Does Your Portfolio Need to Bounce Back? Jarvis® Update August 19, 2022

Are you still looking for a way to get your portfolio back in recovery mode? We share one of our favorite bounce-back plays 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.

Glad to be here.

Once again, it's great to be back talking stocks as the market continues to move higher. Quick preview for everyone. Again, markets are still grinding higher this week. Sentiment continues to become more positive. We've got two topics for you as we usually do. The first is our bounce back list and the second is earnings. And we just heard earnings from a number of retail stocks. Before we get started, a couple of announcements. First of all, 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, we'd love to talk and make sure to give us a call at the number below. Also, if you're an institutional investor, we got something for you as well. It's our research service, Left Brain Investment Research, where we produce 8 to 10 full-length stock reports each month. And also The Chosen, that's our favorite stock and favorite income security. Check that out. We'll put the link below as well. Either way, sign up for our biweekly Jarvis newsletter, which is out this week. So that'll be out in your inbox on Saturday morning as long as you're on the mailing list. So click the link below and we'll get you on the list. We'll jump right into the market recap. First of all, the S&P was up 1.3% this week. Nasdaq was up 0.9% and the Russell also up 1.3%. So that rally continues across all the 3 indexes that we follow. We also follow the VIX, that's the volatility index, and it's now below 20. Once again, that's the barometer that helps, helps us understand that volatility is coming out of the market. Pessimism is going away and optimism is coming back. We also saw retail stocks, which has been one of the weakest sectors this year, actually more or less strong this week. So continued momentum in the weakest sector tells you the whole market's doing much better as a whole. With all that as a backdrop, Nolan, what are your initial thoughts on the market this week?

Yeah, I agree. Certainly the environment feels better. We're in earnings season and we're seeing a better response from, from earnings. We saw that in the retailers. Even when retailers didn't make the number, the stock action was a lot better, à la Target. So certainly it feels a lot more constructive, and at least the big down moves in stocks, at least for the time being, seem to be a thing of the past. And so a lot of fundamental underpinnings here But let's hope we can build on these gains.

Yes, no, I'm looking to definitely build on these gains as we move into the end of 2022. It's hard to believe we're almost three-quarters of the way through. We'll just jump right into our topics. Topic 1 is our bounce-back list. And actually this week we're going to be highlighting the small and mid-cap sectors which seem to be poised for recovery. First of all, Nolan, we've noticed that the Russell has led the other indexes over the last 2 or 3 months. Which actually, if you go back into market history, is typical of early stages of bull markets. So that's one good positive sign. These stocks tend to be pretty downtrodden in the small and mid-cap sector, especially in growth. So multiples are pretty low. Beyond the multiples, there's also a possibility for revenue growth acceleration. So you got those dual possibilities of multiple expansion and earnings growth. So, Nolan, why do you like small and mid-caps in the current market?

Yeah, and just so the viewers will understand, we're not sort of top-down investors, uh, we're more bottoms-up. And the difference is we don't say, hey, this sector looks good, let me go and find something in it. We do our work from the bottom up, saying, hey, what companies are doing very well from a revenue, from an earnings growth standpoint? Which one of these have accelerated fundamentals? And then to boot, where can we get in where valuations aren't top of the market. And a lot of those characteristics, excuse me, are flowing when we take a look at businesses in the small and mid-cap arena. So, we're just sort of following the numbers. Histories would suggest if you get these companies before they start accelerating and before they get expensive, if you get the twin engines going for you and you hit right, you can do very well over time.

Absolutely, Nolan. And I want to give you an opportunity to showcase that bottom-up analysis here. You know, we're looking for a number of companies that are on our bounce-back list. I think we've got over 20 companies on the bounce-back list now. We have noticed a few that are in that small and mid-cap sector. So that's kind of between $1 billion and let's say $10 or $15 billion. So let's have you give us one or two names that you think look good in that arena, uh, for bounce back?

Yeah, so, uh, the first one that comes to mind is a company called AlterYX. The ticker is AYX. It's a company we followed here at Left Brain for several years. The business model has gone through some changes. Uh, AlterYX, they do data analytics. So no matter who you are, whether you're a person or a corporation, you're creating a lot of data. But if you're an enterprise and a company You need to do something with your data. You need to visualize it. You need it to help you make yourself more productive. And I guess they said a lot of hours that are spent with data is on data prep, getting the data in a format where you can actually do something with it. And that's where the AlterYX platform comes in. So they help you visualize your data. And according to AlterYX, it makes you a lot more productive. So there's a huge cost savings for using their platform as well. Several years ago, they had some issue— a couple years ago with growth, as they were growing from being a small to a mid-sized company, you know, a lot of things need to change internally. So they went through some adjustments. Uh, the founder-led CEO was replaced by a new CEO, but growth here has accelerated. Uh, I think it's the second quarter in a row where you have revenue growth accelerating, uh, in the 30% range. You have positive free cash flow and you have a lot of business momentum here and you get all of that for 5 times sales. So it is the perfect idea of a candidate for a business that we'd be, be looking at favorably.

Yeah, it's exciting, Nolan, that we're kind of getting into an area with the market is, is firming up and that pessimism is subsiding. So we have the opportunity now to take a direct look at these businesses from a fundamental point of view looking at management and sort of what's going on with their revenue picture. It's really exciting to be doing that and not playing defense so much anymore. Um, before we get into topic 2, we definitely would like to remind you again to like and share the video if you find it useful. It helps other investors find it. Not only that, leave a comment for us. We'd love to engage with you and answer any investing questions that you might have. And also, of course, subscribe to the channel and hit that bell for notifications you'll know right away when the next video comes out and they do come out every Friday. So check that out and we'd love to have your engagement. With that, let's move on to topic 2. So topic 2 is earnings. We've been talking earnings for a number of weeks here, and this week it was retail's turn to be in the barrel. This week we heard from Walmart. They sort of started out the week on a positive note, very positive earnings report there. And retail's been, definitely has been challenged for the first few months of this year. So it's good to see Walmart coming around. Home Depot had a pretty good number as well. Target, not as much, but the stock responded pretty well. We also heard from Lowe's and a number of other smaller retailers. My general takeaway from retail is that the earnings weren't quite as bad as they were feared, and I think that's a positive sign. Again, when we see positive reactions to negative or mediocre news, neutral news, That's definitely a positive sign for the economy and for the markets. Nolan, what are your takeaways from retail this week?

Yeah, big bounce back week with retail. I know retail was spooked, uh, several weeks ago when Walmart pre-announced and it was a big sell-off in retail. You mentioned about the inflation story. I think one of the narratives were, uh, cost of goods sold, so the supplies that retailers are retailing was costing them more in the wholesale market. We know their shipping or transportation costs went up quite a bit, and the question was, what were they going to do with their higher costs? Are you going to try to pass them along to customers and risk alienating your customers, or are you going to swallow it and take it in your margins like Target decided to do? So it was interesting to see, uh, the earnings come out from retailers this week. Home Depot, a big beat on the top line, so the market liked that. Um, then you had BJ's Wholesale Club, who did very well. Walmart earnings were better than feared. And even a name like Target, who didn't do so well— they had a swing and a miss, they have to clear some old inventory. So a big guy down there, even then the stock on a 3 or 4 day basis is still positive. So, that tells you the reaction to the retail news is much better. And even in the apparel space, we've had TJ Maxx report this week and they did good in their Marshalls and TJ Maxx business, but in the HomeGoods business, the HomeGoods store, not so much. It was a big miss there. And even with that, the stock held up pretty well. So, it tells us that investors are really taking it in stride as far as the retail space goes.

Nolan, as we have mentioned a number of times on this, on this program in the last few months, retail has been one of the weakest sectors. We're starting to see retail pick up slightly in terms of stock prices. Obviously, I think the businesses are still challenged, but based on the fact that we're seeing stock prices getting higher and getting stronger in retail, does that have broader implications for the broader market as we move into the end of the year?

Yeah, we'll have to see. You know, as we know, stock prices discount the future, and so I think that's investors telling us that they can sort of see over this 1 or 2 quarter period where maybe they're dealing with some of these cost issues and transportation rise issues, but the investors are betting that the retailers will get it figured out and it'll be better on the other side. We also can't discount the fact that we are coming into the 4th quarter, and, uh, this is the strong season for retailers coming up on a holiday season. You're going into Black Thursday, and there's a lot of positive sentiment when we get into the fall. You have back-to-school season. And so I think investors are sort of looking through this quarter and looking ahead.

It's all good news, Nolan. We've, uh, had a number of months of bad news, so it's good to kind of get back to a point where we can again, uh, look more deeply into particular companies and not think so much about the macro picture. Any final thoughts as we close out, Nolan?

Yeah, so we are at the, what they call the dog days of summer. Uh, we'll be in Labor Day coming up, uh, pretty soon. And it's hard to believe we're at the end of earnings season. So, um, pretty soon we'll be back to Fed talk, we'll be out of earnings season. And so it'll be interesting to see, uh, the market action then. But my final thought is investors really need to get in touch with their advisors or pull out their portfolio and start thinking about bouncing back repair strategies and things that you can do to position yourself to win, not tomorrow, but over the next 2 to 3 years. And certainly there's some actions and there are some companies that look very interesting and there's some compelling opportunities. And so I think it's time for investors to dust off that playbook.

That's absolutely correct, Nolan. I think we've had a lot of months of volatility, people are getting a little too used to being short-term oriented. And it's important to realize that what we're really trying to do is be long-term investors, buy and hold the best companies, and that's going to serve investors the best they possibly can. So with that being said, Nolan, we're one week closer to the NFL season. So that's important and very exciting. And, uh, with that, we want to thank Nolan and we want to thank everyone for being with us, and we'll see you again next week.