Why We Don't Knee-Jerk Sell: Jarvis® Update August 25, 2023

As we read the latest impressive earnings reports, we are reminded why we often ignore broader economic forces. We cover this concept and more on 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. Delighted to be here on this football Thursday.

That's right. Before we get started with the meat of the program, we'd like to ask you to like and share the video if you do find them useful. It helps us and it helps other investors find the content. Also subscribe and hit the bell for notifications. That way, you know, next time we're out with a video and we're out every other Friday with these. We'd also like to engage with our viewers by asking you the question, are you investing in artificial intelligence or AI? Why or why not and how? So put your answer down in the comments and we'll answer your comment with our comment. Let's start with a preview. We've had decent strength in the markets, though a weak Thursday did bring things down to about unchanged for the week after a tough few weeks in August. We've got two topics for you, as we usually do. The first is our earnings wrap-up, and the second, we're going to zoom out a little bit and we're going to tell you why we don't knee-jerk when stock prices are weak. A few announcements before we get started. First of all, please do sign up for the Jarvis newsletter. Uh, we're out monthly with that. In our last week's edition, we covered why we are still seeking growth in the markets. We talk stocks here on our videos, but it's just as a means to an end. We want to help clients, prospects, and listeners build their portfolios to reach their goals. Whether or not you currently work with an advisor, we'd love to be a resource for you to help you achieve your objectives through investments in public securities. Call us at the number below. And for our listeners on the podcast platform, the number is 630-547-3316. And also for institutional investors, we've got something for you as well. That's our research service. We put out 6 to 8 full-length reports monthly, both on stocks and bonds from our investment team. And we've got a library now of hundreds of reports. So if you have interest in that, check the link below and we will get in touch with you about a subscription. Let's jump right into the market recap. So markets were mixed this week. The S&P was up about a 10th of a percent. NASDAQ was the strongest after some good tech earnings, up about 1.1% for the week, and the Russell was down about 2/10 of a percent. Many investors are back to Fed watching and anticipating the meeting in Jackson Hole next week, where Fed Governor Powell often does make news. But most earnings are finished. We're going to talk about that in topic 1, our thoughts on earnings season. Nolan, before we talk about earnings, any comments on the overall environment here? Are you on the edge of your seat for the Jackson Hole conference?

I'm never on the edge of my seat talking macros and interest rates and policy setting and politics. Never. I am on the edge of my seat, however, my fantasy football draft. I'll be drafting in about 20 minutes right after the viewing. I'm in the 5th round and I'm debating whether I want to take a wide receiver or running back. So that has a lot more interest than does this Jackson Hole meeting.

I thought for some reason you might say that, Nolan. Well, let's jump right into the topics. So topic 1, earnings season draws to a close. Today we're going to put a bow on earnings. We're pretty much to the end of earnings season. There may be 1 or 2 stragglers after. But we did have some really impressive earnings on Wednesday from a number of tech businesses. First, we had Nvidia, NVDA. We also heard from Splunk, SPLK, which had a huge reaction. We also heard from Snowflake, SNOW. Now, the stock price reactions were a little bit mixed on these, but the, what the news that we got out of these three were all pretty impressive. Nolan, let's start there. Do you have any comments on what we heard out of these companies? And what are your thoughts on what we're seeing with respect to AI as a general theme in the investment world?

Yeah, in every transcript you listen to, it's AI, AI, and more AI, as well as should be. There are actually now applications. I know in a lot of our vendors that we're using, they have AI applications right in there already. They're based off some old language models, but it's actually in use already. Thing is, most people don't have the hardware and the computing power to really roll it out like they'd like to. But they're all putting money there. So what stands out is this is going to be an investment theme. Again, it really hasn't gotten started yet. Most people haven't got the equipment, as we heard from Nvidia, who's the number one supplier of these GPUs that are used for AI. They have a backlog and most people that are putting in orders can't get them. So this is going to be with us for a long time. The game really hasn't started yet, so we all need to pay attention to it. And if we get it right, there's gonna be a lot of money to be made in AI. But if you're a CIO at any business, you certainly have to be investing in your tech stack because you wanna be more efficient with what you wanna do. You wanna be up on technology. You do not want your competitors to get a leg up on you. And I think companies are gonna use this. Eventually they're gonna have to spend money from R&D standpoint to sort of rework their businesses somewhat. I think in the end, business margins are gonna go up because of it. We'll talk about some reasons why. So I think there's reasons either directly to play in AI leading to profits, but also think for the average business, if they can increase their margins and make more money using AI, I think that's also beneficial.

It's interesting, Nolan. We heard from the NVIDIA CEO, Jensen Huang, not this quarter, but the past quarter, where he said there were going to be about $1 trillion worth of upgrades needed to get tech stacks of many different businesses up to snuff. In order to process what comes out of these AI systems, which is a pretty amazing business opportunity. So we all know about NVIDIA, or most of us do, and we like NVIDIA. Nolan, are there any other plays that, that you like in the, in the AI world?

I do. You mentioned two that reported earnings today, Snowflake and Splunk, and they both, you know, AI headlined through their earnings release. You know, Splunk, you need data for AI, you need computing power. And you need lots and lots of data. And Snowflake is the data warehouse lake. And so all of that data is gonna go to Snowflake. Actually, they just did a partnership with NVIDIA where companies can upload data and then use AI right from the data. And Splunk has an observability platform and they like to say you can't secure it if you can't see it. And they give you the eyes and ears to your apps and your whole infrastructure to make sure it's working. So I think most tech companies are going to be highlighting their attachment to AI, as well they should. And those three really stand out after just having heard reports. Now, it, it's not just those three. You know, last week you wrote in the Jarvis Letter that just came out last week. For the listeners, go to our homepage, you can see Brian's latest version of the Jarvis Letter. You know, one of the companies you profiled was Axon, A-X-O-N. They started out life making that taser stun gun And then eventually they moved to the evidence.com, the on-officer camera, and the police officers can not only stream data to the cloud, but also they have an evidence recordkeeping service as well. A couple of interesting functions they say for AI where, you know, the on-officer camera is going to roll and AI will be able to use that to make a police report. And so officers won't even need to do that. So really cool applications from AI. We're just at the beginning, but there are going to be a lot of companies that will be involved.

But you mentioned that, Nolan, just gives a good sense that AI is not just sort of the direct plays, the hardware producers or even the software producers, but a lot of different businesses are going to be benefiting from this revolution. It feels a lot like in the '90s, the internet revolution. So in contrast, we had some pretty dismal results from another sector, which is retail. So from this week, we heard from Advanced Auto Parts, AAP, We heard from Foot Locker, FL. We heard from Peloton, PTON, and we heard from Macy's, M. Dick's, DKS, which was another absolute disaster.

Dollar Tree.

Yes, DLTR. It's pretty widespread, universal theme. We saw Nike, NKE. That's gone down, I think, 11 days in a row now or something.

Is that right?

So, Nolan, what are your thoughts on retail? Taken together, we see an obvious skew, I think, of how investors should be allocating. What are you thinking as far as sector allocation for investing here?

The retail is tough. I mean, we've known that for quite some time. They're suffering. I mean, they're getting hit really on both sides of the face here. You know, on the one side, you do have the post-COVID hangover. I know people are kind of like, COVID, what is that still a thing? Yeah, because there's a lot of demand that pulled forward. You had the supply chain issues. What companies did is they raised prices last year in to offset inflation, pass them on to consumers. Now this year they're getting a blowback. Customers saying enough already, you've raised prices, the economy's somewhat weaker. But the big deal I think is these interest rates are really starting to really cripple a lot of economic activity. I think that's worrying people. You know, mortgage rates, uh, this morning hit a new high, like 7.2%, right? And if that doesn't hit you financially, it sure does psychologically. And we've heard that from the homebuilders. People aren't selling homes. You know, you have a 2 or 3% mortgage. Nobody's raising their hand to sell it to jump into a 7% one. So you do have a sort of a standstill there. It's driving business for homebuilders because if you want to buy a home, you might as well get a new one because nobody's selling theirs. But if you're a consumer and every bill in your household's going up, cable bills— nobody has cable anymore, but even your streaming bill is going up. The grocery bill has been higher. Gas prices are back over to $4. If you do have a mortgage with an adjustable rate or a home equity loan, that payment is going up. And the consumer is really saying, hey, enough already. And we've heard that up and down the retail landscape. It really surprised me on the lower end, you know, off-price retailing. We got a note from Burlington Coat Stores this morning. They're having trouble. Dollar Tree, Target didn't have a blowout earning. Look, if you're on the low end, you expect when the economy to get weak for people to trade down. But it just goes to show you that up and down the spectrum, whether it's clothing, hard goods or soft goods, the consumer is pulling back right now. And hopefully the Fed is sort of taking stock of that.

Thank you, Nolan, for that perspective. We're going to move right on to topic 2. So topic 2 is why we don't need jerk when markets show temporary weakness. So first of all, August has been a challenging month for investors. S&P is down 4 or 5%. Nasdaq's down about 5%. A lot of individual stocks are down a whole lot more than that. As we've sort of alluded to today, mostly that's driven by macroeconomic concerns like rising interest rates. Wednesday earnings may have the chance to change that narrative. Well, and can you speak to your posture, focus, and discipline when stock prices are falling?

Yeah, I always say it's best not to look. As I've gone throughout my career, you know, the more you look, the more you're tempted to do something. And generally in these times, you— what you should be doing is buying when things are violently selling. We've seen this interesting reaction. You and I were talking about this earlier, kind of in our pre-production talk, this interesting dynamic where a lot of these companies over the last 6, 9 months have come out with earnings reports and have just been sent to the slaughterhouse. Stocks down 20, 30% in a matter of days. And in a lot of cases, over the next month, 2 or 3, we've seen that total decline reverse. This is a really, really good sign. So typically, as long as the business is a good business, not a failing business, but a good business, it could be going through something temporarily. I don't think in the history of stocks there's been one that's gone straight up over 10 or 15 years without some bumps in the road. So if you get the good businesses, the quality businesses that are going to endure, continue to put up sales and earnings and revenue growth, typically those temporary blips, if you can catch them, can lead to really good profit opportunities in the future. Right now we just have sort of this digestion period. You know, July was off to a good start. I think the first half of the year surprised most people because we haven't had a lot of good news. And we're in the summer, volumes are lower right now. People know the economy is weakening. We don't think we're heading into some nasty recession, but things are kind of slowing down a little bit, and it's just this cooling-off period. Generally, when you invest, you want to invest over a 5 to 10 year period. I can pretty much guarantee you in 5 months we won't, won't remember what happened in, in August. So for the great businesses, you generally want to buy them when they are on sale. I don't know that we're in an absolute low. This is August, September, and October. Historically, sometimes can be dicey. But let's remind people, longer term, we have some really good things coming pretty soon. We'll be talking about, you know, into this Black Friday retail, end of the year, Thanksgiving to Christmas period, where typically markets are buoyant. The Santa Claus rally typically starts somewhere in November. Follows through to March or April. And don't forget, election season is fast upon us. You know, in about 14 months or so, 15 months, we'll be hitting the election booth. So pretty soon— I know we had the first debate that happened this week, but you're going to see the candidates sort of shake out. And the thing about the political season, especially when there's a presidential election, you'll see these parties talk, putting forward new economic policies to really boost the economy. So pretty soon people start feeling good about where we are.

Very much so, Nolan. We've got a little bit of time here left. One more subtopic we want to talk about. We want to talk about why does this all matter to investors? We talked about in the last newsletter the asymmetric payouts of stocks. So I can only lose 100% of my money, but I can make 5, 10, 20 times my money if the stock goes well and a business does exceedingly well. So huge asymmetry there. So what that really means is if we can find a few stocks like Nvidia you know, that can really have an amazing impact on a portfolio for retirement. Can you talk a little bit about the Rule of 72 and what, you know, what stock picking really does mean for investors' outcomes?

Yeah, I'm going to take a step back. This is a really good topic. You know, I think as investors we don't talk about this a lot, but we have a huge advantage, especially here in the U.S. and being investors in publicly traded securities. What that means is I can passively participate in the success of an enterprise. And I can do it passively, so I can just invest my money in a company stock, that stock does well, I'm along from the— for the ride. I'm a partner in that business, and I have liquidity, daily liquidity. It is a huge benefit, and a lot of people have gotten extraordinarily wealthy. If you take a look at the Forbes list and the richest people in the world, and you just go right down the list, 1, 2, 3, 4, and 5, it's all the same. It's publicly traded securities in a concentrated fashion. So that tells us that's the road to wealth. Now, as fiduciaries managing individual clients' money, we generally have diversified portfolios, but it's the same thing. Individual stocks, well-selected, you own them passively. It's been a magical road to wealth, and we need to be very thankful and remember that sometimes you'll have downturns, and so you just have to kind of fight through it. But the ability to be able to participate is unbelievable. And the rule of 72, you know, if I use 72 as my numerator and let's take an even number like 10, if I'm getting a 10% return, that means my money can double in 7.2 years. Now, markets historically have done about 10. If I own 100% stocks, there's been some starts and finishes and it doesn't happen on schedule. It's not like every 7 years my money doubles, but that's the average. Sometimes it's 3, sometimes it's 13. But on average, it's about— with stocks, it's about every 10. But if I put my money in CDs or something today at 4, and 4 is my denominator, 72 is my numerator, it's going to take me 18 years. And you did a really good job in the last Jarvis Letter, which people can get from our home page, with that compounding chart just showing, hey, if you're getting 8% on your money versus 6%, it makes a big difference. And if you're getting 10 versus 8 and you roll that out over 10, 15, 20 years, you know, it doesn't go up arithmetically, it goes up a lot geometrically. And so that's the reason that we invest. And you can really turbocharge your net worth if you do well, you own the right businesses, you let them compound over time. It really can have an impact on our standard of living when we retire. Financial security, being, being able to educate our kids, being able to pay for health care, or wonderful life experiences.

Thank you, Nolan, for that. It's a great perspective. I know we talk a lot about investments and what we want to do is make the connection of what does it mean to invest and why does that help you from a personal finance point of view? That's the connection we want to make for folks. And that's something that we really pride ourselves on helping our clients to achieve their financial goals through, like Nolan said, passive investing in public securities. So we're going to leave it there for the week. We appreciate everybody being with us. We've got football coming up, Nolan, just a couple of weeks from the actual start of the season. My Chiefs kicking off against the Lions. Any final words as we head into the weekend here?

It is football draft season. So wishing everybody luck no matter what your strategy is. If you go on zero RB strategy or you're taking a quarterback number one, wish you luck. If you're only a fan, you don't play fantasy football. Good luck to your home team. Hopefully everybody can get out, if not to the last preseason game, to the season opener. Contrary to popular belief, it's not baseball, it's football. That's an American sport. So it's my favorite time of the year. Excellent.

Nolan, thanks for being with us. Want to thank the viewers and we'll see you again next time.