Turnaround Candidates for 2024: Jarvis® Update December 1, 2023

With markets showing strength in the month of November, our mind is on turnaround candidates for 2024. We cover that and much more in this week's Jarvis Update. I'm Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome back to the program.

Thank you, Brian, and happy holidays to you and all our viewers.

Absolutely. We're happy to be back with you today. First, we'd like to ask you to like and share the video if you find these videos useful, and subscribe and hit the bell for notifications. That way you find out each time we're out with these videos. We're out every other week, but it has been a few weeks of hiatus for us. Happy to be back with you. One question we'd like to ask for you to put a comment below: are you planning to spend more or less this holiday season? Want to learn a little bit more about what your holiday plans are and what's going on economically. So put a comment down below. We'd love to interact with you. As we move out of earnings, markets are a little bit mixed. We got two topics as usual for you as we move into the end of the year. The first is a look back over the last three years in the markets. And then our second topic is going to be 2024 and what we're looking for in turnaround candidates for next year. Give you a few announcements before we get started with the meat of the program. First of all, we'd like to ask you to sign up for the Jarvis newsletter. We're out monthly with those. Two weeks ago, we were out with November's newsletter. We covered the urgency of moving out of cash, not only to stocks, but also to fixed income instruments. So check that out if you have interest in learning a little bit more about fixed income. We talk stocks and bonds here, but as a means to an end, we want to help clients, prospects, and listeners build their portfolios and reach their financial goals. Whether or not you currently work with an advisor, we'd love to be a resource for you. And help you achieve your objectives through investment in public securities. Call us at the number below, and that's 630-547-3316 for the podcast listeners. If you want to learn a little bit more about how we might be able to help you achieve your financial goals. And for institutional investors, we've got something for you as well. That's our Investment Ideas Service. Our service offers model portfolios which we update quarterly, and that's dozens of actionable securities, both stocks and bonds. So if you have interest in learning a little bit more get in touch with us with the link on the screen. Let's jump right into the market recap. So trading in the major averages was mixed this week. It felt like a lot better week as we were talking about before we got started with taping. The S&P 500 was up 0.2%. The Nasdaq, which is the tech-heavy index, was down a little under 1%, 0.8%. And then the small-cap index, the Russell 2000, which has been a little bit stronger than the others for the last few weeks, was up 0.6%. So pretty mixed there. What we do see happening is interest rates are falling, moving lower. We saw the 10-year Treasury fall as low as 4.25% this week. It drifted back up slightly the last day or two, but that's a number we haven't seen for a number of months here. And the reason for that is inflation data is definitely getting better. We're on the march toward normalization. We saw the PCE deflator— that's the Fed's, that, that's the Fed's favorite inflation marker— that fell in October to 0.2% month over month. So inflation starting to get back to a more normal. We've continued to see strong earnings results as we talk about the microeconomics of things. This week we saw strong reporting from Snowflake, SNOW, from Salesforce, CRM, from CrowdStrike, CRWD. And we also saw a strong report from Intuit, INTU. So, Nolan, let's take all those data thrown into a bucket and get your thoughts. What are your thoughts about what we saw this week?

So I thought it was positive. Earnings results, not only were they positive, but the commentary for the first time in many, many quarters was also positive. I think that's a good read into what's going to happen in 2024, at least from a fundamental standpoint. And more importantly, the stock reaction to those earnings releases was fairly positive as well. Particularly as we enter 2024, we're in the Santa Claus rally season. The rally caps have been on all month. We'll see if we can continue that momentum right in through December, which typically is a seasonally strong period.

No, I'm glad you mentioned those stock reactions to strong reports. So there are definitely companies that have been doing well all throughout 2023, putting out good reports, but in previous quarters what we've seen is positive reports met by selling. Seems like a bit of a sentiment change. With that, we're going to jump right into topic 1. So topic 1, we're calling a trip down memory lane. We're going to look at the last 3 years in markets. First of all, we're growth investors here at Left Brain. We love growth stocks. Growth investors will know that growth stocks peaked in early 2021, and it's been very challenging since. We also know that bonds and stocks have fallen as interest rates have risen quickly over the last few years. So you don't often see bonds and stocks both down in the same year. That's something we saw in 2022. The last 3 years have been characterized by a number of false dawns where we think the worst is finally behind us and then another wave of selling. But through it all, we've seen companies continuing to innovate. And what really matters to investors is microeconomics, what's going on in the fundamentals of individual businesses regardless of their stock prices. When we see a really strong business with a weak stock price, tends to be a great opportunity for investors. Nolan, what's your biggest takeaway in the post-COVID era And what makes you think that we're finally moving into a different direction here?

You know, I sure hope so. You know, we've sort of been through the blender here the last few years post-COVID. You know, you had the world stop, that had never happened before. And then you had the world do a pretty fast restart and you had all these work from home stocks, digital transformation type businesses, work remote and do business via the web businesses do very, very well in 2020, like historically well. Once we got the, the sense that people were back to work and the economy was normalizing and supply chains were thawing, then there was a huge reversal starting in 2021 where the last year's winners turned into real big post-COVID, post-stay-at-home return-to-work losers. Now you couple that with the fact that interest rates have risen from 0% to 5%, and that really clipped the wings of growth stocks. So it's a lot of things happening. And I didn't even throw in sort of the geopolitical, you know, the wars that we've had and the political back and forth. And it's just been a series of challenges, but those are always there. I think the big one was the economy stopping, restarting, and interest rates really did a number on valuations. All those things now are though, are behind us. And those headwinds are now starting to turn into tailwinds. When you get to 2024, what you'll see, easy year-over-year comparisons. So you should see the numbers look very favorable vis-à-vis to the last couple of years. The 10% yield peaked earlier, um, over the last couple of months at 5%. That's down now to about 4.3% on the 10-year Treasury. So it seems like we've seen the highs in interest rates because we've seen the tops of inflation. And so if inflation is cooling, interest rates are starting to come down, and corporate profits are hanging in there, you would expect for, um, that to be a pretty positive environment as we go through 2024.

We certainly hope we're gonna leave a lot of those issues in the past, forward into 2024. As you said, hopefully they're gonna be turning into tailwinds for a lot of the businesses that we follow. But all the while, Nolan, we've had all these macroeconomic issues. Lots of different issues with stock prices falling, but at the same time, companies continue to innovate and do business. And that brings us into topic 2. We're going to look forward. We're looking at the turnaround candidates and what we're looking for in turnaround candidates in 2024. So, Nolan, after COVID, a lot of stocks, as you sort of alluded to, traded at really extreme valuations. We had nearly zero interest rates. We had an environment where work from home, technology stocks were soaring in 2020, and a lot of that had to do with the zero interest rates. A lot of that reversed in 2021. Huge moves lower in a lot of stocks and a lot of companies that are really quality companies where their stock fell 50, 60, 70, or 80%. As we look at that, by definition, there are got to be some opportunities out there. So in terms of those opportunities, Nolan, what are some of the characteristics you're looking for in a turnaround candidate?

So we're looking for something that has been unfairly punished, or either investors are looking very short-term when they should be looking intermediate or longer term, so they're kind of missing it. Some cases they could be show-me stories. So, but in either case, we're looking for really, really good businesses, and we characterize, uh, with not a lot of competition, or these companies do well, uh, even with competition. We're looking for things that are not so cyclical, so no matter what happens in the economy, we expect those businesses still to print profits and earnings, looking for a rebound in, in sales and earnings with these companies. Every year there's always some company or some group of companies that are unfairly punished and they get sent to the doghouse. Every now and then we need to take a trip through there and, you know, see if there's any thoroughbreds in there. Generally what you see is, uh, through the first 9, 10 months of the year, some category or some companies in the doghouse And then come the fourth quarter, you'll see a lot of cleansing from the portfolio. So people are looking to take advantage of a lower price, and so they generally sell losers for capital loss, capital gain harvesting. And, uh, generally you'll get a really good opportunity as you see a fire sale and a share sale dump. Those are the companies that generally, uh, do very well. If you take a look at like a Facebook, uh, Meta, I should say, this year, that's the poster child for something that You know, investors hated last year, dumped it heavily in the fourth quarter only to see it rise like Lazarus. And so that's what we're looking for.

That's really helpful, Nolan. I like all those characteristics. It's just generally the characteristics we're looking for, for quality stocks. But in this case, we're looking for those quality stocks that happen to be on sale. Let's open the door to that doghouse, Nolan, and see if we can find any of those potential Westminster winners. And let's talk about some of your turnaround candidates for 2024. What do you like out there and what's got you excited?

There's a lot that has me excited, but for my turnaround candidate number one, I'm just thinking about the economy and if interest rates have really slowed and it looks like the economy is holding up fairly well. We just printed a 5% GDP number, which tells me we are. That means that this recession that we've been looking for for oh so long I'm not going to say it's elusive and it'll never show up, but I think it's probably going to be shallower and milder than what we were forecasting 6, 7 months or so ago. It's probably one of the reasons that November has been a really good month. One of the sectors that's done exceptionally well is the financial sector. It was left for dead. And of course, financials tend to be very economically sensitive. If we're going through a recession, people lose their job, can't pay their bills. This isn't good for banks. But it looks like all of that negativity is sort of starting to reverse. So financials I like, but with a tech twist. So financial technology companies, fintech specifically. They changed the company name to Block, the ticker still SQ. Square is a name that we followed as a firm for, for a very long time. Jack Dorsey is the founder and CEO. He's the same Jack Dorsey that founded Twitter before it was sold to Elon Musk and it was rebranded as X. Really good business here. You have the point-of-sale terminals, which is a fairly good business in my opinion. A much better business is the Cash App. If you go to the iPhone Store, the Google App Store, the Cash App is the fastest growing money transfer app, period. It's a digital wallet. You can buy and sell Bitcoin or stocks in that app. And then a couple of years ago they did an M&A transaction where they bought Afterpay, which is a buy now, pay later lender. But the shares have really been— they've really fallen from where they were a few years ago. And even this year, so far, year to date, the business is still growing at 25% plus. There's no debt there. We think the growth continues for many, many years ahead as banking goes from traditional to digital. And we think Square is going to be a winner. So this is a name that you can pick up. I think we think that they look, look really good. Of course, it's not riskless. There's always risk with these stocks. And here, if the economy tends to roll over, that won't be good. And also they cater to the small and midsize businesses, so not the huge Fortune 500s. Smaller companies tend to be more economically challenged during a recession. So that's another risk. Given all of that, we do like the shares right now, and it is number 1 on my turnaround list for 2024.

Excellent. Thank you for Block, the idea of Block, Nolan. We got enough time for one more of your turnaround candidates, so let's hear it.

It's the holiday season. People are going to be spending time with family and friends and they'll probably be traveling. And we know hundreds of thousands of them will probably be on a cruise ship somewhere. The largest cruise line operator in the world is Carnival Cruise Line. They control about 45% of the industry through their 9 brands and about 95 ships. Business was really devastated during COVID in 2020. It was a couple of years we didn't travel. But they still had a huge cost from those ships idling. So they took on a lot of debt. But we're on the other side now. People are traveling and they're traveling in droves. And so the occupancy is surpasses what happened pre-COVID. The revenue per passenger is up, free cash flows are up, they're paying off debt. And this is a stock that before the pandemic, all-time highs were somewhere in the $70 neighborhood. And the shares now trade at about between $14 and $15 a share. So I think there's a huge opportunity here starting right away. So that's the next name on my turnaround list. For all those who are interested, we are going to publish a full turnaround list. Reach out to us if you're interested in seeing it. And it's another reason to subscribe to our Investment Research Ideas platform.

Excellent, Nolan. So a couple turnaround candidates there for you— Block, SQ, and we've got Carnival Cruise Lines, CCL. We're going to wrap it up here, Nolan. Thank you for being with us. Any final thoughts?

Just happy holidays for everybody. You should be feeling much better. The economy is on a much better footing. We're looking for prosperity to continue in 2024. So happy holidays.

Happy holidays to everyone. Thank you for being with us, and we'll see you again next time.