(More) Earnings Causes (more) Negativity

Hello friends and welcome again to the Jarvis Weekly Update on YouTube. I'm your host Brian Dress coming to you from snowy Chicago, Director of Research here at Left Brain. It's been another turbulent week on Wall Street, lots of earnings and plenty more to talk about. So we're going to quickly bring in, uh, Nolan Langford, our CEO, coming to us from sunny Miami. Nolan, welcome to the program.

Hey Brian, it's nice to be here. And, uh, for our viewers, it's Partly cloudy Miami today, but the temperatures are still wonderful.

Oh, I hope you can handle it down there with the partly cloudy, Nolan. But let's jump right in. It's been another tough week. We had a lot of earnings reports yet again. Unlike last week, reactions have been largely negative this week. S&P and Nasdaq both down around 3%. And most of that damage came on Thursday after a number of earnings reports. And we also have a number of crosscurrents coming through the market. Namely interest rates moving higher and also the Ukraine-Russia conflict, which is causing some risk premium not only in the stock market but also in oil markets. So before we go into our 3 topics, Nolan, what is your overall view on this week's market action?

Yeah, I would agree it's very choppy at best. And of course, some of the things that we look for is direction and continued momentum, both in business fundamentals and to show up in prices. And we have yet to get that. Uh, the price action actually for the last several weeks have been choppy. You know, you'll get up days, big down days, and a lot of that has to do with what's going on in the macro environment. And we thought we had gotten a break from it now that we're in a fundamental earnings release season where investors can focus on the micro instead of the macro. But obviously the macro— interest rates, inflation, Russia, Ukraine— still is playing a really big role in the market action.

Well, let's jump into earnings. It's going to take most of our time today. Nolan, do you want to talk about the small amount of good news or the large amount of bad news first?

Well, there is good news. Let's talk about the bad news first, and then we'll talk about the— then we'll talk about the good.

So topic one is the earnings losers this week. Major theme seems to be emerging in the market, and that's that The market doesn't seem to care about what your past earnings were. I mean, we're always talking about the market's a discounting mechanism of future earnings, so it makes some sense, but it seems like investors seem to be focused only on the guidance. And also, if a company has to invest money in the future to build their business or grow their business, it seems to be swiftly punished. So, Nolan, what's your take on those thoughts? And kind of, do you have a couple of examples that you think are worth discussing?

Uh, there's a few that come to mind. Um, the first two are growth names, the others are value. But, uh, we hear a lot about the, the metaverse and Meta, the former Facebook, you know, a few weeks ago reported an earnings number that the market was not happy with. And just as you diagnosed, they mentioned that, you know, they had slowing user growth as well as they were going to spend more money in building out the metaverse and re-accelerating growth. And the market didn't respond kindly. We had the leader of the metaverse, which is Roblox, for those who aren't familiar, RBLX is the ticker, who came out, who reported earnings, and the, uh, the market quickly did not like the story and quickly sold the stock. Shopify would be the next one, the e-commerce giant. You know, during COVID a lot of people were at home and they resorted to selling goods online or setting up an online business. And, uh, Shopify has a platform where if you're a seller, you can actually go there, set up your online website store. Shopify will help you take payments, make deliveries, and you can actually have your own business on the Shopify platform. It had been a high flyer and doing very well because business conditions— they had the wind at their back. But they also came out with earnings this week, and, um, the stock moved down pretty aggressively. as well. So that would be our loser number 2. And the third one that caught our attention is what a lot of people refer to as a value stock. And then for those listeners, um, who aren't necessarily sure the definition of growth and value, it depends on who you ask. Most people would say if it pays a dividend and you consider it cheap, then it falls into the value camp. And we had an example of a value stock which was the old Viacom They own brands, uh, media companies like CBS, Showtime, Paramount. They came out with earnings this week that were also not well received, and, uh, the stock sold off a lot more than what you would think a cheap stock would. It sold off almost more than the growth stocks did.

Okay, Nolan, I want to dig into a couple of those things that you mentioned. Um, the first is Shopify. I think we want to spend a little more time here. I think this is kind of an illustration of what we're seeing in the market right now. Shopify is a really good and wonderful business. The question is valuation, I think, more than anything else.

So depending on what's happening in the, uh, the economic conditions, interest rates, and inflation, at different times investors are more sensitive to different variables. You know, a couple years ago when the economy was sort of humming along, interest rates seemed to be contained and inflation wasn't an issue, investors tend to focus more on the fundamentals of a business. You know, are sales growing? What's market share? What's the addressable market? Are they gaining share? What's future profitability likely to be? Are they on track for it? Actually, it's not just this year. We've been talking about this for a while in the Jarvis Weekly. We've been talking about it in our research reports at leftbrainir.com. But the market's taken a different view of growth businesses. This started last year, actually more than 9 months ago. You'll see a lot of these stocks hit their peak and they've been drifting down ever since. But you're right, you need to do— the market's much harder to impress these days. It's not only that you have a fundamental business, you've delivered the earnings that you promised, you're gaining share. But you still need to see acceleration. And a lot of these businesses, we saw the peak business conditions at the end of COVID and they're still doing very well, but you're no longer seeing the bar set higher. And because of that, it's almost like you have reverse momentum where gravity's kicking in. And you add inflation, which is driving interest rates up, to it. So even if investors like these businesses, they like the story, they're convinced that the profits that should accrue to them are going to accrue to them. They're still saying that, you know, hey, we're just not willing to pay as much for this business as we were before, given this new environment. And all of those factors hit Shopify this week.

That's definitely the case. And, you know, the thought that a lot of people have out there is that it's— this is a growth-driven situation, and, um, But we've seen some, some examples of value stocks that have struggled after earnings as well. You mentioned Viacom in the last couple of weeks. We saw Clorox, as you say, with a big belly flop and 3M as well with some, some difficulties after earnings. So it's definitely not just a growth, a growth concept. So topic 2 is the earnings heroes. Nolan, we're going to put all the bad news behind us here and talk a little bit about companies that impressed this week. We're getting a lot of information and, you know, when the, when the tape is down, when the markets are down and you see positive movement from stocks, that's obviously a really good sign. So 3 big winners we saw this week, but 3 that I think will resonate with folks, Airbnb, ticker A-B-N-B. We saw DoorDash today, D-A-S-H. And And then we also saw this week from the energy category, Devon Energy, DVN. So Nolan, what are you kind of seeing as a common thread between the winners in this year's earnings, this quarter's earnings season?

So there's a couple things that are driving the winners. I was trying to drive a theme between the tickers you mentioned. One of them's an oil company and then the other two are growth. I think what the market's responding to —growth rates that are much higher than the market model. So that does tell you that the market still will pay for growth. You just have to beat expectations, and then you have to give strong forward guidance. So the market's saying, no, we won't buy them at all. It's just the, the number of them. You have to be an absolute premier business, uh, at this point. for the market to, to pay up. I think all multiples are being compressed, but if you really impress the market, they're still going to send the shares upward. That would be the one takeaway just from price reactions. My other takeaways is just on business fundamentals. The things that we thought were strong areas continue to be strong, um, so networking, digital transformation, cybersecurity, online e-commerce, all those things, you know, continue to ring true, and you can see it not only in the numbers but in the CEO commentary.

Absolutely. Again, not a lot of great news this week, but you know, when you see companies that perform in a difficult market, we really have to take notice of those. And especially Devon Energy is obviously a huge theme for us right now. So it's nice to see that. So this week was Valentine's Day. So we're going to try to bring in a kind of a tortured analogy here, Nolan, between marriage and dating. You know, a lot of these companies that are struggling right now made a lot of money for people in the 5 years previous to this year. Can you talk a little bit about how you think about that and sort of the logical fallacy that some investors might fall into of, "This stock really made a lot of money for me. I'm going to stick with it even though conditions are sort of changing." [Speaker:DAVID_SHERMAN] Yeah, you have to be real careful.

These markets have been very, very volatile. We've seen some unbelievably strong up days even this year, even though the average stock's down and down quite a bit. We've seen some unbelievable rallies in some shares over a 3 or 4-day stretch, and some even in a 1-day stretch. And if you're an investor that owns these shares, it's certainly going to turn your head. And then we've seen a lot more days where you've seen violence on the downside, and that can get emotional. I think for individual investors that are managing their own portfolio, it could also be confusing. Do I buy, sell? Like, what's happening? What's going on? Does this, you know, is this an overreaction to things that are going to go away? Is this a buying opportunity? Should I be adding to my shares? Should I be selling my shares? Or should I just be holding them? And we would encourage investors to, you know, to be real careful that you don't accidentally marry a story accidentally, meaning that, you know, these stocks perform differently in different environments. And that's why for us, we tend to be active investors. We really want exposure to the things that are currently doing well and that are likely to continue to do well. And we want to make sure we watch very closely, uh, the securities that are in the line of fire, um, for the violence on the downside. And if you're an investor that's looking at the past where you're like, hey, you know, we bought the security at 50 It went up to $300, made us a lot of money. And right now, it might be only back down to $200. So you're like, oh, well, we're looking at this correction, but based off our cost basis, we're still doing very well, and I don't want to pay capital gain. You have to be really careful that you're doing some unbiased and objective analysis based off that individual business and the current cycle, and that you're looking at it fresh and new. Instead of being accidentally married to something where you're going to hang on no matter what happens, in spite, in spite of the new outlook and the new fundamental outlook for that business. Right.

I think, um, just to tie that all together, is in times like these, it's important to look at your positioning and, um, act as if you didn't have a position in those stocks. And would you buy that today? I think that's the question you really need to ask. So, Nolan, thank you for, uh, your contribution today. Thank you to our, uh, our viewers and listeners. Once again, I want to remind everyone, we've got the Jarvis newsletter, comes out weekly. Check the link in the description below for how to get that on your inbox every Saturday. We've got our subscription service, which is 8 to 10 reports every month, the type of reports we use in our affiliated businesses to make investment decisions. That's at leftbrainir.com. So we hope that you will take advantage of both of those and also our free portfolio review service. I know a lot of, a lot of investors are looking for answers, and we hope that we can answer some questions in this difficult time. So thank you, Nolan.

I just want to remind the, uh, the viewers, as I'm sure they're aware, you know, this volatility, it is a little unnerving and stomach-churning, But it also turns up a lot of opportunities to do well. What we're working on here at Left Brain is, uh, getting our sort of our target watch lists together for superior businesses that we followed that have reported good earnings and, uh, that have improved market share, where our conviction and the long-term success of these business has been fortified even though the shares may be very weak now. When the market environment improves, those are often, uh, the securities that are going to go up fastest and the furthest. So even at times like this, a lot of times you can be much busier even though you're not currently investing or buying new positions, getting your lists ready. And for our subscribers at Left Brain Investment Research, be on the lookout. We'll be publishing some of our ideas to target coming up this year.

Thanks everyone, we'll see you next week. Have a good week.