Catching Up on Q1
Due to the rise in interest rates, the requirement for a stock to be a “good investment” in terms of return on capital has gone up. Generally you need to think you are going to get an 8% annual return – and with interest rates at 5%, now you need 13%. At 8% over 5 years your $1000 investment needs to return $1450 and after 5 years your 13% investment needs to return $1950 which is the math behind “returns must double”.
When stocks go on big moves up or down, we will consider buying or selling faster. We recently sold 1/2 our position in Nvidia (NVDA) which is a great company after it was the highest returning investment in Q1 on major stocks.
Recent News and Events
We still have some stocks in the portfolio that are growing rapidly and are a play on the future, such as Cloudflare (NET). Although their Q1 earnings and revenues were fine, their CFO made some comments in the earnings call and the stock dropped 25% after hours and is now $43/share. This stock may be too volitile for many in the portfolio and we should consider selling. I personally may consider this to be an “entry point” to buy the stock because I believe it is very well run and innovative but with the higher expectations for earnings it may be a difficult ride.
Activision (ATVI) is being acquired by Microsoft (MSFT) at about $95/share. The stock is currently trading at $77, since the UK is denying the merger. Either this stock will close at $95 or if the merger is rejected, it probably will fall far below $77 (no way to guess how much). We have been hanging on to it waiting for the merger to close but this isn’t helping. Unlike other acquirers we know that Microsoft has the funding available.
Snap (SNAP) also dropped 18% after it released weak earnings. Snap’s value has crashed since Apple reduced the ability to track users and due to heavy competition from TikTok, and it is trading near 52 week lows. Snap is now a bet on recovery / acquisition or if TikTok gets banned and creators have to go somewhere. Another one that either may be too rough to ride or a good entry point.
A month ago, a prominent short seller company went after Block (SQ) which was formerly Square, and said that their cash app was riven by fraud. The stock did fall some but has since stabilized. This may either be a point to fall further or they may be fairly valued, but another rough ride.
Tesla (TSLA) stock also went up significantly and back down again, with the company doing price cuts and having increasing inventory, and much noise from their CEO on various other topics like SpaceX and Twitter. This is a difficult stock to get a handle on and TSLA trades for many of its competitors combined market value, but if the future is truly electric cars Tesla is already there and the others have a long bumpy ride.
It is important to take a moment to think about the stocks that we don’t have – banks. Banks traditionally either make their money on IPO’s and fees, wealth management, loans, and the difference between what customers are paid on deposits and what the bank can earn from the Fed.
Banks have been riven by turmoil because they are forced to hold US government debt (to meet capital requirements) and the stress tests they were subject to didn’t include interest rate risks, so if they held debt to maturity, they didn’t need to recognize losses. But these losses are massive and they are dwarfing even their equity value in some cases. In addition, commercial real estate is tottering and will likely result in huge losses to their loans. Finally, there has been little activity in IPO’s and SPACs are dead so fees are far down. Customers are far more savvy than they used to be and can easily pull their money and get higher savings rates on their deposits, or move into other vehicles like brokerage CD’s (which I recommend) or just put it in a money market account. Perhaps there is an entry point for banks but I don’t know what it is.
Reviewing Stocks and Sectors
I am in the process of reviewing the stocks in various portfolios. There are many sectors that still have promise, and I still believe that investing in non US stocks has value since most growth must occur outside of the US due to the size of their economies and continued economic growth.