Market Musings 030224: The Magnificent Seven Meets The Good, The Bad And The Ugly.

3rd Feb by Edmund Shing

47 comments 3028 reads

Market Musings 030224:

The Magnificent Seven meets The Good, the Bad and the Ugly.

Without doubt, one of the major features or highlights of the last week has been the strength of certain of the largest technology stocks in the US - namely the so-called Magnificent Seven.

In the past week, some corporate results have grabbed the headlines with amazing performance, far better than predicted by analysts, such as of course Meta.

Meta has quadrupled from the late 2022 low

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Source: tradingview.com

But, then there have also been disappointments from others, notably the massive vehicle recall that has been that Tesla has been obliged to enact in the US, involving something like 2 million Tesla cars.

The Magnificent Seven, as they call the largest tech stocks in the US, have delivered pretty much all of the performance of the benchmark S&P 500 index in the US not only last year, but equally over this month of January. But now, this group of seven is finally starting to splinter.

Mega-Cap tech has dominated, while the average S&P 500 stock has done relatively little

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Source: tradingview.com

The Leaders: Meta, Nividia and Amazon

Ultimately, some of the Magnificent Seven, such as Meta and Amazon. continue to perform incredibly well. They are going to see profit upgrades thanks to their stellar profit performance in the latest Q4 reporting period.

Meta and Nvidia lead this year, then Amazon and Microsoft

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Source: tradingview.com

Putting the Meta share price jump in context

Meta released amazingly strong quarterly results (Q4 2023) this last week, including the surprise announcement of the payment of a maiden dividend.

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Source: CNBC

In reaction to these blowout quarterly results, its stock value subsequently rose in one day by $197 billion now, an unimaginably big number. In fact, it's the largest one day gain in terms of value of any stock ever in the world eclipsing the previous record which had been set previously by Apple and Amazon in 2022.

This puts the total market value of Meta today at $1.2 trillion. But what does $197 billion represent?

To give you some…

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doctor dave

17th Feb

No I'm finally having to accept that I should have been invested in the US growth machine all along....

BnB

You don’t have to go all in on the US. Even I, confident in claiming to be one of the US‘s biggest proponents here on Stocko, only have a little over half of my investments stateside. That’s underweight the global distribution. Ease your way in.

Guybrush

I prefer entering early on in a trend not late on, so I'll take a pass on the US markets for now. I'm looking for a correction or the the next bull market(will be a while as will need a bear market first) before my first ventures into the US markets . I like to look from the top down, this would be at the indices: DOW, S&P, FTSE100 and the STOXX to gauge long term global market trends. There is also a bottom up approach, where one's stocks in the markets leaders are all triggering stops then it may be time to get out.

A strong technical reversal weekly signal appeared on the DOW in the final week of Oct 2023, and the MA's shortly afterwards, followed by breakouts, confirming a bull run. That was the best time to enter. However, in the last two weeks there are now technical signs of a top forming, but not yet confirmed. I would be cautious right now.

The FTSE, unlike the DOW, has gone sideways in the last 2 years. It did recover nicely after Covid's vertical drop in feb/march 2020 , and did attempt a break of new highs in feb 2023, but that turned out to be a bull trap. The naked trader did mention on a podcast, I forget which, that he made a killing on shorting the FTSE 100 during covid.

Plenty of time to get into the US markets, but imo now isn't the best time. The bull run may be on its last legs. Also, 34 trillion in debt, and already past the peak of US dollar dominance, cut samson's locks and the source of his power is gone. I do wonder....

Alphaflight

Hi Guybrush,

Yes indeed. It really is mind boggling when the market cap valuations are framed this way.

I allocated a fair chunk of capital towards GOOGL over 10 years ago. I started selling up around 2021, finally selling everything two weeks ago. I still think Alphabet is a solid company and they are ahead of everybody else on the AI front solely due to Deepmind in London (something most people don't seem to understand). Anyway I effectively swapped Alphabet for a basket of very boring, solid dividend paying companies which few people are paying attention to.

As for Oil and gas. I'm not worried about timing this perfectly, I'm just positioning myself for where I think the ball is going to be 5 years from now...same thesis I had with AI over a decade ago I guess. I think >=5X returns are likely with some of the O&G sub-sectors (See below).

Right now circa 80% of crude and 90% of natural gas production is controlled by BRICs. Saudi Arabia is now of course a BRICs member (as is Iran) so the petrodollar looks questionable to me at this point. Also Russia is winning in Ukraine despite what our media says. Anyway I believe that the asymmetry (massive upside) lies with the offshore oil and gas service sector. We need these companies in order to bring on more oil supply in the future. Without them it is impossible. The notion that we are going to completely phase out oil and gas in the next few decades is incredulous. So at some point the US and others will have to bring on more supply. The lazy solution is to just buy SPDR S&P Oil & Gas Equipment & Services ETF (PCQ:XES) and just wait for reality to kick in. If you compare Transocean (NYQ:RIG) to SPDR S&P Oil & Gas Equipment & Services ETF (PCQ:XES) you'll note that they are positively correlated with each other. Transocean (NYQ:RIG) has really sold off recently, being essentially the world's #1 offshore driller, I'd argue that should be in every O&G portfolio, the upside is ridiculous, basically it has an embedded call option built into it.

Oil Tanker companies all look the same i.e. collapsed in price but slowly recovering after bottoming out for a long period (same with the dry bulk shipping companies). See the likes of Tsakos Energy Navigation (NYQ:TNP),DHT Holdings (NYQ:DHT),Frontline (NYQ:FRO) etc, they all look the same in terms of their charts (i.e. the sector fell apart and is now recovering). Some very nice dividends too. If this Red sea situation continues or we get another oil embargo like the 1970s, the day rates on these tankers will blow through the roof.

There are many solid high yielding oil and gas companies of course. My favorites are in South America e.g. Ecopetrol SA (NYQ:EC) and Petroleo Brasileiro SA Petrobras (NYQ:PBR) - Note I don't own the ADRs however. Also Colombian/Canadian listed Parex Resources (TSE:PXT) looks cheap right now. The political noise in Colombia at the moment means that these are selling off, I'd argue that now is a buying opportunity. Unlike the United States, Colombia has lots of "heavy oil", the stuff required to make diesel fuel etc, hence my main interest. Italian listed refiner Saras SpA (BIT:SRS)is another nice dividend payer...

Private oil and gas investments are also worth looking at if you have the means. I've done two private O&G deals with Resource Insider. So rather than owning a listed (paper) stock, you own part of a private US LLC company [i.e. a hard asset rather than a paper asset]. These are of course iliquid but the Net Present Values look to be very high depending on how the future cash flows are scenario tested out.

18th Feb

All true. Hence my reticence. But hence my relative penury too....I did well shorting the FTSE also as Covid hit (trade what you understand) and then thought I was a genius as the FTSE powered back up to the plateau.

Maybe I'm pivoting mentally to growth at exactly the wrong moment. It would be classic bear capitulation. I have 10% in USA and have to concede that, although we might be near a top of sorts, you could have said that any time in the last thirty years in the USA and ended up, in the long term, being spectacularly wrong. My brain is overheating.

mojomogoz

Pure FOMO stage

People have lost their minds on Mag7. Fading this 'certainty' is only rational AND profitable course of action. (Note, in markets rational is often not profitable particularly on a few year horizon)

Great companies make great stories. Great stories make momentum and herding. Catch the early to middle innings if you can....stay into the later stages too but assess your risks...BUT don't chase the later stages as a new or, in our age of zero belief in our general economic futures, the only paradigm!

NVIDIA (NSQ:NVDA) has had its chips. I'm willing to bet anyone a whole British pound (I could even be pressed to raise my stake to a ridiculously priced pint) that Lloyds Banking (LON:LLOY) has a better total return than it over next 18 months. Yup crappy old dead end UK bank...

Lloyds Banking (LON:LLOY) has a better total return than it over next 18 months.

Of course NVDA will pull back at some point, possibly as soon as on earnings this week and potentially violently. But how’s the ten year historical comparison going?

For balance, I wouldn’t commit new money today either. But then I don’t need to - having enjoyed the AI run. Yet would I sell yet? You accused me of banalysis once - Ofer Druker failed my smell test when Tremor/Nexxen shares were 3 times where they are today. Facts have since confirmed my assessment of his priorities. Now I’m tempted to throw the same accusation back at you. While you are 100% correct on the madness of crowds, where is your fundamental analysis? Nvidia’s CY24 valuation is lower than it has been for nearly a decade. The share price has been racing to catch up with earnings - and not the other way round. I can name a whole clutch of semiconductor stocks that are pricier, including the most important one on the planet, ASML.

That said, NVDA is a cyclical semi stock, boosted by overcrowding. It’ll tumble hard in due course. And probably inside 18 months - but from what height?

PS Fully expecting a big crash on this week’s update after this post :-)

BrusselsLad

Saras SpA (BIT:SRS) has just announced an agreed sale of 40% and tender offer for the rest by VITOL.

I'm sorry I offended you with banalysis. It seems a fairly innocuous term in the scheme of things...bit funny and teasing. I don't understand playing markets and being sensitive about stuff, particularly if in a chat area. I've forgotten whatever anyone has said to me here.

I try to avoid comment and analysis whereby I use price gains as the basis of my argument...I find that an incredibly obnoxious form of argument re a stock...and I do find it a little triggering. Everyone's good on saying look at me I made a lot of money. But since that's the context of your response...

Re Nexxen International (LON:NEXN) -> I bought under 130p ish (some under 100) in c.2019 (the daily price doesn't say under 100p but there was at least a couple of days on intraday sub 100. I sold most of my holding from 500 thro the 700s. So tidy. I said when anyone asked it was a rather fortuitous bit of bagging. I saw a cheap and hated stock that I felt was over beaten up. Wont repeat why now but the concerns were overly emotional and prejudice. I saw a double just as negativity unwound...I didn't see the significant profit upside they achieved which I attribute Ofer Drucker. Dislike him or the company by all means...but if its just some ungrounded don't feel comfortable....well a good bit of that falls into prejudice territory. And if share compensation is to someone's disliking but they like AI and big tech....well that's a bit odd as US tech rewards heavily (and Nexxen are not egregious in the context of their sector).

Anyway, I never heavily promoted Nexxen. Only gave counter arguments. Always pointed out its was risky and somewhat opaque. Sadly for me I bought back in when sp fell. Sub 450ish area start and more heavily into the 200s. Not a good decision but much less than I took out. I sold out tho partly around the news acquisition...Drucker's done that well before but I don't understand the move and it seems to hide some structural earnings weakness elsewhere which I don't understand well.

Re Lloyds Banking (LON:LLOY) -> 100% banalysis. I'm not telling you its a great stock. In fact I used it as its a 'crap' bank. I don't particularly like it....BUT its still gonna beat NVIDIA (NSQ:NVDA). Given all you say I'm a bit confused that you don't take the other side of my dumb bet...if you can't be sure its better than Lloyds then what you doing talking Nvidia up!

I made a similar bet with some hot head who tripped through these pages and got upset with me criticising his 1-way bet to the moon tech stocks in 2020 and early 2021. He was pushing THG (LON:THG) as the UK equivalent of Amazon etc and saying they were going to corner all types of markets. I bet him Lloyds too. Beat him by huge amount (over 100% I think, given long v short). I actually knew Hut a little as I looked so I could see some of its claims to have a platform biz were crap. No doubt Nvidia is a better company that Hut...but my bet stands.

If you really understand Nvidia then tell us all about its prospective volumes and margins not its price and vibe....as you say its a deeply cyclical stock...the cycle never dies but it can extend. I believe very few people understand semis.

I remain bemused that in a small cap UK forum people continue to chat about UK being crap and US great and that they are super smart as they are in US and not UK. Bravo...but it ain't telling me anything about UK small caps...I just hear some gloating.

I have given up posting in detail about individual stocks as no-one wants to talk in detail...until something is hot as hell...its all a bit chase what's hot and/or brag about gains making one a master of the universe. In the past few years I've posted on a number of stocks when they were near bottoms with details rather than some glib aggressive statement that I'm the man. I'd lay out risks too eg Time Finance (LON:TIME) (bought sub 20p) , Ultimate Products (LON:ULTP) (bought sub 40p) , Uranium as general theme, K3 Capital (LON:K3C^B23) (sub 120p) , SCS (bought sub 150p when everyone was saying was basket case), etc. Not all that I wrote about been clear winners (eg RM (LON:RM.) and Mercia Asset Management (LON:MERC) -> sold both for profit tho and actually still like Mercia but just can do better things and idiosyncrasies make for some sharp downside risks...one to come back to on any future revulsion)

I've been in markets for near 30 yrs now. I've worked all round the world. I've read a lot of theory, analysis and history. Seen lots of different approaches to investment. You don't need to believe me but the odds of winning over next couple of years by chasing Mag7 is low. The system canny hold Captain...no matter how superb a business model is once it becomes very large AND highly valued it is a dependent on other things being decent and will be punished hard for stumbles. If the former happens then there's a lot more cheap growth elsewhere...and if the latter, darlings crash hardest

I may be wrong...but risk reward on a strategic level is best playing away from this '1-way winner call'

Your mojo out

PS Nexxen International (LON:NEXN) - not for the fainthearted and I don't have a position here. I don't know if this is a bottom as chance of negative update for Q4 23 and fy24 guidance taking down further (they don't really forecast heavily and are quite conservative so if Q4 23 is less than expected they will notch down fy24 too....does mean that if an upgrade cycle kicks in can be strong). But I'd wager it too will beat NVIDIA (NSQ:NVDA) over next 18 months.

Again...I could be wrong...but I'm happy to take the better 'risk adjusted' side of things

Hi Brussels Lad. Thanks I wasn't aware of this.

Hi Mojo. Good to get a fulsome reply. I'm not taking your bet because, in the timescale you've cannily proposed, I think you'd win. Will you offer me the same bet over 5 or 10 years though? To put it crudely, semis halve after peaking and treble from the trough, and there's time for a couple more cycles before the longer period is out. A disciplined buy and hold investor will simply ignore the fluctuations and get on with other matters and switch to bonds at 65. Part of my point is that Nvidia is only exhibiting the same behaviour as most of the other semi names. Their charts ALL look like that!

What is set to bring the whole house down is not necessarily the deflation of a valuation bubble - I think we are well short of that categorisation because earnings are so remarkable. Instead, it's the deflation of the earnings bubble, when NVDA and all the other AI beneficiaries see their earnings growth rate normalise. That could be as soon as Wednesday night, or might take a year or so. Then the house will fall down.

Alphaflight, well done on Google, which ten bagged over the last decade. Your timing selling Google was impeccable, selling right at the peak, not once but twice - one would think you were a chartist! A decade is a very long time to hold a stock but if one had to, choosing a US tech stock and the market leader in internet search engines was a savvy move. And more recently, it was the leader in AI too with Deepmind as you mentioned, but I don't think its generative AI tech(Bard) is able to compete with the likes of Open AI's ChatGPT or Microsoft Copilot(chatGPT v4.0). Everyone's heard of ChatGPT, not many have heard of Google's Bard, even I had to Google for the name.

As discused, I'm interested in following the money, and my strategy is to look for market leaders in the strongest sectors(energy sector is currently the weakest sector in the UK, according to the average Quality ranks of each sector and I'm not interested in playing the long game like youself), and swing trade breakouts in a stage 2 trend. I'm ready now for the US markets - Barclays recently offered international trading, I have the tools now with Stocko to research and screen hundreds of shares and their charts, my fundamentals analysis is also improving, and I'm feel more disciplined in my risk managment these days - which does help to offset the extra layer of risk due to the exchange rate risk for UK investors in the US marktet. So I'm all set to go, but don't mind waiting a while longer. The AIM all share index has been in a down trend for the last 2 years, but it does appear finally to have bottomed( I want to see a confirmed uptrend first though), and recent higher than average volumes is indicating capital in flows into AIM could be returning. This could be a good time to be returning to AIM.

19th Feb

To cut a long story short, I never expected to sell GOOGL but after all of the AI hype and Deepmind publishing a lot of their key findings (remember Deepmind created the Alpha Go, Alpha Go Zero et al algorithms) I decided that Ray Kurzweil's 2029 expected singularity might now work out as I expected. I could see cheaper value else where but it took me a long time to finally liquidate everything, my emotions got in the way and of course you should never be emotional about stocks!

The growth stocks (MAG 7 stocks) seem to have little upside now, whereas the "value stocks" have low debt, lots of free cash flow and are churning out income.

A long time ago I used to work for a US Investment bank on their bond desk so equities were never my area of expertise. Anyway my strategy now is to look further down the road for sectorial patterns because most of the move in a stock (70% - 80% I think it is) can be attributed to the sector rather than the individual company. So I look for sectors that are out of favor but necessary (roughly based on Mr Maslow's "hierarchy of needs"). If the sector appears to have suitably bottomed out, I then start buying a basket of the main companies in said sector or an ETF (if one exists) and hold, rather than focusing on one single company. For example right now I own a lot of the following sectors, you'll note that few people here are interested in them: Coal, tobacco, oil/gas tankers, dry bulk shipping, offshore O&G in general, Uranium (although I've sold a chunk of that recently with the hype), gold/silver miners and royalty companies, Agriculture, South America (Brazil - I own some actual real economy businesses there and frequently visit). Also Hong Kong, lots of deep value in the HK market with high dividends and very cheap metrics - the caveat is political risk so I use an HK broker as I lost a lot of money with Russian ADRs/GDRs when the US and British government de facto stole them from me (once bitten, twice shy). Also Indonesia is interesting, lots of coal companies churning out cash with low valuation, some of these have dual Singapore listings.

Mojo. I thought the effort you put in to your reply deserved a more thoughtful response. To be clear, I wasn't offended that you accused me of banalysis in respect of Ofer Druker - I was amused. I'm a former FTSE C-suite dweller and I know bullshit when I hear it from another chief exec. He was clearly signalling a downturn in Tremor/Nexxen's fortunes and I was even more grateful for his transparency - I sold out that day - than I was for the little smile you gave me with your dismissal of my perspective. I delight in your willingness to give it out and you are amongst my very favourite contributors on Stocko. But if you hand it out, you have to be prepared for some gentle ribbing in return :-)

I see that you were happy to introduce a couple more digs in your response yesterday. What you suggest is gloating is nothing of the sort. It's frustration that UK investors are so frightened of the valuations attributed to US stocks in general, when the enduring outperformance of superior companies in better markets - way beyond Mag7 - is plain for all to see. I guess if a shopper spends her days rootling around in Poundland, then even M&S looks expensive. But buy cheap, buy twice, as my mum used to say.

Nor am I the momentum rider you imagine. I've owned most of the AI beneficiaries since the previous decade and well before the dawn of ChatGPT. That means that I've endured gut-wrenching falls as well as thrilling rallies without trading in and out. I own them because they are moaty franchises with high returns on capital in an industry that I understand from a 30 year career embedded in software and technical architectures. And I'm not selling you Nvidia's price or momentum, I'm looking at its valuation relative to earnings and finding it, if no longer as downright cheap as it was at the start of year, still not too pricey in respect of its current performance. That will change, as we both know. If you want to talk future volumes, then I'd draw your attention to the FY Jan 26 (effectively CY25) forecasts, which anticipate 22% growth. This is rather pedestrian for NVDA but, on the back of such a big surge in volumes, enduring two years and operating largely without competition, it's as conceivable that progress could flatten out as it is to imagine the juggernaut rumbles on. We both know this run will end in a tumble. But a look at the wider semiconductor market and its history shows that this is just normal semi stock behaviour. And when it halves in anticipation of the next trough in the cycle, so will the rest of the semis.

As for understanding the semiconductor stock market, that has become a whole lot harder. It used to be that most of the sector moved in unison. And that holds true in that the AI beneficiaries in graphics processing, packaging, memory and networking are actually only now picking up in financial performance while the analog industrial chip makers are still troughing. But the market has moved much faster than in the past to anticipate the flow of orders turning into revenues. So you have a stock like BESI, which has just had an awful reporting year in '23 with revenues down more than a fifth, surging not just to ATHs but to double the high of the previous cycle before any of the anticipated orders become revenue, let alone profit. It used to be that the market would anticipate the semi cycle by about 6 months - now it is 2 years ahead of itself. Clearly much of that is AI hype and BESI is considerably more expensive - and more cyclical - than NVDA. But I argue that, absent a fortuitous guess, and if the market is unfathomable, then a buy and hold investor should just ignore the volatility and focus on the future for its hybrid bonding technology. And so it is for Nvidia, not just for its GPUs, but for the software moat that it has built around them. Today is not a great buy point. But I'm willing to bet that, 10 years from now, owners will be looking down on the price from a commanding eyrie.

Anyway, keep up your high quality, unfiltered contributions. They are a source of enjoyment and education for me and you rarely disappoint. We have very different investing - and posting - styles but I'm sure there is much we have in common.

Big love BnB

The Magnificent 7 have a higher weighting in the MSCI World Index than all of the stocks in the UK, China, France and Japan combined. Link

Microsoft is now larger than the entire energy sector:

A better comparison:

Source Tavi Costa

rmillaree

ref Tesla

If one had said 5 years ago market cap will be $600 bill in 5 years time i think investors wouldnt have been happy. think end of 2019 market cap was $75 bill so the poor recent price performance really needs to be taken in the context of the 8 hold increase this decade - i think the reality is the price may have simply gotten ahead of itself.

I suspect that we are approaching the point where the CEO Elon Musk may be ‘spreading itself a bit too thinly’

I would say Tesla are a mature enough business now that i would hope they are NOT over reliant on him on day to day basis. In some repects i suspect now the initital mass production issues are solved he deserves the right to step back from frontline firefighting (he saw as being necessary preumbaly) and leave it to suitable other bods on a day to day business. We all know he is prone to make random decisions - i think there is a certain point where being frank he may not know best if there is so much going on that he isnt as in tune as he was.

Latterly, Tesla has been hit with a widespread 2.2 million vehicle recall that has been ordered by the US regulator, in order to update the software to increase the size of warning messages on the dashboard.

not convinced this is a real recall in the traditional sense - if its the same recall as mentioned here it might be that this is mostly done online ? even if its not recalls are justa fact of life in their business.

https://fortune.com/2024/02/02...

the agency say the warning light recall will be done with an online software update. It covers the 2012 through 2023 Model S, the 2016 through 2023 Model X, the 2017 through 2023 Model 3, the 2019 through 2024 Model Y and the 2024 Cybertruck.

I dont think anyone will doubt there is more competition and there are margin issues here - but i suspect where Tesla is now is a pretty good place if we look back to 5 years ago rather than compared to shareprice highpoint when perhaps there was over exuberance ref prospects.

Also, a major win for the lil guy, the minor Tesla (NSQ:TSLA) shareholder, who took Elon to court over his $50 billion ish 'Tesla bonus' and won!That's a real corporate David and Goliath moment......... even just surviving the lawyers' fees.And now he wants free and extra voting shares in Tesla...... Great soap opera if nothing else.

I always though the "bonus" potentially on offer at the time was fair reasonable - 6% dilution ish perhaps if the optimistic targets where hit - think shareprice needed to rise ten fold for him to get the full payout . From where they were back then i think most investors would have said - hell yes elon you turn us from $50 bill company into $650 bill company and start churing out profits over $10 bill per anum then you deserve 6% at that time.

The ones designing, manufacturing AI chips are the ones rising the most

Tesla makes cars not AI chips, not suprised its falling.

Tesla are most certainly designing their own AI IP unless i am wrong - yes they make cars we all know that and they may be reliant on Nvidia and AMD at present for their stuff but pretty sure their plan is to have their own stuff ref AI IP (Dojo?) In a technological battle i wouldnt want to dimiss their abilities compared to others. I would agree their plans in this regard are very much wip - so who knows how styrongly musk will folow through withn these aspirations - he does talk a good story .....

Market Musings 030224: The Magnificent Seven meets The Good, the Bad and the Ugly.