The View from S&P 5,000: Where Markets Go from Here
"You know what I noticed? Nobody panics when things go according to plan..."
"You know what I noticed? Nobody panics when things go according to plan...Introduce a little anarchy, upset the established order, and everything becomes chaos.” - Heath Ledger as the Joker, The Dark Knight
As I thought about markets and my positioning over the long holiday weekend, I was reminded of a scene from one of my favorite movies, The Dark Knight, where the Joker, portrayed by Heath Ledger, visits Harvey Dent (Aaron Eckhart) in the hospital. Ledger’s Joker continues by saying, “I’m an agent of chaos. Oh, and you know the thing about chaos? It’s fear.” Imagine, for a moment, replacing the citizens of Gotham with markets and market participants. Nobody panics when markets relentlessly trend higher and complacency reigns supreme. Yet, introduce volatility to the market, disrupt the established trend, and suddenly, everything becomes chaos.
Frankly, I pondered the parallels between the quote and markets for more time than I’d like to admit, but for good reason. What I realized was that in a euphoric market like the one we have today, markets will always find a reason to move higher because reckless abandon is the “plan” – extend risk, taper hedges and hope for the best. To make sense of this market, I turned to one of the most valuable aspects of my investing process: writing. Writing not only allows me to organize my thoughts; it also allows me to evaluate my positioning and juxtapose it against a different backdrop like heightened volatility.
Writing is a multi-faceted process for me because there are different ‘tiers’ of notes that I keep, ranging from bullet points to explore further all the way to fully-formed investment theses that I am investing on the back of. The evolution of a thought to an actionable thesis is a meticulous practice for me, one that only a handful of ideas sees through. In order to get comfortable enough with a trade or investment, I always take the other side of the trade to try and poke holes in my own thesis. If I can’t find any weaknesses, I then vet the idea with colleagues who see things differently than I do. In a perfect scenario, I am able to find someone who is on the other side of the trade so I can compare and contrast their position against mine.
One of the primary reasons I started Hoags Research was to expand the pool of investors with whom I interact. A larger network means more perspectives, and more perspectives lead to better insights, and over time, better insights lead to better investments. Moving my writing to Substack means I’m relegating my thoughts from the privacy of my phone to the public square. By publicizing my thoughts, critiques will no longer only be my own; instead, I’ll be able to hear readers' as well. I am a firm believer that hearing different perspectives from you, the readers, will allow me to refine my process so that I produce better content, in turn, creating a virtuous cycle. Moreover, the opportunity to scale the reader base that Substack provides for a newsletter like Hoags Research means a great deal. Every time you like or share my content amongst your network, there is an exponential return for all of us. I encourage and thank you in advance for sharing my content and look forward to what’s in store.
Thoughts on the Market
On Friday, the S&P 500 closed above 5,000 for the fifth time this year. This comes on the heels of Tuesday's hot CPI print, which led to a 100-point drop in the S&P at the intraday lows. However, the hot inflation data must not have affected investors too much, as the index recouped 80 of those points by Wednesday's close. It didn’t take long for my antennas to go up with last week's price action. Given my nature—a tendency to always believe everything is bullshit until proven otherwise— I posed the usual questions I ask myself to mitigate my (lovable) tendency and view the market through an objective lens. The conclusion I came to was that no matter how I analyze the information at hand, I cannot fathom markets being able to sustain levels like this, especially given the fact that only a handful of stocks have carried the day for the market since last year.
The current backdrop of the markets is fraught with potential pitfalls—from the geopolitical tensions in Eastern Europe between Russia and Ukraine, to the quickly evolving standoff in the Taiwanese Strait between China and Taiwan, and the looming US Presidential election. Conventional wisdom would suggest such scenarios should rattle the markets, investors currently say otherwise. Geopolitical tensions are not unusual, but the magnitude of the current geopolitical environment is significant. Yet, in the face of all of that, markets have shown sheer resilience to traditionally negative news.
All things considered, the most astonishing feature (or perhaps bug) in the markets is the blatant disregard for risk among investors in recent months. There appears to be a prevailing willingness to add risk while completely neglecting the protection of one’s downside. The term "Irrational Exuberance," famously coined by Alan Greenspan, is defined as "unfounded market optimism that lacks a real foundation in fundamental valuation and instead rests on human psychology." In recent months, I have noticed a change in sentiment that closely resembles the definition put forth by Chair Greenspan, giving me reason to believe that we are currently navigating a period of market euphoria. It's essential to clarify that I'm not suggesting we're in a bubble akin to those of 1999 or 2008. However, history has shown that markets have a way of humbling those who become overly confident in their positions.
Although opportunities exist in any market, finding them is the challenging part. Euphoric markets, similar to bear markets, present asymmetric opportunities that are unique to the circumstances in which they arise. When participating in a market like the one we are experiencing today, it is important to "keep your head on a swivel," as my Dad would say. Liquidity and adaptability trump everything else at the end of a euphoric market, so rather than fighting for the exits in a burning theater, I’ll be waiting patiently at the door to buy stocks at a discount from investors who over-extended on risk.
“Trust the Process” - Sam Hinkie
Before I dive into some of the stocks that I am looking at, I thought it would be helpful to offer a brief explanation of my process, clarifying how an idea evolves into an investment. The genesis of my investment ideas primarily starts with a top-down approach, meaning my ideas often come from news events, emerging trends, or better yet, they are found in the middle pages of a newspaper written in font so small that no one bothers to read it besides me. These sources serve as my foundation for developing an investment idea. As someone who is naturally curious, I'm constantly on the lookout for new data points that may allude to a changing of the guard within markets or individual stocks. Whether these points of reference indicate the reversal of long-held trends or involve data that isn't widely discussed, they all play a crucial role in shaping an idea. This varied approach to idea creation ensures that I'm never short of concepts to explore.
Once I have formed an idea that I believe has legs to it, I begin formulating as many theses around it as possible, both bullish and bearish. After determining what I consider to be the strongest thesis, I draft an outline that represents the opposite side of the trade and attempt to identify any weaknesses in my thesis. If I can’t find fatal flaws, I expand the thesis before giving it to peers in the industry, inviting them to critique my argument.
Should an idea survive the thesis stage and I continue to believe in its viability, I proceed to the research phase of my process, which is bifurcated. The first prong is further Top-down Analysis, where I assess global trends through a macro lens, whether they're economic, geopolitical, or part of broader market phenomena. The second prong is Bottoms-up Research, which is where I spend a significant amount of time diving into the company itself, its competitors, management team, financials, etc. I won’t bore you with the details, but the process of modeling out a company’s financials and creating sensitivity analysis for different scenarios is arguably the most important aspect of bottoms-up analysis. It is my opinion that people spend too much time modeling factual data already given to them in the company’s financials rather than meticulously refine the variables they use as assumptions in their models. Anyone can get a model to output anything they want, but that’s not the point. The point is to be as precise as possible thus I’d rather follow the “aim small, miss small” motto rather than have my work be viewed as “garbage in, garbage out.”
With that said, I have listed a few stocks that I am actively trading and/or invested in. The descriptions are brief by design, but will give you a flavor for what I see and why I’m positioned the way I am.
Abercrombie & Fitch (ANF): Short stock via OTM puts and put-spreads ranging from 30 – 90 days until expiration. Weakening consumer data, absurd valuation and competing in a market that is highly commoditized are why I’m short and that’s only to name a few. All one has to do is look at ANF’s chart to see what euphoria looks like in price action.
Palantir Technologies (PLTR): Actively building a long position in PLTR stock based on the company’s strategic role in data analytics and defense. Moreover, PLTR’s commercial business continues to grow organically and will be a healthy secondary revenue source in the coming years. Although the valuation is lofty, I’m viewing this from as a long-term investment. I usually would shy away from a valuation like PLTR’s, but with the backing of early-stage investors like the CIA’s Venture Capital Arm and software that is utilized by the US military and its allies, I am inclined to view the long-term prospects of PLTR favorably.
Bumble (BMBL): Long stock, as well as long OTM calls expiring in 240+ days. The company is positioned favorably within the digital dating ecosystem with additional networking services focused on friends and business peers. Moreover, the company expects to turn profitable this year. With the stock price having faced pressure over the last year, buying a growth stock with expanding margins and a healthy balance sheet at these prices puts the trade in my favor. Whether it is a market re-rating or M&A transaction, I see BMBL as an opportunity on the long side.
Enovix (ENVX): Long stock. Arguably my favorite long-term investment. Board is led by T.J. Rodgers who founded Cypress Semi and led the company for 34 years. Rodgers’ is highly regarded in the semiconductor space and has used his experience to create a world-class team at ENVX.
Although the details of the positions above are brief, I expect to put out full reports on each individual name over the next week or so. Those reports will provide full company descriptions, valuations, management and analyst guidance, as well as a comprehensive investing thesis.
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Disclosure: The views and opinions expressed in this article are those of the author and do not constitute financial or investment advice. All information provided is for informational purposes only and should not be interpreted as an endorsement or recommendation for any specific investment strategy or financial product. Readers should conduct their own research and consult with a professional financial advisor before making any investment decisions.