In this episode of the Jarvis Update, Brian Dress (CFA) and CEO/CIO Nolan Langford review the week’s market performance, noting a modest rebound in the S&P 500, NASDAQ and a stronger Russell 2000 as 10‑year Treasury yields rose. They explain the classic inverse relationship between growth‑oriented software indices and interest rates. The hosts then shift to micro‑level opportunities, highlighting two small‑ to mid‑cap growth stocks that they consider attractive: Celsius Holdings (CELH), a health‑focused beverage company benefiting from a recent Pepsi partnership, and EPAM Systems (EPAM), a digital‑transformation services firm with a founder‑led model, solid earnings growth, and a temporary valuation dip due to its large Eastern‑European workforce amid the Ukraine conflict. After discussing each company’s upside and specific risks, they introduce an “enhanced bond” strategy: purchase investment‑grade bonds trading at a discount (e.g., $0.85 on the dollar) to lock in a higher yield‑to‑maturity, then redeploy the price discount (the $150 saved per $1,000 face) into growth‑stock positions. The Starbucks 2032 3% coupon bond is used as a concrete example, illustrating a ~4.8% YTM when bought at $850, with the residual cash allocated to the highlighted growth stocks. Throughout, they promote their research service, newsletter, and invite viewers to contact them for personalized advice, while maintaining a conversational yet analytical tone and a cautiously optimistic outlook on the presented opportunities.
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Markets have been volatile and headline-driven. Is there a way to invest and push the short-term macroeconomic considerations to the side? We answer this question and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.
Thank you. Good to be here.
Yes, Nolan, it's good to be back with a positive week in the markets this week. We're going to preview the episode for you here. We've got two topics as we usually do. The first is who is actually doing well? And then the second topic is a way to execute a strategy in a volatile period. Before we get started, a couple of announcements. First of all, we produce the show for you, the individual investor, whether you have a 401(k) or an IRA, work with your own investments or work with an advisor. If you'd like a second opinion in a difficult market, we'd love to talk. Make sure to give us a call at the number below. Also, if you're an institutional investor, we've got something for you as well, and that's our investment research service. Our analyst team provides you 8 to 10 full-length stock reports each month. Either way, sign up for our biweekly newsletter that comes out next week. We're off this week to get on the mailing list and we'll get that to you every Saturday. And then finally, thank you so much to the viewers that have recently found us. We've noticed our— a little bit of an uptick in our viewership numbers. We'd love to find out who you are. Leave a comment or any investment questions that you may have. And also, of course, like and share the video if you find it useful and subscribe. Make sure you get notifications every time the videos come out. And that's every Friday morning. We'll jump right into the market recap. We did break a 2-week losing streak. S&P was up about 0.4%, NASDAQ about 0.3%, and the Russell was the leader this week, 0.7%. So definitely positive to see. 10-year Treasury rates continue to move higher. Interest rates generally do. Uh, we actually saw a 15 basis point— that's 0.15% move in the 10-year Treasury rate in one day on Tuesday. So obviously there's a lot of volatility in rates. I wanted to bring up the inverse relationship between growth stocks and interest rates. So I'm going to put a chart up on the screen. This is the last one month between the IGV— that's a software index— and also the 10-year Treasury rate. And as you can see, very strong inverse relationship between the two. When IGV is down, you'll see that the Treasury rates are up and the Treasury rates are down. You'll see that IGV is up. It's blatantly obvious as you look at the chart. Nolan, initial thoughts on this week's action?
Glad to hear you say that we had some positive results because certainly it didn't feel that way coming back from Labor Day. People coming back from vacations weren't in a buying mood. So I'm glad the last couple of days we've seen some buying come into the market.
We're going to just jump right into our two topics. So topic one is just a simple question. Who is actually doing well? So Nolan, we've noticed over the last couple of months, small and mid-cap businesses seem to be doing a little bit better than sort of the mega-cap and the large-cap businesses. Mega-cap seems stuck and actually may have pulled forward some of their results into 2020. And we've had pretty negative action from those stocks in 2022. Companies of all sizes, however, are taking the opportunity. We're seeing a lot of macroeconomic headwinds. And a lot of different factors that are causing business challenges. So companies, no matter whether they're facing those challenges or not, are taking the opportunity to guide down their results. Uh, in future earnings reports, they'll have a little bit of a lower bar to clear. Uh, plenty of companies with strong growth. We just got through earnings season. We read a lot of transcripts. We saw some positive news from a number of businesses. So first of all, Nolan, who's doing well in small cap?
I think in small and mid-cap, and just so the viewers know, we consider small cap around that $2 billion is really the big bright line for small cap. For small and midsize companies, again, those would be companies from $2 billion to $10 billion. It seems to me, taking a step back from earnings, when you look at the transcripts, you look at the price action, you look at the valuations, I do think there's a land of opportunity here. Valuations aren't high. A lot of these businesses are really attractive businesses. Earnings are really accelerating, valuations aren't high, you have cash flow, um, you have really in general good balance sheet. And then there's an opportunity there. I think we've seen this where you have some larger companies that aren't growing. This gives them an opportunity to step in and buy growth at a reasonable valuation. In general, that's it. I think your question was which companies are, are— and I think it's interspersed. You know, you and I were talking earlier, certainly there are some technology companies that, that do look good. There's a beverage a rich consumer defensive company that you and I both like. So I think it's wide-ranging, and I'm not surprised to hear you say that the Russell 2000, which is the index for small and mid-caps, uh, has been leading.
Excellent, Nolan. And we always preach here, we're not really talking about the macro so much, we focus on the micro. So this is a great time for you to choose one of those, uh, smaller mid-cap names and tell us and the viewers a little bit about it.
You know, the last one I said is a beverage company. The company is Celsius. And for those that have been on the beverage shelf lately, they make an energy drink. And if you're like Brian and I, where you work out, you need all the help you can get. Celsius has a canned beverage that allows you to burn calories. I think it has caffeine, but it's low on all the other stuff. So it's a quote unquote healthy drink, started at the gym. And it's moved on. So you can go to your favorite beverage cooler, whether it's Target or the gas station or whatever. Distribution is growing a lot. Last month they did a deal with Pepsi. Well, Pepsi took a stake in Celsius. I believe it was a 10% stake. In exchange, Pepsi is going to be distributing the Celsius product. There's a lot of things to like. Consumer tastes really don't change. And if you take a look at one of the great growth stocks over the last 20 years, it was Monster, which is another beverage company.
My goodness, Nolan, it does have caffeine. I can tell you from experience. That's Celsius, that's CELH. A lot of investors are looking for ways to play growth. I think sort of the intuition that folks are having is, you know, growth stocks, and a lot of stocks are down. They want to find a way to play it, but maybe small caps may not be their bag. Maybe they want to look at a company that's a little bit larger. Can you tell us about the company that we want to highlight here, Nolan? That has a lot of operations out in Eastern Europe.
Yeah, so let's talk EPAM. The ticker is EPAM. This is a company that helps companies get digitally transformed. You know, really, if you're a company, you have to modernize your operations to connect with customers, whether it's the front, middle, or back end. And we've seen that coming out of COVID From a momentum and a catalyst standpoint, It's all there. We really like the leadership. It's a founder-led business. Uh, the valuation is very reasonable at 5 times sales. Uh, the earnings report that came out was just stellar. Revenues are still growing at 30% plus. It's a profitable company. The issue that they had earlier this year is about 35 to 40% of their workforce was based in Eastern Europe and Ukraine. And as soon as those Russian tanks stepped on Ukrainian soil, the shares dropped about 40%. That's when we really got attracted to this business. Of course, we've had it in our database. We've had exposure off and on throughout the years, but this really got us excited because this is exactly what we look for, an opportunity in a great business for some outside temporary event.
Yes, really like EPAM. Lots of like there, really strong founder-led business. And, uh, we've got catalysts. You know, when this war finally comes to an end, probably going to be very positive for EPAM. And even if it doesn't, they found a way to adapt. So it's very impressive.
Just so the listeners are aware, you know, obviously both of these businesses have risk. All stocks have risk. I'd be remiss for not mentioning that. With Celsius, I think the big risk, it does trade at a high valuation. That's an issue. It's a smaller-cap company. So market volatility, the shares are volatile. So there's a chance of loss there. And then in the case of EPAM, again, 35, 40% of their business is in— it's not their revenues that are there, but their workforce, their software developers and engineers are there. So to the extent that conflicts either gets worse or they're not able to shift their workflows other places, that could impact their business. But all that said, we like both of these companies even with those risks.
All right, we'll move on to topic 2. So topic 2 is how do we execute on buying growth stocks? Nolan, you mentioned a few of the risks that are inherent to the, to the two companies that we mentioned. There's also a lot of market risk out there. Uh, we've seen a big pullback in markets over the last year. We're not completely sure that we found a bottom in markets. So a lot of investors are, uh, concerned and rightly so. So Nolan, we wanna talk a little bit about a strategy that we've been putting together in the office, um, that might empower investors to take a cut at some of these growth stocks. So we see in interest rates have moved higher and that's creating some dislocations and some opportunities. One of the ones that we're seeing is that investment-grade bonds are moving lower in price, higher in rates. So that means that there are bonds out there with low coupons that actually have pretty high yields to maturity because they have lower prices. We're seeing a lot of those bonds trading below par at discounts, maybe $0.80 on the dollar, $0.85 on the dollar, substantially below par. So there's an opportunity there. So, Nolan, tell us a little bit more about the strategy that we think can empower investors to take advantage of those higher rates, lock in some income, and then also take a little bit of risk in the growth stock arena.
So we're always looking for opportunities in something somewhere, and we're calling this an enhanced bond strategy. Bonds are typically issued in $1,000 face, start at $1,000 generally. So if a bond was issued today and it was a $1,000 bond that was issued and it's a 5-year bond, 5 years from now, I expect to get my $1,000 back. And then in between then, I expect to get the promised interest payment. And let's just assume it's 5%. So $1,000 in, $1,000 out, and 5% a year, or $50 per $1,000 bond. Now in between today and the 5-year maturity, the bond can trade at theoretically any price. It could go lower than $1,000 or higher than $1,000. What we've seen though is bonds that were issued, particularly in the last 2 to 3 years when interest rates were really low, were issued with low promised coupon payments. So 2 to 3%, because at one point after COVID, the Federal Reserve Board here lowered interest rates to zero. So it gave corporations an opportunity to issue debt or refinance debt with low promised payments. However, rates are up now this year, as Brian said earlier. What that means is those $1,000 bonds in some cases are trading at $800 or $850. So as long as the company doesn't default, purchaser is going to get their $1,000 back and they're going to get their planned interest payment as long as they hold. Definitely gives an opportunity for people on the sidelines looking to purchase these bonds. You can buy them below par. The case that we're going to look at with this bond, we can pay $850 for it. We know at the end we're going to get back our $1,000 per bond as long as the company doesn't default. and then in the meantime we get the coupon. So it sets up an interesting investment strategy that Brian's going to give us more detail on.
Sure, Nolan. So as you mentioned, if you bought— you want to buy $1,000 worth of a bond trading at $0.85 on the dollar, it's going to cost you $850 for that $1,000 at face and you got $150 left over. So what we think is maybe a novel strategy is potentially you could purchase $150 worth of growth stocks like the two that we mentioned before. You buy income stocks, you could buy other bonds. The possibilities are limitless. But we think it's an opportunity to get some exposure to growth with a little bit less risk, more of an investment-grade bond portfolio type of risk profile. So that's what we're looking at. We've covered that in last week's video. We've covered it this week and we'll continue to cover it over the next few weeks. We think it's a novel strategy. We'd love for you to reach out if you'd like to learn more and if it's appropriate for you. Nolan, we've got one bond we wanted to talk about. We wanted to make this a little bit more concrete for folks. Can you talk about one bond from a household name that we see that might fit the strategy?
Yeah, the bond that we like is Starbucks. We like the stock, but they have a bond that's issued. It has a 3% coupon. So that means if you buy $1,000 worth of these bonds, it'll pay you $30 per year. However, you don't have to pay $1,000 for the bond if you bought it today. Today it was trading at about $850. So again, my $850, we know it's going to turn into $1,000. The maturity of this bond is 2032. So we put up a 10-year bond. I get my 3% based off of the face. But remember, I only paid $850 for it. Put them together, my yield to maturity, if I buy it at $850, is about 4.8%. We like the idea of taking and buying $10,000 of face value for this bond at about $8,500. And then taking the $1,500 and going to buy some stock that we think has a lot of upside potential in it. Even if that $1,500 does not work out, let's imagine we're completely wrong and the stock goes bankrupt. I'm still getting my 3% coupon based off the bond and my $8,500 is still going to turn into $10,000 in 2032. So long as Starbucks doesn't go bankrupt, this is a very high quality bond and a very high quality company. Chances are very, very, very low I'm going to not get repaid. And so it gives me an opportunity because I'm buying this bond at a discount to take that discount and to go do something more with it.
Absolutely. Nolan, really love this strategy. I'm attracted to it. Hopefully others will be. We'd love to explain it to you in more detail. So again, put our number on the screen here below if you want to learn more. If this is a strategy that might work for you, your risk tolerance and your circumstances, get in touch with us. So Nolan, we're zero sleeps from an NFL game. We're very excited. Bills versus Rams tonight. When this video is played, we'll know the answer of who won, but we're excited to be here back in the NFL season.
The NFL faithful, this is Christmas, it's kickoff tonight, and I'm just as excited as you to see some pigskin.
Yes sir, Nolan. Thanks to Nolan and thanks to the viewers. We'll see you again next week.
