Q4 Earnings Season: Market Reactions Largely Positive: Jarvis® Update February 17, 2023

Earnings season continues to drive on, and already the reactions in 2023 are a dramatic reversal from what we saw in 2022. We cover that and much more in 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.

Thank you, Brian.

Before we get started, we'd like to ask you to like and share the video if you find it useful. It does help other investors like you find the content. We'd also ask you to subscribe and hit the bell for notifications. That way you find out when we're out with our next video, and we are out on a biweekly cadence, uh, in 2023. Quick preview for you: markets were strong over the last week until a negative day on Thursday, but we do remain optimistic. We have two topics for you around earnings, as we usually do. First of all, we'll be talking about the end of the valuation reset. And second of all, we'll talk about the better-than-feared earnings reports. A few quick announcements. First of all, we produce this show for you, the everyday investor, whether you have a 401(k) or an IRA, if you manage your own money or you work with an advisor, we'd love to be a resource for you. If you'd like a second opinion on how to position yourself for the upcoming market recovery, we'd love to talk. Give us a call on the number below. Also, if you're an institutional investor, we've got something for you as well. And that's our investment research service. We'll put the link below if you want to get involved with that and see our hundreds, our library of hundreds of reports and 8 to 10 reports per month coming from our research team. Either way, please sign up for our monthly newsletter. We are out every month with our Jarvis newsletter and also our biweekly updates and a number of other pieces of content. So get on our mailing list if you want to receive that in your inbox every Saturday morning. With that, we'll jump right into our market recap. First of all, we do follow 3 indices here at the Jarvis Update. The first is the S&P, that was up about 0.2% over the last week. The NASDAQ, the tech-heavy NASDAQ was up 0.6%. And then this is what we've been noticing over the last few months. The small-cap-heavy Russell 2000 was up 1.4% leading the way. Things were going quite well out of earnings, but we were derailed a little bit by some mixed inflation data. CPI, that's the Consumer Price Index, came out on Wednesday and was slightly higher than expected. And then we had the Producer Price Index. The PPI came out on Thursday and we saw a 0.7% increase in producer prices month over month, which is a little bit more than we were expecting in the investor community. Nolan, have you any thoughts about this week's action and does the inflation data change anything for you in terms of how you're viewing the markets and investing in the current environment?

No. As you know, we try to really ignore all those macro factors. The outline of them, though, they've just been so strong over the last 12 to 18 months that they've really sucked everything into their gravity field. And so we had to pay attention to them. The PPI number was a little bit stronger, but again, that's what the Fed's been saying for the last several months. Market participants are really getting ahead of themselves thinking that rates are going to drop pretty soon, but the Fed has been pretty vigilant. They've been saying, hey, This inflation number is higher than we'd like, though it's coming down. It's still higher than we like, and we'll keep raising rates until we see the numbers get back to what we're comfortable with. And so I don't think this changes anything for the Fed, and I don't think it changes anything for investors as well. The path of inflation is down. It may not get there as quickly as we like, but, uh, we know we've seen the peak and we're just gonna have to be patient.

Thank you for that, Nolan. We've got the macro out of the way for this week. Let's jump into what we like. That's the micro and the fundamentals of individual businesses. So we'll start with topic 1. Topic 1, we're calling the end of the valuation reset, and particularly as regards growth stocks, 2022 was terrible. Some stocks were down 50, 60, 70, 80 or more percent. And interest rates did have a lot to do with valuations falling for some technical reasons. A lot, a lot of stocks are evaluated based on what the interest rates are. And when interest rates go higher, those stocks do fall, particularly in the growth space. We also did see some fundamental factors in individual businesses that did present challenges as well. So a couple of reasons why those stocks fell in '22. However, this week we saw a number of positive earnings reactions from some of those stocks that we follow that were challenged in 2022, and it was very positive. I'm just going to name a few for you, Nolan, and you can let us know which ones you want to talk about. But we did see positive earnings reports from InMode, INMD, Airbnb, that's A-B-N-B, The Trade Desk is a stock that we followed for a long time, ticker TTD. We also saw strong reports from Arista Networks, ANET, and also Crocs, CROX. First of all, Nolan, can you comment on the end of the valuation reset? Which of these earnings upside surprises jumped out at you?

So I'll start with the latter first, if you don't mind. None of the reports really surprised me. In the case of InMold, which you mentioned first, For those of you who have been watching our broadcast for any length of time, you know this is a name that we've highlighted quite a bit. It's a real big favorite of ours. It's a small-cap med tech company, but they have not had any issues even through COVID. It's the classic growth story, 20-25% like clockwork. And the valuation, unlike a lot of these stocks, is not demanding at about a 15x forward earnings rate. So very attractive. So it didn't surprise me. I was really surprised at the stock reaction. Stock went up. But they always pre-announce earnings because they generally go into earnings season having done a beat. And so they did that several weeks ago, and the market just yawned. But it wasn't until they actually released— and even the day that they released, there was not much reaction. It was a couple of days afterward. But no surprises in the names that you mentioned. As far as growth stocks generally, You're right about 2022. Wow. It was almost the worst of times. And there was two factors. One, you mentioned the valuation reset. Hey, earnings just aren't worth as much today in a higher rate environment. That we get. I think what surprised us as growth investors or investors, period, is a lot of the business models that we had penciled in as being durable and built to last were anything but. And it seems like COVID really played a number on a lot of businesses and a lot of industries. We know what it did with the supply chain. It probably has something to do with inflation. But a lot of businesses that looked pretty good going into COVID looked great in through COVID. And then after COVID, they looked awful. And so what we thought was sort of a permanent tailwind to their business turned out to be only temporary. I think that's what really threw investors for a loop in 2022.

I think that's very well explained, Nolan. Let's jump on to topic 2. So topic 2, we're calling Better Than Feared is Better Than the Alternative. So Nolan sort of alluded to the bar has been set very low for earnings from some of the most beaten down stocks for some of the reasons that Nolan mentioned, business models being threatened and the like. Among some of the worst performers in 2022 were companies that reported decent to middling earnings. This past week. That includes Twilio, TWLO, Upstart Holdings, UPST, Roku, ROKU, and then also Datadog, DDHG. And those stocks did respond well to the reports, even though some of the results were actually mixed. Nolan, what are some of the implications of the fact that we're calling the bar being lowered? Should investors be considering any of the names I mentioned or any others in this category?

There's a lot in the category to consider. I think the jury's sort of still out on the names you mentioned. You know, we had this imminent— this interesting phenomenon come in starting almost the first week of January, where a lot of companies and stocks that had been beaten down over the last 12 to 24 months really rose a lot with no news. And I think they rose in anticipation that the worst was behind them, and they rose right into earnings. And so some of that, you're starting to see some giveback. Maybe they came too far too fast, à la Shopify. But there are some companies that are healing and that are on the mend. You know, if we think about the stocks that are down over 50% last year, Meta is a name most people know. Stock shot up over 20% on earnings. They're sort of getting their act together. They're cutting costs, being a lot more rational. And so I think investors cheered that. Same thing with Netflix. Now they had a business model issue last year where it looked like competition was causing them to lose subscribers. Seems like they got a handle on things, not only their ad-supported tier and password sharing, but they're starting to add subscribers organically again. And that's what's got the shares moving again. So I think you have to pay attention. I think just because the stock was down a lot last year does not mean it's a good candidate for purchase. A lot of business models are under permanent pressure, and so investors need to be careful.

I'm glad that you mentioned Meta, Nolan. That was something that we covered in last week's newsletter. So again, get on our, get on our mailing list. We'll be putting out the newsletter again this week for those who didn't see it. If you want to learn more about our thoughts on Meta and also Nolan, of course, everything hasn't been rosy. Everything hasn't been perfect in this earnings season. We did have some more terrible earnings reports in the last week. Devon Energy, DVN, being one of them. Another one that you just mentioned, Shopify, SHOP. Do we have any takeaways from those?

So there's a couple takeaways in my mind. With Devon Energy, that's an energy stock. Remember, energy had a real wonderful 2022, so the bar, unlike tech stocks, is set much higher. So it's really going to be harder to impress. I think in the case of Devon, I think that will be a temporary blip. I think you'll see those shares move higher. Energy itself isn't very expensive. But technology generally is not expensive either, or at least it's less expensive than it was. And remember, technology is deflationary. So a lot of growth stocks certainly have our interest. I know we've been interested in them. And so I think investors now, I think the message is things are sort of back to normal. Markets always climb a wall of worry, and investors should not wait for the all clear, for no news stories to show up as being concerning. We're always going to have them. The market's priced in a lot of bad news. I think a lot of the bad stuff is known. And as long as we don't get any more terrible bad surprises, markets can grind higher. And I think investors want to take a look at their portfolio and take a look at some of these ideas of things that they think over the next 2 to 3 years can, can do very well, uh, given this environment. And that's what we've been doing. So I think it's a bullish backdrop.

Yeah, no, it's really good to get out of that mindset of we're just trying to get to the next day. We're looking past that and moving on to that thought of what's going to be good 2, 3, and 5, and 10 years from now. That's where we want to be as investors, long-term oriented, looking for the best businesses and not worrying about all the macro backdrop. Well, thank you, Nolan, for being with us. Thanks to the viewers. Nolan, any final thoughts as we bid the viewers adieu this week?

I just want to reiterate the strength in travel. It has really shocked us You mentioned Airbnb earlier, but Marriott produced good reports. The airlines have all been good. The cruise lines have been good. Hotels, rental car companies. I think the, the travel industry has continued to show strength. And so that's a good place to look for opportunity. I know that's what we've been doing.

Very much so, Nolan. Thank you to everybody, and we'll see you again next time. [MUSIC] [MUSIC]