Are We Out of the Woods? Jarvis (R) Update July 22, 2022

Markets continued higher in the first week of earnings. Are we out of the woods? We answer that question and more in 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.

Glad to be here. Glad to be talking markets and talking investment opportunities. That's what we do.

Absolutely. And there's a lot to talk about this week. Just a brief preview for everyone. We obviously saw continued momentum in markets this week. First of all, we're going to do an earnings review. Saw quite a few earnings came out this week. Secondly, we're going to talk about our bounce back list. Certainly a lot of us are looking for ways to juice the returns in the second half. And then third, we're going to give you a brief earnings preview of next week, which is the biggest week of earnings we've got coming up in this earnings season. Before that, we've got a few announcements for you. We produce this show for you, the everyday investor, whether you have a 401(k) or an IRA, handle your own investments, or work with an advisor that buys mutual funds and ETFs. If you'd like a second opinion on what you're doing with investments, we'd love to talk with you. Make sure you give us a call. We'll put the number at the bottom of the screen here and, uh, schedule a meeting. Also, if you're an institutional investor, we've got something for you as well. It's our research service, Left Brain Investment Research. We put out about 8 to 10 full-length stock reports per month, as well as The Chosen, which is our favorite stock and bond opportunity each month. So check that out. We'll put the details in the description below. Either way, if you're an individual investor or an institutional investor, we'd love to have you sign up for a biweekly newsletter. That's the Jarvis Weekly, and that's an on week this week. So check that out. Again, we'll put the link in the description below and you can sign up to get that in your inbox. Every Saturday morning. With that, we'll jump right into the market recap. The S&P was up 5.5% this week, NASDAQ even better, 7.2%, and the Russell was up 7.6%. So pretty broad-based rally. Um, the VIX, which we watched as an indicator of volatility, was down to 23 this week. So we're moving back toward that normal level around 20. Um, Nolan, we're going to cover earnings in the first topic, but what are your main takeaways from this week's action?

We're still seeing this tremendous volatility, both up and down. We see it in stocks. We certainly see it in the bond market. Hopefully with the VIX settling down, hopefully it stays settled down. It'll give us a lot more confidence that maybe the worst is behind us. My other thought, well, I have two, but the other one goes to earnings. It's the summer, volumes are lower. So it's nice for the market to refocus its attention on earnings, which are fundamentals, which is what drives stock prices. Price. You know, it's nice to see a reprieve, a little bit better sentiment here this earnings reporting season. Companies that even miss earnings reports, like a Bath Body Works this week, are still rallying, uh, à la Netflix. So whether you point to report a good number or a bad number, the market is taking it in stride, which leads me to my second thought, that there's been so much negative talk There's been a torrent of news, mostly negative, this year. Maybe most of it is priced in, and unless we get some terrible surprise out of nowhere, hopefully we can start to settle down here and start to gain some ground in the second half of the year.

Well, an end to the negativity would certainly be positive, Nolan, so we're going to keep our fingers crossed for that and jump right into topic 1. So topic 1, we're calling Earnings Season Is Here. We say this ad nauseam, but this is our favorite time of year as investors. We get a great chance to listen to the CEOs tell us what's going on inside their businesses. We get a chance to look at the numbers and everything in between. Major companies reported this week. Tesla was one, TSLA, we'll put the chart up here for you. Great reaction there. As Nolan mentioned, Netflix, NFLX, great reaction there, despite some sort of negative news there. And then also we heard from a lot of financials. Last week we heard from Wells Fargo. This week we heard from Goldman Sachs, GS, big rally in GS, uh, Bank of America, BAC. Did anything stick out to you in any of these names?

No, it's good to hear the different sectors, how they're doing, and more importantly, how the CEOs feel about their business, how the boards feel about their business, and the commentary, particularly from the banks. Uh, they're so wide-ranging, they touch every sector of the economy and So whether it's credit losses or what they're seeing in economic activity, that's important. I think the big ones come next week. No huge read-throughs this week. It's good to see the investor reaction. We've had some guide downs, market tends to be taking it in stride. So, so far no fireworks for me. I guess the Netflix one for some people was a big one, but I'll be more interested next week when we get to Roku.

[Speaker] What about Tesla, Nolan? Is there any takeaway there for you? I know we haven't had a chance to really digest it completely, but. Obviously, like around a 10% spike on earnings from Wednesday night. Is that a stock that people should go out and jump back into?

You know, there's a lot that surrounds Tesla. There's a lot of drama with the CEO, and then there's a lot of moving parts. You know, I think the Tesla business itself is fine. It's healthy. There have been some questions on competition. You know, a lot of people are getting into the EV space. The question is, are people going to catch up to Tesla? I think the answer there is no. But then you still have to deal with the multiple. They do have free cash flow and earnings. I think their competitive position's probably going to be unchallenged, but the stock is pricey. And in an environment where the investors are questioning valuations, that would be the one thing that would give you pause. What we can say is it's cheaper today than it was in January.

It's definitely true. All right, we're going to jump right into topic 2. So topic 2, we're calling bounce-back candidates. Nolan, the question on many investors' mind— obviously we're all kind of struggling whether we're stockholders or bondholders— how can we play catch-up? Shorts appear to be a little bit on the run, especially in these really hated names for the first half of 2022. We're talking about the ARK type of stocks, that's Shopify, SHOP. We're talking about Block, the old Square, SQ, Teladoc, TDOC, and then finally One that really made a lot of money for a lot of people was Trade Desk, TTD. But a lot of these stocks have really struggled here in 2022. Are these the type of stocks you like for the long term as bouncebacks? And, uh, what characteristics are we looking for?

Stocks that we think can have the potential to double over the course of the next 2 to 3 years, that's generally what we look for. And there are certain characteristics we're looking for. We like acceleration, acceleration in revenues. Acceleration in earnings. Hopefully the earnings are accelerating faster than the revenues. And we're looking for strength and competitive positions, and hopefully there are some catalysts. And typically we say we can, you know, get there one or two ways. One is the valuation increases a lot. The second is the earnings increases a lot. And hopefully you get both engines of growth working and you can double quicker. Or a lot of these stocks have just been hammered so far this year. So, I think for the bounce back, some people are looking for, hey, can I catch up within 1 year? Because stocks are down over 50%. I think that's what the hypergrowth buyers are thinking. I'm not so sure that this, that that's going to work this time with the same group. Historically, it's not been that group that has led the way, it's been a different group. So, in this time, yes, we do have a bounce back list. I'm starting to feel much better about it. We do have some degree of confidence that over the next 2 to 3 years, we know that there are some businesses out there that are going to do extraordinarily well with the potential to double. The names that we have on our list are a little bit different than the names you mentioned earlier. We're looking for valuations that have an opportunity to grow. So things with, you know, price earnings ratios below 20, price sales relation, uh, ratios below 10, and in some cases below 5. So we can get some multiple expansion, but more importantly, We're highlighting businesses that have continued to grow even with the economic and geopolitical turmoil that we've seen, that have good enough business models and competitive positions where we think those earnings are going to continue to grow.

One stock we've identified using our Jarvis system is In Mode, that's INMD. They sell machines that are used in minimally invasive cosmetic procedures, so a big advance over the way that people did plastic surgery before, just a few years ago. What do you like about InMode? I know it's got a pretty low multiple. What else do you like? And then also, what can viewers do if they want to hear more about our, the stocks on our bounce back list? We've got about 20 stocks on the bounce back list.

Yeah, so they should reach out to us. They can go to reach us at online, uh, you see the URL behind us, leftbrainir.com. You can reach out, that's probably the best way. You can see the subscriptions we offer. You you can hit the Contact Us button on the website, and we'd love to hear from you and respond. As far as the bounce-back list and then Enmode goes, yes, I would say that's number 1 on our list. First, let's talk about the risks, just so clients are aware. This one is a small cap, and the market capitalization here, the market size is $2 billion. And so generally, if you have a smaller company, you have a lot more volatility. And if the economy does do a really nasty, something worse than a recession, or smaller companies tend not to have the same financial wherewithal as larger companies to withstand it. So just be aware of that. That being said, Enmol, we like it. You mentioned the industry that they're in, the minimally invasive surgical, and rather somebody's getting a tummy tuck or a facelift or anything along those lines, typically, you know, you have to go under the knife to do it. And surgery is always dangerous. In this case, they use devices using the new technology, RF, radio frequency. Patients can return to work actually the, the next day, and the results have been really, really good, and the cost is very competitive. So it's an area that has tended to hold up even in economic downturns. If you take a look at the beauty industry, it tends to be very recession resistant, uh, rather this older or younger people The devices that they, uh, that they make, uh, are going for a sort of a wider group of usages as well. So they're expanding usage on it. It's an Israeli-based company, so they sell devices all over the world. They have thousands of physicians that are using these devices, and we really like the economics. Typically, when you think of these equipment companies for medical technology, you think of some razor, razor blade strategy where they sell the hardware very cheap and then the consumables, the products that go into it, is where they make margin. Not the case with Inmode. Throughout their history, most of their revenues and earnings have come from product sales from the devices themselves, which carry very, very high margins. They have started to make some new devices with consumables. So we expect more consistency with revenues. We expect the margins to actually go up over time. Now with all this, uh, you are getting a very cheap stock. You know, the stock trades at about 15 times earnings. Again, they have earnings. So, this isn't just revenue. Uh, trades less than 5 times sales. Believe it or not, it's a $2 billion market cap. They have about $400 million in cash and they're growing over 20% per year. Just a very attractive business. The competitive positioning is very attractive. It's a large total addressable market. We wrote it up last year, our analyst did. The stock was $114 when we wrote it up in 2021 and we greenlit it. At that time. Today, investors can buy it right around $30. So this is number 1 on our bounce-back list candidate. We love them when the stocks go cheaper and the businesses have gotten better, and, and this fits that category.

I like it, Nolan. It's a cheap stock, and, uh, we got the vanity of the U.S. consumer behind your back, so that's positive. Before we move on to topic 3, we want to remind you to like and share the video, leave a comment, Helps the algorithm help other investors find the video. And then of course, subscribe to the channel and hit the bell for notifications when the next video comes out. With that, we'll move right to topic 3. This is the earnings preview. This is a lightning round, Nolan. Next week we've got Google, GOOG. We've got Microsoft, MSFT, Visa and Mastercard, Boeing, Shopify, Meta, the old Facebook, Qualcomm, ServiceNow, Teladoc, InMode, Apple, Amazon, Intel, and Roku all next week. What are you looking most forward to and what do you hope to learn next week?

Wow, we won't be getting much sleep. Those are the big, big heavy hitters as far as growth is concerned, and how investors react to these earnings reports will go a long way to determine how the markets behave next week. Growth has bounced back this week. It hasn't been really earnings-driven It's been more sentiment, technical, but we get into the meat of it next week. I'll be interested to hear, yes, how their year is going so far. Are sales continuing to grow or are they continuing to moderate? What they're projecting for the second half of the year. But there's a couple areas I'm really interested in, Brian. One of them is enterprise spending. For technology, we know is deflationary. It'll be interesting to hear. We're starting to hear some rumors. That maybe enterprise customers starting to cut back on some of their spending. So we don't have that fact-based yet. ServiceNow last week made some mention at a conference which drove software stocks in general and ServiceNow down specifically. So I'll be waiting to hear as these companies announce whether that's actually truly the case. I'll be looking to hear whether cybersecurity spending is hold— holding up, whether it's slowing down or whether it's speeding up. I'll be really interested to hear that. And then finally, Now, a lot of these growth stocks are getting cheap. We've heard companies starting to freeze hiring, they're starting to lay people off. So we know that they're preparing for tougher times. That means they're protecting the balance sheet a lot more. So I'll be really interested to hear what the CFO said that they're going to do with their cash.

Absolutely. We're going to hear from a number of oil companies as well, and Exxon, Phillips 66, and Chevron. So those are all names we're going to keep an eye on. Nolan, thanks for all your insights. Uh, we'll be back with you next week to cover all these earnings. And, uh, with that, have a great weekend and we'll see you again next week.