Is "Too High, Too Fast" Really a Thing? Jarvis® Update November 22, 2024

If a stock goes too high too fast, should you sell it? 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 and also an investment advisor, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. It's good to be here on this football Thursday.

We only got about 5 more of these Football Thursdays, so I'm going to enjoy it. Quick preview for today's video. So our best barometer on market sentiment is, of course, speaking with clients. One theme seems to be creeping in. Some individual stocks have moved quite high quite quickly. We've got 2 topics for you today, as we usually do. The first is dispelling the myth of too high, too fast. And then the second is alternative options if you can't stand the market's rare air. So, Nolan, a number of stocks have made enormous moves this year, many of which we follow and we favor. Palantir is one of them. It's up 262% this year. We've got Nvidia, everyone's favorite stock, up about 195% this year. Axon up 136%, Netflix up 82%, and then AppLovin, not in the S&P 500 yet, that one's up about 700% this year. Nolan, just a quick question for you. What is your reaction to the moves in this— in these stocks? And then, to lay the groundwork for today's video, what sorts of reactions have you been hearing from investors, even those who have experienced a number of, of market cycles?

Yep. So let me take— I was tempted to take the last question first, but I'm going to take them in the order that you gave them. What is my reaction to those stock moves? Well, I think just about in every case, the stock moves followed business trends. So I think just about in every case of the names that you mentioned, the businesses are getting better, meaning revenue and/or sales are improving, brighter outlook for the business. Business has a bigger value, investors are willing to pay more for it. So in those cases, it actually absolutely makes sense. What's more interesting, a lot of times stock prices can go up— take the case of Nvidia— but if earnings have gone up just as much, the stock isn't more expensive even though the price is up. So ponder that for a second. So I, I would just say, as long as stocks are moving up for the right reason— in this case they are— I would smile and not question it. So yes, this— I'm glad we took the first first and the second second, because it's a good follow-up. A lot of stocks are up a lot on the year, and it's surprising to me, Brian. I think when investors see stocks in their statement that are up a lot I think it's new to a lot of clients. I get the sense that it's novel, you know, and I guess it kind of makes sense. You know, we use individual securities here. We like to know what we own and control what we own and how much of what we own. And so our clients, you know, they can actually see the names in the portfolio, the 40, 45 names we own. But if you own a mutual fund, you don't. You know, it's a basket of a couple hundred stocks and you just see the ticker symbol and Uh, you don't really know what's, what's underneath the hood. So I would say the first thing is clients are shocked a lot of times to see that they can buy something and it goes up 5 or 6 times their money, like in the case of Nvidia, uh, in, in the case, case of some clients. But I would just say you shouldn't be surprised if you've been an investor for any length of time. This happens, and usually good companies that are growing, growing earnings and revenues, that are going up rapidly most often you should just sit back and enjoy the ride and don't question it. Don't try to catch a top. Uh, don't try to use those fancy sayings like take a profit, you can never go broke. As long as that business is still performing, earnings estimates are still increasing, that's how you do really, really well.

Thank you for that, Nolan. Let's jump right into the topics. So topic 1 is debunking the myth of too high, too fast. So Nolan, we are in a bull market. Most investors would agree with that. We wanted to cite a few statistics for you about bull markets, about the overall market. So the average length of bull market since the Great Depression in the '30s is about 4.9 years, and the average move in the S&P 500 in each of those bull markets is about 178%. Uh, conversely, bear markets usually last about 1.5 years. They're a lot shorter, with the average drawdown around 35% on bear markets. How would you respond to sort of the difference, the differential between how long a bear market lasts versus how long a bull market lasts?

So I think that's good. I'm glad bear markets are much shorter than our bull markets. Uh, they hurt a lot more, but yeah, it's like we always say, the stairs up, the elevator down. I'm glad to have that sort of out of the way. It also lets me know that all bull markets aren't created equal. That was the averages, as you mentioned. Some of them take on different characteristics. But by those measures, I think we're just getting started in this one. And I certainly can foresee with the economic circumstances we have, you know, people working, interest rates not rising much more, inflation seem to be under control, corporate balance sheets are in pretty good shape. I say we're in a pretty good situation right now. The, um, economy's pretty strong. I think the next couple years could be really, really good. And this bull market, which we're definitely in, I still think a lot of people don't believe it, Brian. I think a lot of people are questioning it. I know that there's a lot of cash on the sidelines, and I think for everybody that's bullish, I think there's an equal number of people that are nervous enough not go all in. So I think, yes, we're not at the euphoria stage. I think this bull has a lot of kick in it left.

As you know, Nolan, the old saying on Wall Street, the bull market climbs the wall of worry. So We still have plenty of worry out there and so plenty of room for the bull market to continue. Another piece of data here. The Fed has cut rates twice now and there are plans to do more cuts with inflation subsiding over the last few months. Over the last 40 years, we have seen 4 such cutting cycles, and that is when the Federal Reserve has decided to cut interest rates in a decent economy, but inflation is subsiding. And so what they call normalization of rates. We've had 4 of those over the last 40 or so years. After each of those, the average 1-year return in those situations is about 12.6%, and the average 3-year S&P 500 returns about 68%. And those were in 1984, 1989, '95, and 2019. So a number of different time periods there. Nolan, what do you think of that historical pattern? And do you think this time is similar or do you think this time is different?

Let's just hope— in the case of bull markets, let's just hope this thing goes a while. Let's just hope I'm right. I, I always like to say, Brian, in these bull market situations, yes, you have the index and you have what those markets are doing, but then you also have the individual names underneath the index. And I'm glad you gave those stats about, you know, what happens in a normalizing interest rate markets when interest rates are going down. You you know, 12 months and 3 years later, those are really, really powerful numbers. But I'm going to combine those numbers with what— something you mentioned earlier on the index level is over a 3-year period. If the average is 65% returns, there going to be some stocks that are double, there'll be some that triple, some that'll do more. That's what makes these bull markets really, really exciting, especially coming off— in some sectors we've had a really nasty downturn. So seeing those winners rise again in some cases to new highs, that can be a very attractive proposition. So that's what has me a little bit more excited.

I'm glad you brought us back from the macro to the micro because, you know, some investors own indexes. That's fine. That's not what we do here at Left Brain. We like to own individual stocks, which means we like to own individual businesses. So I want to get a little bit more specific in terms of your response of what we are seeing today. So my question is, Nolan, what is your reaction when you hear this question? I know I've heard this from investors before. XYZ stock has moved up so far, so fast. Should we sell it? And in terms of answering that question, can you speak to the nature of how growth stocks work over time?

Yeah, growth stocks tend to go up a lot and the returns tend to be bunched. So you can go for 2, 3, 4 years in some cases with some of these stocks that haven't done anything. In some cases they go down and then all of a sudden a light bulb comes on. Investors realize there is something here. Some sort of catalyst in the business happens, and shares can move up quickly. And we're actually seeing that today. Company reported this, uh, last night, company called Snowflake, which is the largest data warehouse company pretty much in the world. Company IPO'd about 4 or 5 years ago. Shares are a lot lower than the IPO price and still down about 70% from their all-time high. Coming into the earnings report yesterday, the stock was down about 30— over 30% on a year-to-date. good report. The stock has come back to life. The growth engines are back on. Stock's up over 30% today. And so with these growth stocks, you can get this sort of switch, and then once people realize that the growth story is real, now you get multiple expansion, you get earnings growth, and that's how you get stocks that move up 2, 3, 4 times.

You know, Nolan, we talked about NVIDIA before. I'm going to bring it back up. I know that the entire time that Nvidia has gone up over the last 5 or 6 years, all we hear is, oh, it's too expensive now, it's gone up too much, too fast, and it's time to sell. Like you said, people trying to pick a top. I want you to think back over the years of your career and think about some historical examples of, of stocks that have caused investors to ask this question in the past. And tell me more about how it would have played out for them if they sold, if they would have held on, or if they would have bought more. You know, give me a historical example in that case.

So the one that comes to mind for me is Netflix. It's a name that we started buying when the market cap was about $3.5 billion. At the time, they were still fighting with Blockbuster, and they were still doing DVDs by mail, and they had just started this streaming business that only had old B movies from other places that you had to stream, and they weren't making any money from it. About $3.5 $100 billion business. And along the way, you can see what the— I think the market cap now is well over $300 billion. So it's done well, but we've had times, um, it wasn't a smooth ride. You know, Netflix went up a lot, but we also had some earnings quarters where they reported and the stock dropped like 30% in a quarter. We've had multiple quarters like that in its history. I know a lot of clients— I've had more conversations with clients over this Netflix position, especially as it grew, but became to be a bigger part of their portfolio and the volatility kept up, you know, trimming it, selling it. I had to talk clients out of selling it multiple, multiple times. Fortunately, they still remember and still thank me for it. So a lot of times it can surprise you. I think, again, I think investors just— I don't know what it is. It seems like a generation or a couple generations ago, I think people were a lot more optimistic about investing in stocks. They were a little bit more knowledgeable about willing to learn and hold them. I don't want to say that there's a fear of stock now, but, you know, it seems like people these days are more comfortable with stuff like Bitcoin than they are with traditional stocks. But what attracted people to stocks originally is you can make a lot of money by owning stocks. And I mention this all the time. If you take a look at the Forbes list, they all got there the same way, which was equity, which is ownership. And everybody— it wasn't even diversified. It was concentrated. It was one stock. That historically has been a way to wealth. A lot of people are not used to it. So many stocks have gone up 100%, 1,000%, 10,000%, even some that you think are boring. And if you don't believe me, go back and pull up Walmart stock chart and just go back a few decades. Stocks— you can make a lot of money by owning really good businesses run by really good managers and holding them for a very long time. Let the magic happen. I wanna say that because when people ask us to sell and trim these stocks, you know, there's several thousand stocks that trade in the market. The S&P 500, there's 500, so there's a lot to choose from. But if you think about super winners, ones that could really put zeros and commas on your net worth, you know, Brian, think about us and how many ideas we look at and how many super winners we actually uncover. I mean, it's not that many. And so if you're kind of cutting off your super winners, that doesn't leave, you know, a lot of gas in the tank for some really awesome returns. So you have to kind of balance them both. But yes, when you find a really good business, really good opportunity, man, it can really help your net worth and build your family fortune if you hold on.

Thank you for that, Nolan. My two cents is I think a lot of times investors try to outsmart themselves, trying to sell at a, at a particular price, trying to buy low at a you know, at the lowest price of the stock ever traded and those sort of things. Whereas investing is really more simple than that. It's just buy the right business and hold on for a number of years. So we want to emphasize to people, let's work on investing. Let's not try to be traders here, you know, hurt ourselves trying to make a couple of cents when we could be making many dollars. So that said, let's move on to topic 2. So topic 2 is if you can't stand staying long, there are alternatives. So, Nolan, We've said a lot here. We believe in what we're saying, but I know there are some investors from a personality standpoint, they're just not going to be able to stick to what we're saying and stay in some of these stocks when they're up 10 for 1 or what have you. They just can't stand the prosperity. They tend to respond in a way that they want to retreat into a shell and protect gains and be conservative. I get it. And there are alternatives for them. Nolan, if we can't convince these investors to hold on, expect the bull market to extend, both overall and in particular stocks, what's an alternative path?

So, you know, the investment markets are, are really, really big, and it's not only stocks. We got income securities as a bigger part of the market than our stocks. And stocks aren't appropriate for every investor in every denomination for every purpose. There's some reason that people just need income, especially for retirees or people that are financially independent, and they're not relying on a paycheck from work, they could be wealthy enough where we can convert something in their account to some income-generating security and distribute that to them regularly. Hence the world of income securities. And so it's not for people that are just nervous about the stock market. I think income securities are great particularly for people that are holding cash, that have been building cash for years, and they feel better about it now because cash is yielding them 3 or 4% in some cases. They don't feel compelled to make a decision, but we want encourage people to think about income securities as being the middle way. We have stocks that we put on a 0 to 10 point scale from a volatility standpoint. We put stocks at 8.5, 9 maybe. We put traditional bonds, government bonds, CDs, we put them at probably a level 2 or 3. And traditional fixed income, you know, corporate bonds, we probably put at a 4. Income securities would probably be somewhere between a 5 and a 6. So a little bit more volatility than bonds. There are no guaranteed dates where you're guaranteed to get your money back, but also you get most of your return right up currently in the form of a current income stream. So you don't get the volatility of stocks where you typically get a payoff way in the future, if at all. So the volatility is somewhere in the middle. And with that, the reason that we've been following income securities, uh, one, our clients need income. 2, our traditional sources of income like bonds aren't paying as attractive rates anymore at only 6%. And 3, we'd like to distribute income to our clients that are tax advantaged. And you know, when you do money markets, you do CDs or government bonds in taxable accounts, it is taxed as ordinary income, whereas income securities that we follow, some of them are taxed at ordinary income rates, But a lot of them have tax-advantaged income streams. And I'm going to turn it over to Brian, who's been working on our income securities project, to highlight what we should know about income securities. And I know he has a name that he wants to bring to our attention.

I do. Thank you, Nolan. Like Nolan said, we have been spending a lot of time the last 6 or so months moving away from bonds. We still like some bonds, but the opportunities just aren't as great as they were 6 to 12 months ago. So we're looking at some of these income securities and specifically closed-end funds. Those are mutual funds that have a finite number of shares. And, uh, if you have interest in learning more about what that is, we can speak with you directly. But one that we've been looking at recently is called QQQX. I'll put a quick— I'll put a chart up here for you quickly so you can see that. It's called the, uh, the Nuveen NASDAQ 100 Dynamic Overwrite Fund. And so this fund offers some of the opportunity and some of the upside of the NASDAQ 100. Those are some of the most profitable and highest growing tech companies out there. But what they also do is they own some of those stocks, but they have an option strategy to shave off some of the volatility. Without getting into the weeds, they like to sell calls against their, their stocks in order to decrease the volatility, and it also generates income. So we take a look at the return pattern of QQQX versus the QQQ, which is the actual NASDAQ 100. And as you can see on the screen here, The peaks and valleys are a lot more shallow for QQQX than they are for QQQ. What we like about this, this fund is that it does offer some of the upside that you, that you can get in the NASDAQ 100, but also increases some of the volatility and offers some of the income that we've been looking for for some of our income clients. This fund pays 8.05% dividend yield and it breaks that out into quarterly payments to you. Which is a really nice yield compared specifically to fixed income. But there's also a tax advantage to this that most of the income is paid out in the form of long-term gain. So you're taxed mostly at your capital gains rate on this dividend that's paid out. So we really like QQQX. It's going on our list of income securities. We put together a list of about 20 or 5 or 30 income securities that we like. If you've got cash on the sidelines, whether you're a client of ours or you're not, I think this is an opportunity you should take a look at if you're looking for income and also a little bit of the upside that you can get from the NASDAQ 100. Any thoughts, Nolan?

No, I like the idea. I just want to, um, just frame the discussion for people. This income security is a closed-end fund. This one is based off NASDAQ stocks with an income component so that the volatility isn't as high as the NASDAQ with an income stream. But a lot of these income securities, some of them are operating businesses, and then some of them are portfolios of bonds Some of them are firms that deal in the financial market. So they're all different types of investments that generate income. The common theme is generally the income streams are higher than bonds. Generally, we're looking at 7% and in some cases 10%. We have a couple of income securities in the portfolio that yield over 10%. We have one involved in the mortgage business that yields about 12% or 13%. But the common theme is the high income. Generally, I would say comfortably somewhere between 7% and 9% for income securities. Most of them pay either quarterly. There's a handful that actually pay monthly. It is a significant income stream. It is consistent and it's not dependent on what happens in the stock market.

Excellent, Nolan. So again, if you have interest, if you've got cash on the sidelines or if you're looking for a new place to park money, if you've got money coming up, maturing CDs or you see that savings account percentage starting to dwindle a little bit, we'd love to have a discussion with you about our income securities list and whether that might be a fit for you. If listeners have gotten this far, we would appreciate a like and a share. It does help other investors find the video and find some of these income securities that we're teeing up. And also subscribe and hit the bell for notifications. That way, you know each time we're out with a new video. I did look back at our statistics, Nolan. About 70% of our views over the last month come from non-subscribers. We do expect you all to smash the like button if you find this, if you find this content useful. Nolan, any final thoughts as we close out for the week?

Now we're going into the holidays, the Thanksgiving week, on a good note. We got football on Thanksgiving. Markets are taking to our new President Trump in waiting very, very well. The markets are doing well. Corporate CEOs are more jolly than I've heard them in many, many years. So as investors, these are good times. Rejoice.

Thank you, Nolan. Thank you to the listeners, and we'll see you again next time.