"Boring" is the Way to Play: Jarvis Update 5-13-22

Does persistent selling in the market have your nerves frayed? Our prescription is simple: let's get boring. We share our current views of how to cope in this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thanks, Brian. I got two words: go Heat!

Yeah, looking good. 3-2 on their way.

Big game tonight.

That's right, that's the closeout.

Hopefully. Fingers crossed.

All right, we'll, uh, start with the preview. Um, this week we cover the continued sell-off in tech and our, our thoughts on the term buy the dip. Also some other areas and some additional conclusions we've reached after digesting some more earnings reports. And finally, the way we are looking to invest in this environment, which is boring sectors like energy, food, and consumer products. And a couple of announcements. Of course, we've got our subscription service. Head over to leftbrainir.com. This is the last week you can take advantage of our $59 promotion with the, with the coupon code Jarvis59 at checkout. New subscribers for the basic subscription can get the subscription for $59 a month for the first 3 months. And we also wanted to let you know the Jarvis newsletter is now biweekly. This is an off week and then next week we'll be back. So make sure you check that out and fill out the, the form to be on the mailing list. With that, let's jump into the market recap. So the S&P was down around 5.2% for the last 5 days of trading. That's Friday to Thursday. NASDAQ just a shade under 8% and Russell with the small caps just a shade under 6%. Outside of the major indexes, we saw some major trouble in Bitcoin and cryptos. We'll throw up the chart for you of Bitcoin, um, really sold off quite heavily last week. Um, there's a lot of news going on there with stablecoins. Uh, it's not really our bailiwick, but it's definitely something we're keeping an eye on. We also saw some wild swings and some cash-burning tech names, especially this morning. We woke up, some names were up 10 to 20%. Pretty shocking action, but a lot of that evaporated by the end of the day. Earnings season is starting to wind down. We've learned a lot. Nolan, what are your general thoughts on what we've seen in the last week?

Confusion reigns, my friend. It is, uh, it's not a pretty environment, um, at this point for investors, and it's somewhat confusing. Uh, same thing with today. So when you were, you know, opening up in your monologue talking about the, you know, those numbers on the downside this month. It was a shocker and it was eye-opening. It's happened very, very fast. And we were saying earlier in the year that you had this sort of reverse relationship with interest rates. Interest rates up, growth stocks down. But it seems to have spread, and it's not just growth stocks that are trending down. They're not trending down or taking the elevator down. It sort of spread. And so I'm interested to see when it'll stop. And it's interesting to see as well on earnings, you know, we have had some significant beats. We'll talk about them here in a second. And we have had a lot of positive earnings reactions. And so I'll be watching to see if those gains hold through the rest of the month into the summer.

[Speaker] All right, Nolan, with that, we'll jump right into our first topic. So topic 1, we're calling, is buy the dip dead? You know, a lot of the pandemic darling stocks are down more than 50% and some are down 80% and 90%, just to name a few, Shopify, SHOP, Teladoc, TDOC, Zoom Video, ZM, DocuSign, DOCU, DraftKings, DKNG, many more. Investors don't seem to have thrown the towel in yet, Nolan. I know for the last 2 or 3 years, we keep hearing the term buy the dip, BTFD, as they say on Twitter and other avenues. But I don't think people have really thrown the towel in yet. I think they're still trying to buy the dip. We actually saw that ARK fund, ARKK, is still receiving inflows. So I think people are still trying to pick a bottom in growth and some other names. What do you say to all these folks that are still trying to buy the dip in pandemic names and other stocks and kind of how do you view buy the dip going forward?

So it leads me to believe that we haven't had capitulation yet. I know a lot of people are waiting for a bottom, and then they're looking for— they're trying to pick the bottom to look for an opportunity to rip these things on the way up. I would just say be very careful here. You know, history would suggest that when leadership does re-emerge, it's going to be from a brand new group. It'll probably be a surprising group. But probably not these shares that were pandemic darlings that have graced the front of client statements. And I know a lot of that is behavioral bias where we get the anchoring, hey, the stock was 100 or 200 or 500, pick the price, just 8 months ago. And if it went from 500 to 50, if it gets back to 500, it's a 10-bagger. I would just be very, very careful in trying to do that. Hasn't worked so far, and history would suggest it's going to be a tough, uh, you know, a tough course to pursue.

Yeah, Nolan, I think it might make sense for a lot of investors to just start with a blank sheet of paper and let go of the past, and let's look at something new for the future. Um, so that's topic 1. We'll move to topic 2. So topic 2, earnings reports continue to trickle in. We're moving toward the end of earnings season. I guess a few takeaways from earnings on my end. Acceleration in fundamentals is definitely cooled in a lot of areas. You know, there are pockets of strength here and there, but for the most part, a lot of companies have not necessarily contracted, but certainly growth has slowed. Supply chains are still in upheaval. We've heard from a number of companies, especially in autos, Semiconductor chips are still in short supply, and that's just one of many supply chain issues that are around. What we've noticed kind of earnings reactions is the takeaway is, you know, good reports have been met with kind of a blah reaction, but bad reports have really been met with extreme selling. We saw that in Netflix, for instance, and a number of other shares. But another, you know, kind of on the positive side, people are enjoying themselves with travel and leisure. Nolan, we heard from Wynn Resorts this week, WYNN, definitely positive results there. And Norwegian Cruise Lines also reported, not such a great reaction, but definitely reporting more action on their ships. What have we learned from earnings and anything that stands out for you?

We love earnings season. I love it. And in an earnings season like this, which is very, very messy, I think you hit it, you nailed it. They've been kind of a yawner. Hey, look, if you beat and raise, the stock reaction for the most part has been underwhelming. And it's really stood out to me that you do see these huge gap-ups. We've seen a few of them today, Squarespace and AppLovin. There was a couple other names where you see a huge reaction on the upside. For the most part, that's because they were sold off so much going into earnings and the bar was so low. You wonder if it's fresh buying or short squeeze. So I'm interested to see if those gains hold. So far in the earnings season, what we've seen is they haven't held very well, and they've given back those gains and then some. However, there are a few diamonds. There are a few companies and holdings that we've seen that have kind of surprised us out of nowhere. Some of these have come back from the dead. Some of these have been sort of slow and steady. But we have seen some impressive earnings reports we'll get to later. So what stands out to me is confusion reigns. Most— mostly we've seen selling during earnings season. You mentioned what the, um, what the returns have been this week, and this was a huge week of earnings release. And we've seen that whole thing throughout the earnings season. So investors have certainly been disappointed on earnings, and even when they've been impressed What investors are telling us is they're just not as willing to pay as much for the shares.

Yeah, it's, it's interesting, you know, I think a lot of investors were sort of waiting for earnings and hoping for a catalyst, um, and it seems like even positive news from the companies themselves hasn't been that catalyst to forestall the declines, uh, all across the stock market. So I think we all need to be realistic and realize that that catalyst is not there for us and it might be time to rethink the way that we invest, which brings us to topic 3. So topic 3 is the title of today's video, Boring Is the Way to Play. Nolan, in the bull market of the last 10 years or so, a number of sectors were left behind, most notably energy and commodities, had a really terrible time, at least especially in the last half of the last decade. Also consumer staples, food, consumer goods, really not a lot of movement there over the last 10 years. But, you know, obviously the market regime is changing. A lot of growth stocks have struggled, and I think we're all kind of reassessing and looking for new ways to play. What's really starting to get our attention is these boring sectors, and what they tend to have in common is strong cash flows, pricing power, ability to raise their prices even though inflation is raising costs. And then of course dividends. And I wrote down a couple of examples that we can throw out for people and take a look at the charts. You got Kraft Heinz, KHC, which we mentioned a couple of weeks ago, Kroger, KR, the grocery chain, Clorox, CLX, and you've got one of our favorite stocks over the last 6 months, Exxon, XOM. Nolan, what's exciting you about boring?

The returns, they're certainly holding up. They seem to be back in the spotlight, favored again. And you, uh, you hit on a couple themes that, um, you know, makes sense. One is a lot of these companies, even if they didn't report a good number, you know, I think what was music to investors' ears was the fact that they could pass along costs. So even if you take a company like Clorox They had an awful report on the top line and the bottom line, but the shares turned around and have rallied since earnings. Basically, they're able to raise prices. And you've seen that time and again. Kraft Heinz was the same way. The organic growth rate wasn't spectacular, but they were able to pass on costs. And so what you get is margins that are expanding. And we always talk about the acceleration in fundamentals, and that's exactly what you get when you get expanding margins. The other thing that takeaway for me is the consumer. We keep coming back to the consumer, and you just mentioned earlier, you know, Norwegian Cruise Lines and Wynn. And you have travel stocks that are saying their order books are full, people are coming out in droves, but the stocks are not performing. So what gives? I think the market's having this read-through that, hey, if all of these stocks or these companies are passing through higher costs energy costs are up for consumers, mortgage prices are up for consumers, inflation in general is up for consumers. The market, the read-through is the consumer is either A, not going to have as much money to spend on discretionary purchases at restaurants or whatever, or if they do have it, they're just not going to be willing to do it because of the wealth effect that they feel from just the general economic environment in the downturn. So those were my takeaways.

And Nolan, do you think there's kind of a— I know we often hear about the wealth effect when stocks are going higher. Do you expect kind of the reverse as stocks go lower? Are people feeling less wealth because they have, you know, portfolios that aren't performing? And is that something that can feed into the economy as a whole?

History would say that's the case, Brian, and that's certainly the worry. And you mentioned earlier these boring stocks, but there's also another common theme with a lot of these stocks as we, as we went through them earlier, and that is they're all related to the grocery store, stay-at-home, discounting, and those also go with, you know, tighter budgets for consumers or consumers, you know, displaying a lot more caution in regards to their spending. So that is, that's interesting. And as long as that effect is with us, we might be in this boring as working phase for quite some time.

Sure, food and energy are kind of the last expenses that you can cut as a consumer. So we kind of like being positioned there, seems like the safest place for now. So with that, we'll ask you to please like, share, and subscribe to the video if you enjoyed the content. And please leave a comment below. We'd love to hear from you and speak with you. Also, Nolan, how can they get in touch with us if they want to learn more about how to position their portfolio?

Yeah, go to leftbrainir.com and hit us up there and click the button for free portfolio review, and we'd love to talk to you.

Excellent, Nolan. Well, hopefully we can all enjoy the NBA this week. A wonderful diversion from, uh, not such a great week in the markets. But, uh, yeah, go Heat!

Don't forget, the NFL schedules were just released as well, so we have that to look forward to.

I'm looking forward to the Chiefs, you know that. All right, thanks everyone, we'll see you again next week.