are surpassing both revenue and EPS expectations:
Financials:
Drivers: Higher interest rates, increased lending activities, and robust investment banking revenues.
Performance: Financial institutions within this sector are reporting EPS and revenues above analyst estimates, driven by enhanced profitability from higher interest rates and diversified financial services.
Health Care:
Drivers: Advancements in biotechnology, pharmaceuticals, and medical devices.
Performance: Many companies in the Health Care sector are exceeding EPS expectations and experiencing strong revenue growth due to innovation and operational efficiencies.
Consumer Staples:
Drivers: Steady demand for essential goods.
Performance: Companies within this sector benefit from reliable sales of everyday products, maintaining robust revenue streams and surpassing EPS forecasts through effective cost management and strong brand loyalty.
Information Technology:
Drivers: Continued investment in digital infrastructure, cloud computing, cybersecurity, and software solutions.
Performance: The Information Technology sector is leading revenue and earnings growth, with many companies reporting EPS and revenues that exceed analyst expectations. This sector's strong performance supports the overall positive earnings growth of the S&P 500.
3. Sectors Raising Their Outlook in Terms of Earnings and Revenue Expectations
Financials, Health Care, Consumer Staples, and Information Technology are also the sectors that have raised their outlooks for both earnings and revenue:
Financials:
Outlook: Enhanced profitability from higher interest rates and diversified financial services have led to raised guidance for both earnings and revenues.
Health Care:
Outlook: Continued innovation and strong sales in biotech and pharma products have prompted the sector to increase its earnings and revenue projections.
Consumer Staples:
Outlook: Effective cost management and stable consumer demand have enabled this sector to elevate its earnings and revenue expectations.
Information Technology:
Outlook: The sector remains confident in its growth trajectory, supported by ongoing digital transformation initiatives and strong demand for technology products and services. This confidence has led to raised earnings and revenue guidance for many IT companies.
4. Sectors with Revised Outlooks to the Downside in Terms of Revenues and Earnings
Energy and Industrials are the primary sectors that have seen their outlooks revised downward:
Energy:
Revenue Declines: The sector is experiencing a year-over-year decline in revenues due to fluctuating oil prices, changing energy policies, and reduced demand in certain segments.
Earnings Expectations: Analysts have significantly lowered EPS estimates for companies within the Energy sector, contributing to a decrease in the overall earnings growth rate for the index.
Industrials:
Earnings Expectations Decline: The Industrials sector has faced downward revisions to EPS estimates.
Revenue Performance: While some areas within Industrials maintain revenue growth, the overall earnings outlook has been tempered by these revisions.
Conclusion
The S&P 500's third-quarter earnings season highlights a selective landscape where Financials, Health Care, Consumer Staples, and Information Technology are leading by exceeding both revenue and EPS expectations, thereby strengthening their positions within the index. Conversely, Energy and Industrials face challenges with declining revenues and earnings forecasts, reflecting broader economic and market headwinds. Overall, while the market shows resilience in key sectors, the underperformance in others suggests a more cautious and selective investment approach moving forward.
SECTORS PERFORMANCE (last 6 months)
In hindsight, all the best-performing sectors have clear explanations. AI is driving growth in tech, utilities and uranium; geopolitical factors are influencing uranium and aerospace; interest rates are affecting the home construction sector and financials.
I expect the Technology sector to remain strong. Additionally, I see numerous opportunities within the Biotech sector.
My Take
The backdrop remains favorable for stocks, with inflation under control, solid economic data, and interest rates trending downward.
Valuations are neither cheap nor excessively high. Do I expect the stock market to keep climbing higher? I don’t know what will happen. However, I anticipate volatility as we approach the elections.
Earnings are showing a slowdown in growth velocity, making the market more selective.
PORTFOLIOS
10X UNDERPRICED GROWTH PORTFOLIO
The portfolio is up 11% since inception (on open positions), with HIMS, SOFI, and APP leading the pack. Below is a snapshot of this young portfolio:
What I Am Doing This Week:
Risk Management: My stop loss has been updated to manage risk effectively.
New Purchase: I am buying 286 shares of HEAR if it touches USD 17.45 during the week.
This purchase would bring the total number of companies in the portfolio to 10, which is the maximum I have decided to maintain at any given time.
Company Spotlight: Turtle Beach Corporation (HEAR)
Turtle Beach Corporation (HEAR) operates as an audio technology company in North America, Europe, the Middle East, and the Asia Pacific. It develops, commercializes, and markets gaming headset solutions for various platforms, including video game and entertainment consoles, handheld consoles, personal computers, tablets, and mobile devices under the Turtle Beach brand.
Revenue Growth: Expected to grow by 21%.
Return on Assets (ROA): Currently at 15%, accelerating to 18%.
Asset Growth: 16%.Earnings Margins: Improving from 6% to 8%.
Below is the current weekly chart for HEAR:
Chart Analysis:
The price is breaking out from a triangle formation on increased volume.
The MACD looks poised to cross above the signal line.
Let’s see if the stock will keep climbing higher.
MOMENTUM PORTFOLIOS
10X Mid-Large Cap Momentum Portfolio
My stop on ZETA was triggered by a 56% gain, leaving me with 4 positions. I have updated my stop-loss levels.
This momentum portfolio is now up 137% (74% annualized).
What I Am Doing This Week:
Stop-Loss Updates: I have updated my stop-loss levels.
New Purchase: I am buying 53 shares of HQY if it touches $89.10 USD.
Healthequity (HQY): HEALTHEQUITY is at the crossroads between the Technology and Healthcare sectors.
Below is the weekly chart for HQY:
Chart Analysis:
HQY is breaking out with a recent MACD crossover.
It has been overperforming the S&P 500 over the last few weeks.
10X SMALL CAP MOMENTUM
This is the portfolio I am waiting to close. However, my only holding continues to perform well and is now up over 100% since I purchased it.
Overall, this portfolio has been underperforming the S&P 500 since its inception. I believe I have learned a lot about buying small-cap stocks through this experience.
I have updated my stop-loss level for CMPO.
As soon as I exit, I will close the portfolio and focus on just one momentum portfolio, managing a maximum of 5 positions at once.
BEST OF ARKK Portfolio
Last week, I started an experiment to test my investment method by selecting 11 stocks from the ARKK Innovation Fund, an actively managed ETF focused on disruptive innovation.
It is too early to assess the outcome of this experiment. If you want to learn more about the process and see my picks,click here.
That’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.