Markets Break a Winning Streak: Cause for Concern? Jarvis® Update August 26, 2022

Markets broke their 4-week winning streak this week. Is it cause for concern? We answer this question and more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, flying solo this week as our CEO Nolan Langford enjoys a much-deserved vacation, but he'll be back next week. As we get started, a quick preview for everyone. Markets took a breather this week as a number of factors came into play, which we'll discuss as we go through. But this week we'll cover a couple of topics as usual. The first topic is the last gasp of tech earnings. We're coming to the close of earnings season. And second is energy. And we're going to talk a little bit about energy and how it was the only sector this week to buck that downtrend in the markets. So before we get started, a couple of announcements. First of all, this show is geared to you, the individual investor. It's been a tough year, and how investors should position for the next 2 to 3 years can be murky for the individual investor. If you'd like a second opinion on how you're positioned, whether you work with an advisor or you manage your own money, we'd love to talk. Make sure you give us a call on the number below. We'll schedule a meeting in order to do a portfolio review for you. And if you're an institutional investor, we've got something for you as well. We've got our research service where we provide you 8 to 10 full-length stock reports per month and the chosen— that's our favorite stock and favorite income security each month. So check that out. We've got 2 new reports this week from our analyst team. Either way, sign up for our biweekly newsletter to come to your inbox every Saturday. And it's an off week for the newsletter, but of course we're here with the video and other content for you. So make sure you sign up. Before we get started on our two topics, a market recap. The S&P was down 2% this week. The tech-heavy Nasdaq down 2.5% this week, and the small-cap-heavy Russell 2000 was down 1.8% this week. So again, the Russell outperformed. I think that's a number of weeks in a row that we've seen that. Again, as we mentioned before at the beginning of the show, the rally faded away this week. We had 4 weeks of positive results in the market and this is the first week breaking that. So the VIX, as we follow, that's the volatility index. It dipped down below 20 last week finally for a brief period, but actually popped back above 20, moved up almost to 25 this week. And then on Thursday's session, which was a positive session, leaked down back below 22. So volatility didn't get too out of hand this week. But certainly spiked as predictably when we have a down market like we did this week. A lot of the bearishness this week was driven by Europe. There's definitely concern in Europe. The euro continues to fall, the dollar continues to strengthen, and we also have the problem of European energy supply, obviously in the context of the Ukraine-Russia war. As we move toward winter, that's a topic that's definitely on high on the minds of investors around the world. So that caused a lot of bearishness this week. We also have energy prices moving higher. We have interest rates moving higher as well. Federal Reserve continues to hang over everything. So we had a number of Fed governors speak this week discussing how the Federal Reserve is certainly not done hiking interest rates. So that's something we have to keep in mind. Interest rates had fallen precipitously over the last few weeks, but that trend has stopped over the last couple of weeks. And we certainly have to consider a world with a little bit higher interest rates. The takeaway for us before we move into the two topics this week was it seemed that some market participants had forgotten about risk over the last month, had gotten a lot more bullish, a lot more risk-seeking. Realities of energy prices, inflation, geopolitics, and factors impacting companies on the ground as well all converged to make markets go lower this week. So we'll keep an eye— keeping an eye on all of those topics as we go forward toward the end of 2022. So let's move right into our first topic. So topic 1 is more tech earnings. Tech earnings were a mixed bag this week. We started out earlier in the week with Palo Alto Networks. We'll put a chart up here. That's ticker PANW. That's a, that's a cybersecurity company that announced results that were quite well received by the market with a 10% uptick early this week. We also heard from Snowflake, SNOW, a huge uptick on Thursday's session after their earnings were released. Uh, that company is growing at over 70 and 80%. And then we had negative results, uh, from NVIDIA. That's the chipmaker, one of the biggest chipmakers in the world. And we had salesforce.com, that's ticker CRM. Both of them had negative results this week. So first of all, let's talk about Palo Alto Networks, again ticker PANW. This is one of the leading cybersecurity companies in the world. First of all, in their earnings report this week, that cybersecurity as an industry is expected to grow 13.4% annually through the year 2029. So we've talked here a number of times how we like cybersecurity here at Left Brain, and that's the reason. It's a growing industry. When you open up your email, you see more and more threats every day. We're starting to see texts, other scams coming through, and cybersecurity is certainly one of the biggest priorities for many of the companies around the globe. So that's driving a lot of the spending there. In terms of Palo Alto Networks, that's a company that's been a leader in the firewall space, which is sort of a legacy business in cybersecurity, but also starting to transition towards software, hybrid cloud architecture, and real-time threat analytics. So the company is definitely in the midst of a transition, which makes it all the more impressive how they had such a good quarter, because oftentimes when companies are making this transition from on-premise to cloud, it's been a stumbling block for many of these companies. We're very impressed by the 27% revenue growth by Palo Alto over the last quarter. That beat analyst estimates for the fourth quarter revenue growth. The company is taking market share away in network security despite that transition to software as a service model. So again, very impressive. We've seen a number of companies like Splunk and others who have definitely struggled in the face of this type of transition. So we're very impressed by Palo Alto, and even more so in the context of how the markets have been trading over the last year. We're looking for increased profitability. We're looking for acceleration in revenue growth, and we're seeing that in spades in Palo Alto. Uh, 33% growth in adjusted free cash flow over the last quarter, um, in a year-over-year basis. The company has nearly $5 billion in cash and is expecting 20 to 21% growth in 2023. Not only that, we're seeing cheaper valuation than peers like Zscaler and Fortinet. So we also like the fact that the company trades at a reasonable valuation. That's definitely something that investors are clamoring for in the current market environment. And then finally, we've got a $365 million stock buyback and another authorization for more than $900 million more stock buybacks through December of 2023. So a lot to like in the Palo Alto Networks report this week. Very impressed. And there's for good reason the stock has rallied more than 15% this week. So the companies that reported not, not as impressive earnings were Nvidia, that's ticker NVDA, and then Salesforce.com, ticker CRM. First of all, Nvidia, that's one of the biggest semiconductor chip makers in the world today. We've been a big fan of this company for years, followed it for a long time. Founder-led business by CEO Jensen Huang, which is one of our favorite CEOs anywhere in the world. The company pre-announced a few weeks ago that this is gonna be a tough quarter for them, and they actually followed through. They reported that second quarter revenue was up just 3%. Now, this is a company that's been growing in the 30s and 40s over the last few years, so that was a huge disappointment for investors. First of all, this is a gaming company. For years, they've been providing the type of chips that power gaming consoles and gaming computers. And that has all— those computers have also been used in crypto mining. So they've got a lot of exposure there in the gaming side, but they've diversified their business over the past few years. And data center actually grew by 61%. These are the chips that power some of those powerful computers around the world. So data center was up 61%. Overall revenue was up just 3%. So you know that gaming was a big drag on the business this year. Earnings were down 72% year over year, and the company's got supply chain problems, and also there's a lot of slowdown in the PC world and the gaming world. So I'm not surprised to see these results. However, what did surprise us was the market's reaction to the report. So Nvidia stock fell in the after-hours trading of Wednesday after the report came out, but on Thursday, stock was actually up 3 to 4%. We'll put a chart again up here of Nvidia so you can see how it behaved this week. We were impressed by the fact that the stock reacted positively to difficult news. And I think a lot of it had to do with the fact that the company pre-announced and let investors know that this was going to be a difficult quarter. And we're impressed by the fact that that shows good governance on the part of the management team at Nvidia. It's going to be a difficult year for Nvidia for the next year going forward based on a lot of the supply chain issues and also the issues in PCs. But we do think this is a company that investors should keep an eye on over the next few months. And then we also heard from Salesforce.com. This is one of the pioneers in cloud computing and cloud software. That company has grown over 25% for the last 20 years. They just reported the last quarter that they had revenues of $7.7 billion. That's 22% growth. That's, that's strong growth, but below expectations that investors had set. So The company told us that they had headwinds because of the strong dollar, made it difficult for them to sell their products in Japan and other countries, and they lowered their guidance. CEO Marc Benioff, another one of our favorite CEOs, a founder, has had many conversations with customers around the world, and they're all in a bit of a holding pattern in terms of their purchase of cloud software and the products that Salesforce provides. Difficult time for companies like Salesforce, but it might be a good time for investors to start taking a look at these companies. Again, we wanted to mention the investor reaction to the, to the earnings report. In last quarter, if you would have seen a report like this from Salesforce, we might have expected a 10 or 20% downtick in the stock price. However, in Thursday's session, Salesforce stock CRM was only down 4%. So what that's showing us is that potentially we're seeing a little bit of a different sentiment here. When we see positive reactions to difficult news, uh, like we saw from NVIDIA, and then sort of a muted negative reaction for CRM Salesforce, our takeaway is that potentially we're seeing better sentiment in the market. Before we head to our second topic, we asked you to like and share the video if you found it useful. Helps other investors find it. Drop a comment below. We'd love to engage with you and answer any investing questions that you may have. Then of course, subscribe. And hit the bell for notifications. YouTube will let you know when the next video comes out, and we're out every Friday with these videos. So with that, we'll move on to our second topic. So our second topic is energy portfolio ballast. So energy was the only sector of the 11 sectors in the S&P 500 this week that was up. All the other 10 sectors were down. So interesting to see that energy is sort of countercyclical to the rest of the market. Oil prices were up about 3% this week. Whereas if you see the look at the chart of the XLE, that's the ETF that covers oil stocks, was actually up 5% this week. We've been telling you over the last few months that there's a bit of a decoupling between oil prices and the price of oil stocks. We think oil stocks are profitable at much lower prices of oil. So it's not really a one-for-one relationship any longer. What that tells us is these are very strong businesses that are kicking off a ton of cash, returning it to shareholders in the form of buybacks and dividends. That's why we've been so bullish on oil in 2022. Of all the sectors that we cover, this is the sector that we've been the most convicted on, and we've been rewarded well, and so have other investors in 2022. In terms of oil, why did it move higher this week? Supply is definitely an issue in Europe as we move toward the winter, especially natural gas has been supplied to Europe from Russia for years. That supply linkage is not clear for 2023 winter. There's a lot of uncertainty in terms of what the price should be. For energy in Europe. We've got the secular supply and demand characteristics that are going on in the oil market today. Oil companies have been disciplined with their capital expenditures, aren't spending a lot of money to drill for new oil wells. And so that means that the supply is definitely constrained. Of course, as economic activity picks up, as COVID restrictions fall away and we move back toward more of a normal life here in the US and around the world, demand continues to move higher for oil. And that's why we're so bullish on on the sector. ExxonMobil is definitely a company that has benefited from the characteristics of the market and should continue to do so. Again, our takeaways here: we are definitely heartened by the fact that oil prices and the price of oil stocks are decoupling in a positive way. Oil stocks should hold up well even if oil prices move down toward the $70s and the $80s. And then the second takeaway for, takeaway for us in terms of energy stocks is we do like the fact that it does provide balance to a portfolio. So Like I mentioned, we've got 10 of the 11 sectors of the S&P 500 down for the week. And the one sector that was up for the week was energy. That tells you that, you know, when the markets are down, oftentimes energy will be up. We've seen markets stabilize over the last few months. Investors are beginning to dip their toe back in the water and add risk back to portfolios. We've done so here as well at Left Brain, but we continue to maintain our energy exposures. And we like the fact that energy creates a bit of a barbell strategy in a portfolio that's starting to add more risk in tech, healthcare, and other sectors along those lines. So again, we want to thank you for being with us this week. We covered the loss of the 4-week winning streak in the markets. That was driven by higher energy prices in Europe and again, further bearishness in Europe with the euro weakening and the dollar strengthening. Oil was stronger. We covered tech earnings. There was a mixed bag, but we're starting to see better reactions to earnings that gives us a sense that sentiment continues to improve in the markets despite a negative week. And then secondly, we covered energy as a portfolio ballast in the context of that barbell strategy. So again, we want to thank you for being with us this week. Let us know if you have any investing questions. We'd love to answer them for you. Give us a call at the number below. We'd love to give you a second opinion on your portfolio and make sure your portfolio is allocated well to take advantage of trends in the next 3 to 5 years in the long term. And we'll see you again next week.