Q2 2024 Market Insights: Investor Letters and S&P 500 Analysis

O'Keefe Stevens Advisory Q2 2024 Investor Letter

We initiated two new positions during the quarter: Alibaba and Perrigo. Continued hopes of near-term rate cuts drove a 3.9% gain in the S&P 500 in Q2, led by names you may have heard of - Nvidia (NVDA), which was the largest company in the world for a brief second. Microsoft, Alphabet, Amazon, and Meta saw their stocks rise 10%+ in the first half. These five stocks accounted for ~63% of the S&P 500's rally in the first half, led by Nvidia accounting for roughly half of the 63%. The S&P equal-weighted index again lagged its market cap-weighted counterpart, down ~2% in the quarter, displaying the concentrated and top-heavy nature of the rally. During the quarter, the A.I. rally broadened beyond the obvious players of Nvidia, AMD (AMD), and hyperscalers. Qualcomm (QCOM), a long-standing investment, is gaining recognition for integrating artificial intelligence into mobile phones. Qualcomm's A.I. on-device capabilities enable real-time language translation, improved voice recognition, and sophisticated imaging techniques as A.I. becomes more integral to mobile experiences. Qualcomm benefits by leading the market in providing robust, efficient, and versatile A.I. solutions. A.I. could be the first technology advancement in several years to accelerate the smartphone replacement cycle as users desire these advanced capabilities. Corning (GLW), another long-time holding, announced Q2 results would come in better than anticipated due to outperformance in their optical connectivity products used for Generative AI. Corning has long been a disappointing investment; with leading-edge technology, it consistently underperforms expectations. Their "springboard" plan, which revolves around $3 billion of excess capacity, seems to be the first sign in a long time that they are ready for a surge in growth. Management has frequently discussed the potential for operating leverage in nearly every conference call, anticipating a return to normal business conditions. Margins should expand over the coming quarters, driving EPS growth. The $3B in incremental sales could be worth in excess of $900m in EBITDA. While A.I. use cases appear endless, ROI on spending is far from known, blurring the visibility and duration of the ongoing Capex boon. Will spending hit an air pocket as hyper scalers and other players pull back to assess whether spending is an attractive ROI? Our recent quarterly call discusses portfolio holdings set to benefit from machine learning. We concluded that every business benefits from AI, but those not adopting the technology will fall behind. Employees need not be concerned about AI taking over their roles but how they can incorporate it into their jobs, making them more efficient. A personal anecdote is ChatGPT's role in ramping up new ideas. The conversational nature and ability to distill complex topics into lamens terms is incredibly beneficial for those unfamiliar with industry terminology. We initiated two new positions during the quarter: Alibaba (BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs. Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025. It's rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks - 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China's geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23. All investments carry risks; some can be diversified away, and others cannot. While incremental investments and spending will likely lead to margin compression, this is a necessary step to stabilize and potentially regain market share. The risk of continued market share loss from Pinduoduo (Temu), JD.com (JD), Shein, and Douyin is shown below. Alibaba's Chinese market share has declined from 78% in 2015 to 44% in 2022 and 40% in 2023. The under-reinvestment in the business opened the door for others to come in. Joe Tsai, Chairman, stated Alibaba had shot itself in the foot over the last decade, not prioritizing the end-user experience. Eddie Wu, who took over as CEO in late 2023, has prioritized improvements in the user interface. This reinvestment should help mitigate future market share losses. We expect capital returns through dividends and buybacks to continue for the foreseeable future. The business generates substantial free cash flow, cumulatively over the next 5-6 years, could total today's enterprise value. Perrigo offers over-the-counter (OTC) self-care and wellness solutions in the U.S. and internationally. In the U.S., the company primarily focuses on store brand products, whereas Perrigo markets its own brand internationally. The Consumer Self-Care Americas (U.S. business) represents ~2/3 of sales, with most revenue generated through store-branded products at retailers including Target, Walmart, and CVS. Products include pain relief, sleep aids, upper respiratory relief, and digestive health. Consumer Self-Care International (International business) represents ~1/3 of revenue concentrated in Europe. 90% of sales stem from Perrigo's branded products, pain and sleep aid brands Solpadeine and Nytol, upper respiratory - Aflubin, and Physiomer. Over the past several years, Perrigo experienced significant management missteps and regulatory changes. Investors have seen nothing but a downward trending business and stock price over the past nine years. Fatigue has set in. However, significant business developments, management changes, and new market opportunities, combined with an undemanding multiple and growth acceleration, have us encouraged that the future is unlike the recent past. In August 2023, the FDA issued warning letters to Perrigo and two other infant formula manufacturers, ByHeart and Reckitt, for violations of the Federal Food, Drug, and Cosmetic Act and the FDA's infant formula regulations. These letters are part of the FDA's ongoing efforts to ensure the safety and quality of infant formula products and prevent contamination. As part of these efforts, the FDA updated its infant formula compliance program to enhance inspections, sampling, laboratory analysis, and compliance activities. This includes annual environmental sampling for Cronobacter and Salmonella. Perrigo, the only private-label infant formula manufacturer in the U.S., was required to shut down manufacturing facilities to modernize and update production lines to achieve compliance. The resulting downtime, along with several starts and stops, led to approximately $130 million in lost operating income. Guidance calls for infant formula stabilization in 2H 2024, with 2025 seeking to fully recover the lost $130m. We like this easy comparison and accelerating growth formula. Management Change - Patrick Lockwood-Taylor joined Perrigo in June 2023. Before this, he held leadership roles, including President of Bayer's North America Consumer Health Division. In the first quarter of 2024, he announced Project Energize, a three-year investment and efficiency program aiming to achieve $100 million to $110 million in pretax savings by 2026. Management has several ongoing initiatives, including SKU rationalization, an infant formula relaunch, the introduction of Opill (discussed below), and Project Energize. These efforts are designed to increase free cash flow generation, directed toward debt reduction. Currently, leverage stands above 4x, with expectations to reduce it to approximately 3x by the end of 2025. In a rising rate environment, it is unsurprising that the market is concerned about leverage levels. However, we anticipate these concerns will diminish as leverage decreases, leading to higher valuation multiples, lower interest costs, and incremental EPS growth. Around 65% of women aged 15-49 use birth control, according to a survey conducted from 2017 to 2019 by the Centers for Disease Control and Prevention (CDC). In the first quarter of 2024, Perrigo introduced Opill, the first over-the-counter (OTC) birth control tablet. This total addressable market (TAM) is substantial, offering significant potential earnings if the launch succeeds. Considering all current initiatives, we estimate that Perrigo can generate over $3.50 in EPS by 2025. A valuation of 14x earnings (a conservative estimate for a staples/healthcare business) translates to a $49 stock price. We anticipate mid-single-digit EPS growth beyond 2025, coupled with reduced leverage, which could result in a "Davis double play" of earnings growth plus multiple expansion. During the quarter, we launched a Substack, "The Lion's Roar - Outside the Box Investments," which can be found here. Most research reports will be posted here moving forward. Our first post was on Southwest Gas Holdings (SWX). We will post research reports, follow-up earnings notes, and management/industry conference notes. The move gives us increased freedom to post what we want in a manner consistent with our style. Ideas will consist mainly of long/short SMID cap US-listed securities. We aim to foster discussions, provide a source of idea generation, and grow our investing network. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

White Falcon Capital Q2 2024 Partner's Letter

This will not be an easy environment for making money, and those crowding into US passive ETFs are likely to see minimal real returns on their investments. Dear Partners, While individual returns may differ based on their inception dates, consolidated performance of all accounts for the period ending June 30, 2024 is as follows: Q2 2024 1H 2024 2023 2022 ITD* White Falcon (net of fees) -5.9% 2.4% 36.0% -9.26% 24.4% S&P 500 TR (CAD) 5.3% 18.8% 23.2% -12.6% 32.1% MSCI All Country TR (CAD) 3.7% 14.6% 18.5% -11.9% 21.5% S&P TSX TR -0.5% 6.1% 11.8% -5.8% 11.2% *Inception date is Nov 8, 2021 Click to enlarge This was a difficult quarter. The negative performance of Endava (DAVA), EPAM and Converge (OTCQX:CTSDF) could not be offset by strength in Amazon.com (AMZN), Nu Holdings (NU) and precious metal royalty companies. The portfolio was affected by middling earnings and guidance downgrades from our IT services and software positions as corporates prioritize Artificial Intelligence ('AI') related IT spending. The market itself had an excellent first half but we must point out that a lot of these gains were led by a few select stocks with the equal weighted S&P 500 (SP500, SPX) up about 5.1% in the first half of the year. Towards the conclusion of this letter, we elaborate on why we perceive the current environment to be similar to the 1970s rather than the late 1990s. We have always emphasized that our performance will always look very different when compared to the popular indices as our portfolio looks very different when compared to the popular indices. These differences are especially enhanced over shorter periods of time. There are numerous factors - sentiment, narratives, flows, factor rotations, among others - that affect the price of a stock over the very short term. However, in the long term, fundamentals rule. We believe we own some wonderful businesses and have full confidence in the portfolio. In fact, we believe that this temporary dip enhances the look-forward Internal Rate of Return ('IRR') of the portfolio as it has allowed us to lower our average cost base and concentrate on our best ideas. Investment ideas are fragile. In order to achieve market beating returns, one has to have a variant view. Most of White Falcon's positions are in companies where: We believe the growth, margins, or free cash flow will exceed market expectations. The market undervalues the business's quality or the management's capital allocation skills. The business is temporarily out of favor, and we anticipate the stock price will recover as these issues subside. Our longer-term perspective aids in this. We purchase securities from distressed investors who are selling for reasons unrelated to fundamentals. "The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."-Warren Buffett When we make an investment, the situation is often complex and convoluted, otherwise, it wouldn't offer high risk adjusted IRRs. For example, there can be issues such as a poor quarterly performance, supply chain issues, or a longer than anticipated turnaround in business performance. Investors often acknowledge a business's quality but prefer to invest after challenging quarters have passed. On the other hand, we often try to invest at the point of maximum pessimism in the stock as that is when we can buy a good quality business at a reasonable valuation. If our analysis is correct, we are likely to profit in the long term; however, we have limited control over the situation in the interim. In a typical quarter, we often see one or two investments - like Aritzia (OTCPK:ATZAF) or Converge experiencing a drawdown. Due to our portfolio's diversification, this drawdown does not significantly impact the portfolio's overall performance. However, during Q2, a higher-than-usual number of portfolio companies experienced drawdowns, marking a departure from the norm. I will delve into some of the reasons below, and explain why I have confidence in our portfolio. Our portfolio is heavily tilted towards technology companies. Technology, whether in the form of railroads, electricity, radio, motor vehicles, or the internet, has consistently had the potential to disrupt existing industries and create entirely new ones. We have learned through experience that investing becomes marginally easier, and far more profitable, when done in secularly growing and good quality businesses - as long as one pays attention to valuations. Due to this, we have positioned ourselves in businesses such as EPAM and Endava which are IT services companies that help other corporations implement new technologies. These are good quality businesses with robust economics and are led by their founder CEOs. Currently, AI is the new technology trend and investor emphasis has been on investing in hardware to support AI capabilities. As the necessary hardware becomes more widespread, the focus will likely shift towards creating and optimizing AI applications. EPAM and Endava will benefit from this cycle as they have built a reputation for executing specialized and complicated IT projects. However, AI is still a new technology, and clients need time to identify the best use cases. This has led to a cautious "wait and see" approach from clients, which is currently suppressing demand for IT services. The timing of demand revival in the sector is uncertain and, as we have discussed before, the market hates uncertainty. "Everyone has the brainpower to make money in stocks. Not everyone has the stomach"-Peter Lynch We believe the market has overreacted and EPAM and Endava are now trading at historically low multiples of depressed earnings. Eventually, corporations will need the help of EPAM and Endava in order to design, build, test, and implement AI applications. We have added to both stocks and lowered our cost basis, which we anticipate will enhance the overall internal rate of return (IRR) of the portfolio. Case Study: Aritzia Let's look at Aritzia for a typical case study. We bought a position in Aritzia in 2022 and had an average cost base of around $36 per share. Our thesis was that Aritzia is a high-ROIC business offering essential clothing, driven by a capable management team with strong founder leadership. Importantly, there was predictable growth in the business as Aritzia was just starting to expand in the US and had plans to open ~10 stores in the US every year for the foreseeable future. However, in 2023, the business encountered difficulties due to over-ordering of inventory and rising expenses. The market's dislike of uncertainty caused the stock to be punished beyond what we considered reasonable. At the bottom, our estimate was that Aritzia was trading at less than 10x our estimate of 2026E earnings. "You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing."-Charlie Munger We thoroughly reviewed and verified our work, including speaking with management, former employees, and competitors; and concluded that these issues will resolve themselves over time. We took advantage of the situation and added to our position in the $22-25 price range and brought our cost base down to $28 per share. The situation recently corrected itself when Aritzia reported a good quarter and the stock recently closed at $47.50 per share. From our perspective, market volatility is a feature, not a bug - Aritzia experienced more than a 50% decline followed by more than a 100% increase - all within just two years! To be clear, it is not always appropriate to add to a declining stock. This should be done selectively and only when the risk-reward is favorable. In the last two quarters, we sold our positions in Warner Bros Discovery (WBD) and Fortrea (FTRE) - both at a small loss. While both stocks remain inexpensive and could potentially recover, our analysis has reduced our confidence in their prospects. This concern was exacerbated by the high levels of leverage present in both companies. The top 5 positions in the portfolio are: Precious Metals royalty basket, Endava, Amazon.com, Nu Holdings, and Rentokil Initial Plc. We have been communicating our strategy of shifting the portfolio increasingly towards small and mid-cap stocks where we have found valuations to be much more reasonable. In the last quarter, we noticed that several of these stocks did not gain or sustain their gains despite improvements in their fundamentals. However, following the quarter's end, we witnessed early signs of optimism as lower inflation readings and expectations of rate cuts rejuvenated small and mid-cap positions in the portfolio - including EPAM and Endava. It is our job to position the portfolio for the future - sometimes the future is just a little bit delayed! Rentokil Initial Plc (RTO) is a global business services company specializing in pest control and hygiene services. These revenue streams are relatively stable and resilient, even during economic downturns. Rentokil's moat comes from its scale, network density, technology and established brand name. Rentokil typically trades for ~25x earnings but is currently available for 19x 2024E earnings and 12x our estimate of 2026E earnings. As we have described above, something must be going 'wrong' if a good business is available for a low multiple. Rentokil acquired Terminix, the largest pest services provider in the US, and has encountered some integration challenges. Our due diligence on Rentokil has led us to believe that they can successfully integrate Terminix and meet their targets. Importantly, the valuation discounts many of these issues, creating a 'heads I win, tails I do not lose much' scenario. In the appendix to this letter, we re-produce an article that we wrote for the Globe &Mail on Rentokil. While it's not our typical long-form report, we hope you'll still find it enjoyable. Overall market comments A few of you have inquired about the general market environment. While many commentators draw comparisons between the current surge in AI stocks, particularly Nvidia, and the late 1990s internet boom, we find the nifty-fifty craze of the early 1970s to be a more fitting analogy. On a macro level, fiscally induced inflation, populist policies, increasing regulation, geopolitical risks, and increasing negotiating power of labor are some of the common themes between the two time periods. On a micro level, similar to the 1970's, a few select stocks are now considered 'one decision stocks' and investors of all stripes are having a hard time coming up with a bear case. The above chart from Marketwatch shows that, in the 1970s, after the initial wave of inflation, there was a subsequent and more pronounced surge in inflation. This spike in inflation triggered the bear market of 1974-75, which resulted in the S&P 500 seeing no positive returns for almost 10 years. Two additional points further reinforce and support this hypothesis: First, the total return from the market is typically ~10% per year on average. This is because, in the long term, stock prices generally move in line with earnings growth, which is driven by nominal GDP and profit margins (which are already at the highest levels ever!). Over the past 15 years, since the Global Financial Crisis, S&P 500 has increased by a compound annual growth rate ('CAGR') of 15.03%. To return to the historical average of 10%, forward returns will need to be significantly lower - perhaps somewhere between 1-5% - over the next 10 years. Second, Warren Buffett is the only investor we know who actively invested capital during the 1970s. Observing his actions today, we see that he has been purchasing oil and gas companies like Occidental Petroleum and Chevron, as well as gaining exposure to commodities through holdings in Japanese trading companies. Looking back at the 1970s, the best-performing sectors were REITs, oil and gas companies, and various commodities including gold and silver - any and all real assets. Warren's recent purchases reflect a belief that these types of investments will again prove profitable just like they did in the 1970s. This will not be an easy environment for making money, and those crowding into US passive ETFs are likely to see minimal real returns on their investments. While we do own some of these popular stocks, we believe that, as active managers, we can be much more agile in our approach compared to a passive index. Unlike our contrarian approach, indexes act like momentum investors, buying more of what is going up. If these mega-cap stocks begin to underperform, they will likely drag the index down with them for an extended period, as reducing their weight in the indices will take time. Traditional active managers might outperform, but charging a fee of 1%+ on assets under management ('AUM') for a potential 1-5% annual return means that the fee represents 20% to 100% of potential returns, significantly reducing the net gains realized by investors. White Falcon's structure and alignment offer numerous advantages in such an environment. In closing, I want to express my enduring gratitude to each and every partner of White Falcon. I'll be in Vancouver from July 29th to August 9th and in Calgary from August 12th to 24th. I'd love to meet up while I'm there, so please reach out to arrange a time. Also, please feel free to get in touch with me at any time for any questions or feedback you may have. With gratitude, Balkar Sivia, CFA Founder and Portfolio Manager, White Falcon Capital Management Ltd. Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. White Falcon Capital is an independent entity and have a mandate to do the right thing for the portfolio and the partners. Our goal is to protect and compound capital over the long term on a risk adjusted basis.

Rewey Asset Management Q2 2024 Investment Letter

We added three new companies to the portfolio in the quarter and sold outtwo positions.9. The equity markets put up a solid return in the first half of 2024, overcoming economic and geopolitical uncertainty, as the potential for an elusive soft economic landing became more likely. We were pleased with the performance of our RAM Smid Composite, rising 2.75% in 2Q24 and 7.89% year-to-date, compared to the Russell 2500 Value index which fell 4.31% in 2Q24 and is up 1.50% YTD. We continue to see exciting individual investment opportunities and believe the general investor rush towards indexing is creating more individual security neglect and valuation opportunities. The concentration of large cap technology in the S&P 500 continued to push that index higher, rising 4.28% in 2Q24 and 15.29% YTD. The impact of the top weighted names (the magnificent 7 representing 32.07% of the index) is seen in the more modest return of the equal weighted S&P 500 (SP500, SPX, SPW) down 2.63% in 2Q24 and up 5.07% YTD, trailing our RAM Smid composite return.1,2 Source: Rewey Asset Management, Index returns sourced from Bloomberg 06/28/2024. *Note that there are material limitations inherent in any comparison between RAM Smid strategy and the R2500 Value Index. The R2500 Value Index is unmanaged, and you cannot invest directly in an index. The RAM portfolio is actively managed and holds concentrated investments in the equity securities of small-mid capitalized companies. Click to enlarge The Economy and Inflation are Cooling - When Weakness is Perceived as a Positive The other major driver of stock market performance, in 2Q24 besides large technology, was fluctuating investor expectations around the potential for a FED rate cut. Contrary to investor expectations entering the year for four to six rate cuts for 2024, persistently higher than expected inflation reports dampened rate cuts hopes. For example, as seen in the June 12th 2024 Fed Dot Plot summary, Fed expectations for a rate cut have cooled significantly since March.3 In general, in 2Q24 on days when economic indicators such as employment or PCE inflation were reported on the stronger side of expectations, the market, contrary to what might be normally expected, fell as investors pushed out their rate cut expectations, and conversely, when economic data was reported weaker than expectations, the market rose. We do not base our investment decisions on forecasts of short-term interest rates, or any other economic measures, but prefer to focus on company specific factors over a 2 to 3-year time frame. That said, if the Fed does end up cutting rates in 2025, as expectations suggest, we think it would represent a nice tailwind for small caps and would likely hasten a rotation away from the high concentrated position levels at the top of the major indexes. An Elusive Soft Landing? On June 28th, the Core PCE price index (generally believed to be the Fed's favorite measure of inflation) came in at up 2.6% for May, continuing a gradual decline, compared to 2.9% at year-end 2023 and a peak of 5.56% in Feb 2022. Remarkably, this cooling has been accomplished with positive GDP readings (3.7% for 1Q24) and low unemployment rates (4.0% in May). With the median predictions from the Fed for 2.3% core PCE in 2025, 2.0% GDP for 2025 and unemployment only modestly higher at 4.2% for 2025, it looks like the Fed may be able to achieve its desired soft-landing targets. If this outlook holds, it could be a very positive driver for small and smid-cap stock performance into 2025.4,5,6,7 Will Investors Rotate? At quarter end, Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Google (GOOG,GOOGL) and AMZN all have total stock market capitalizations that are above the total of the Russell 2000 Small Cap Value index. The combined weighting of these 5 stocks dominates the S&P 500 (as represented by the SPY ETF) with a 28.5% weighting. The concentration in these stocks continues to build, as 1) investors chase momentum, 2) passive inflows to ETF's buy these names regardless of stock price and 3) active PMs who "closet benchmark" are forced to buy these names to avoid the risk of underperforming the index if they do not match the benchmark weights. Investors "running with the herd" are clearly getting packed closer and closer together. For now, it all feels good. It reminds us of the game of musical chairs, where everyone is half-dancing to the music while knowing that at some point they are going to have to try to quickly dash for a chair. Looking through a different lens, the market cap of Microsoft is 65% of the Russell 2500 Value Index and 178% of the Russell 2000 Value Index, while Apple's market cap is 64% and 173% and Nvidia's market cap is 60% and 163%, respectively. For those who believe, as we do, that buying low-expectation stocks and selling high expectation stocks is as important as buying low valuations and selling high valuations, we offer some statistics as food for thought. If investors reallocate only 1% of the S&P 500 to the Russell 2500 Value Index, they would need to buy 10% of the index. If investors want to allocate this 1% to the Russell 2000 Value index, they would need to buy 27% of the index. We also suggest that when a paradigm shift emerges, investors will look to move more than just a paltry 1% from the top weighted names.8 Total Market Value 1% of S&P 500 S&P 500 Index $50,383,074,451,131 $503,830,744,511 Russell 2500 Value $5,084,138,894,582 10% Russell 2000 Value $1,869,674,185,731 27% Total Market Value % of the Russell 2500 Value % of the Russell 2000 Value MICROSOFT CORP $3,321,869,074,628 65% 178% APPLE INC $3,229,664,350,840 64% 173% NVIDIA CORP $3,039,084,000,000 60% 163% ALPHABET INC-CL A + CL C $2,258,693,835,000 44% 121% AMAZON.COM INC $2,011,080,747,949 40% 108% Source: Bloomberg and Rewey Asset Management Analysis Click to enlarge Portfolio Highlights We have built our RAM Smid portfolio based on our 3-pronged investment philosophy of 1) Financial Strength, 2) The Ability to Grow and 3) Discounted Valuations. Six of our composite holdings have net cash on the balance sheet and eleven others have net debt to EBITDA under 1.5x. Thirteen holdings are trading at less than 1.5x book. At quarter-end, our RAM Smid cash level averaged 4.8%. We added three new companies to the portfolio in the quarter and sold out two positions. 9 Lakeland Industries (LAKE) was our top percentage gainer in the quarter. Portfolio activity for LAKE was unusual for us, as we purchased the entire position at $17.05 May 17 th and exited the position at $23.64, on June 18 th for a total return of 38.7%. While we do have an initial 2-3 year horizon upon investment, position size is driven by our quality vs. risk/reward position sizing matrix. Said differently, we had established a $25 initial price target for LAKE, and we got most of the move in a month! We exited the position, as the upside vs. downside tradeoff on holding the shares was no longer attractive for us. 10 Notably, Richardson Electric (RELL) which we featured in our 1Q24 letter, was up 29.8% in the quarter. We continue to see tremendous potential upside for RELL, drive by the bottoming of the semi-conductor equipment cycle. RELL noted it thought 1Q24 was the trough. We also think investors still don't appreciate RELL's new "whitespace" near-term growth into the aftermarket for wind turbine battery replacement with its ultracapacitors, combined with longer-term opportunities to replace batteries in diesel locomotive starting units. 11 Information Services Group (III) was our worst performer in the quarter, down 26.03% to $2.94. III is a technology research and advisory firm, with about half of its business comparable to Forrester Research and half as a technology general contractor, where III will work with companies to determine the scope and execution of technology implementation projects. III has seen its clients take longer to commit to large IT implementation and transformation projects recently, in line with comments from most industry participants, due to general economic concerns and, perversely, the growth of AI - as clients study the best way to deploy AI into their tech spending plans. III has not seen many project cancelations and expects project work and its employee utilization metrics to rise throughout 2024 off 1Q24 lows. III has kept most of its staff in place to meet what it believes will be strong demand from enterprises looking to both control/optimize costs and deploy AI over the next few years. Indeed, III has not backed off its 17% EBITDA margin goal as a potential for late 2025. We see tremendous potential value in III, which is currently trading at approximately 7x EBITDA, yielding 6.16% and repurchasing shares, up to and potentially exceeding our AFV price target of $6.00. 12 Webster Financial Corp. (WBS) Webster Financial Corp. was one of our detractors this quarter, falling 13.4% to finish at $43.59, recovering a bit into quarter-end off its June 15 th low of $39.34. We see tremendous value and neglect in the shares of WBS, as investors have pushed out their rate cut hopes, worried about commercial real estate and, in our view, have not done a deep dive into WBS's credit strength, its diversified deposit strength, or what could be a valuation catalyst in its HSA Bank division. We see Webster as having tremendous financial strength. Webster has a 10.5% CET1 ratio, well above the 6.5% CECL minimum requirement. Moreover, this level is temporarily depressed due to the just completed acquisition of Ametros Financial Corp. WBS is targeting to rebuild its CET1 ratio to 11% in the near-term. Webster also remains very profitable, with a Bloomberg earnings per share forecast of $5.59 for 2024, and rising to $6.27 in 2025, even with slightly higher reserve building levels. Webster's book value as of 1Q24 is $49.07, and has risen at a 9.9% CAGR since 1Q19 while its tangible book value of $30.22 has risen at a 4.3% CAGR since 1Q19. This is strong book value growth in a period where banks have endured significant headwinds, including Covid, Fed rate hikes, and growing loan competition from private credit funds (see our 6/28/24 Linkedin post). Webster also has what we see as significant business structure strength. At the parent level, its loan-tototal deposit ratio is 84.1%, which we see as protecting against potential modest deposit shrinkage (which we do not expect) while also providing firepower to grow loans. Moreover, the diversity of its deposits is a hidden asset and not a well understood competitive advantage for WBS. Only 71% of its deposits come from its traditional banking activities, with 44% from the consumer bank and 27% from the commercial bank. WBS gets 15% of its deposits from its Healthcare Financial Services unit (mainly HSA Bank) where the cost of deposits is a very low 15 bps. WBS also gets 10% of its deposits from its recent Interlink cash sweep acquisition and projects strong near-term deposit growth (movement to WBS) in the near-term. We think WBS has a strong Ability To Grow. With only an 84.1% deposit ratio, WBS has substantial room to grow loans, and we note that its footprint along the I-95 corridor between New York and Boston is a very attractive, populous and growing market. WBS forecasts total 2024 loan growth of 5%, accelerating off 1Q24's 0.7%, while deposit growth is forecast to be in the range of 5%-7%. With $76 billion of assets, WBS also has considerable room to growth before hitting the $100 billion asset threshold, which would increase compliance costs for stress testing, etc. WBS should also see continued strong growth out of its HSA bank (now Financial Services) unit, as HSA's gain popularity to help consumers manage the rising burden of healthcare costs. HSA's pre-tax net revenue continued to grow strongly in 1Q24, up 19.2%. Moreover, HSA Bank is the #2 HSA account provider, second to Health Equity (HQY) and these two leaders continue to consolidate the market. We see tremendous neglect in WBS as well. First, WBS, like most regional banks, has been shunned year-to-date by investors who were expecting the Fed to cut rates multiple times in 2024, but now have abandoned the bank trade, which they see as a beneficiary of rate cuts. We see this impact as a nonissue for WBS, as it can grow without a rate cut, while also seeing the potential tailwind of rate cuts in 2025 if they should occur. We also see neglect in the fears around WBS commercial real estate portfolio, as investors have seemingly "shot first without asking questions." While WBS does have a $20 billion commercial real estate lending portfolio, only $1 billion is in traditional office. None of these loans were on non-accrual status at the end of 1Q24, the loan-to-value (LTV) was 60%, average loan size was $5.6 million and WBS has a $50 million reserve against this book of business. Maturities are well staggered, with $260 million remaining in 2024 and $158 million in 2025. Its rent regulated multi-family portfolio is also well managed. Of the $1.5 billion of loans where rent regulation is over 50%, non-accrual rates are only 0.1%, the LTV is 61%, average loan is $3.5 million and remaining maturities are $99 million in 2024 and $56 million in 2025. While these lending sectors are facing headwinds across the industry, we see WBS's underwriting strength evident in low current non-accrual levels and well staggered maturities. We see a compelling valuation opportunity in WBS shares, which closed the quarter at $43.59, down 18.4% from the 12/14/23 high of $53.39. WBS is forecast to earn $5.59 in 2024 and increase earnings to $6.27 per share in 2024, for Price /Earnings ratios of 7.75x and 6.91x respectively. WBS is compelling on a price to book and price to tangible book basis as well, at .87x and 1.41x respectively, especially given the historical growth CAGRs of 9.9% and 4.3% over the last five years. Our near-term Assessed Fair Value price target for WBS is $60, up roughly 38% from 2Q24 closing levels. This valuation level is under a 10x PE for 2025, which in our view prices in some conservatism for WBS to build reserves if desired. Importantly, any reserve build, in our view, would likely be an income statement impact for WBS, and not a balance sheet issue, and thus we view our PE metrics as very conservative, with upside to a 12x-14x PE ratio if rates are cut in 2025 and CRE fears ebb. Moreover, WBS has the balance sheet strength and the will to keep paying its dividend, which has 3.69% yield. Lastly, although we don't incorporate sum-of-the-parts catalysts into our AFV targets, we see significant upside potential and immediate strategic need for WBS to do a 19.9% IPO of its Health Care Financial services segment. HQY, HSA's largest competitor, trades at a 28.5x PE multiple on this year's earnings, and it is using its higher priced stock to roll-up smaller HSA competitors. If WBS were to IPO 19.9% of its Health Care unit, it would retain full control of the low-cost deposits, but create a new currency, likely at a significant PE premium to WBS shares, to compete with HQY for acquisitions to grow and defend its market share. Any gain on the sale of these shares would also bolster WBS capital levels, which could be used for share repurchase, reserve building or balance sheet repositioning. While WBS has said it is not an outright seller of this unit, we were intrigued by CEO Cuilla's comments on the 4Q24 call when he answered the HSA spin/sale question as "we continually evaluate" all lines of business to "maximize economic profit of those business lines and whether or not that happens as a wholly owned activity or joint-venture opportunity". In our view, where there is smoke and undervaluation, there is fire.13 Looking Forward We believe the cooling inflation and as of now the likelihood for a soft landing will be very positive for small and smid-cap stocks, due solid economic activity, potential rate cuts and a likely rotation/rebalancing into small and mid-cap names. Positioning at the top of indices has in our view become extremely concentrated and expectations around small and mid-caps has become too negative. Our investment cases, however, do not rely on rate cuts or economic acceleration as the main pillar for our investment thesis. On the contrary, we believe our portfolio companies possess attributes that can lead to outperformance without an economic or rate cut tailwind. Having a strong investment case and a long-term view creates time as a powerful ally for value creation. We thank you for your trust and support. As always, please do not hesitate to contact us for client service, to discuss our commentary or to simply opine on the market and stocks. Chip Footnotes 1Past performance is no guarantee of future results. The RAM SMID Value Composite schedule of net investment performance of Rewey Investment Management LLC (the "Schedule") represents the activity of separate customer trading accounts managed collectively (collectively the "Accounts") for the annual and cumulative periods from January 1, 2019 through June 28, 2024. 2022-2024 performance unaudited. Please see full Marcum footnotes for RAM Smid composite 2019-2021 a t Microsoft Word - {A44BB912-3141-4B59-AE8E-3D695C6B8BD4} (reweyassetmanagement.com). Performance graphic not to scale. 2,8The Russell 2000 Value, Russell 2500 Value, the S&P 500 Index and the S&P 500 equal weighted index market cap information and performance levels are sourced from Bloomberg. The Russell 2000 Value, Russell 2500 Value, S&P 500 index and the S&P equal weighted indices are each an unmanaged group of securities considered to be representative of the small and mid-cap stock market, and the large-cap stock market in general,espectively. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. There are material differences between the RAM SMID Value Composite portfolio and the indexes used for comparison purposes. The RAM portfolio is actively managed and holds concentrated investments in the equity securities of small-mid capitalized companies. An index is generally designed to illustrate the performance of a specific asset class (i.e. small cap) but is not actively managed and the index performance does not reflect the impact of advisory fees and other investment costs. 3,7The Fed - June 12, 2024: FOMC Projections materials, accessible version (federalreserve.gov) 4Core PCE inflation statistics sourced from the Bureau of Economic Analysis and Bloomberg. 5Atlanta Fed GDPNow forecast sourced from Bloomberg. 6US 3Q GDP sourced from the Bureau of Economic Analysis and Bloomberg. U-3 Unemployment rate sourced from the Bureau of Labor Statistics and Bloomberg. 9All portfolio discussion is based off our model RAM Smid portfolio of separately managed accounts. Company financial estimates sourced from Rewey Asset Management proprietary analysis, and Bloomberg BEST company estimates. Historical pricing and company financial data sourced from company 10Q and 10K filings, and Bloomberg. Individual portfolios may hold slight deviations in position sizes, cash levels and positions held. Portfolio statistics discussed are from December 29th, 2023. These statistics will likely change over time. Debt/EBITDA ratio comments exclude financial companies due to noncomparability. 10Lakeland Industries (LAKE) quarterly performance information sourced from Bloomberg. Other LAKE commentary sourced from company earnings releases, 10Q, 10K filings, company presentations, RAM discussions with management, Bloomberg and Rewey Asset Management proprietary analysis. 11Richardson Electric (RELL) quarterly performance information sourced from Bloomberg. Other RELL commentary sourced from company earnings releases, 10Q, 10K filings, company presentations, RAM discussions with management, Bloomberg and Rewey Asset Management proprietary analysis. 12ISG / Information Services Group (III) quarterly performance information sourced from Bloomberg. Other III commentary sourced from company earnings releases, 10Q, 10K filings, company presentations, RAM discussions with management, Bloomberg and Rewey Asset Management proprietary analysis. 13All financial ratios, statistics, and projections discussed in the Webster Financial (WBS) commentary are sourced from WBS 10-K, Proxy, 10Q filings, company press releases, company public conference calls and webcasts, company slide presentations, RAM discussions with management, Bloomberg, RELL company webpage and Rewey Asset Management proprietary financial analysis and Rewey Asset Management industry due diligence. Historical share price information sourced from Bloomberg. Rewey Asset Management is a registered investment advisor in the State of New Jersey. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by RIA Innovations. These views/opinions are subject to change without notice. This material is for informational purposes only and is not a recommendation or advice. Investments and strategies mentioned are not suitable for all investors. No one can predict or project performance, and forward-looking statements are not guarantees. Past performance is not indicative of future results. Investing involves risk, including the loss of principal. Indices are unmanaged and you cannot invest directly in an index. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. There is no assurance that any securities discussed herein will remain in the portfolio at the time you receive this report or that the securities sold have not been repurchased. Securities discussed do not represent the entire portfolio and in aggregate may represent only a small percentage of the portfolio's holdings. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Click to enlarge Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Rewey Asset Management is a boutique, value-oriented investment management firm dedicated to the needs of high net worth individuals and family offices with a fundamental driven research approach that focuses on long-term capital appreciation and downside risk management. Our investment philosophy is grounded in three fundamental pillars of financial strength, ability to grow and valuation. This approach allows us to identify companies that have the ability to deliver robust profitability over time, while avoiding those that take on excess financial leverage. It also allows us to be selective when the market offers a compelling valuation opportunity, rather than follow the herd into dangerous market bubbles. Rewey Asset Management is a registered investment advisor in the state of New Jersey

SPY: Prematurely Priced For A 'Soft' Landing

This idea was discussed in more depth with members of my private investing community, The Quantamental Investor. Learn More " Introduction In my outlook note for 2024, I provided the following economic scenarios-based outlook for the S&P 500 (SPX)(NYSEARCA:SPY): TQI's Market Outlook For 2024 Heading into 2024, the equity market (S&P-500 trading at ~20-21x forward P/E) is priced for a "soft/no" landing with consensus analyst estimates calling for double-digit earnings growth in 2024 & 2025. If the consensus view is correct, I can see the S&P-500 climbing to new all-time highs on a nominal and inflation-adjusted basis over the next 12-24 months. A soft landing looks a lot more tenable now than it did a few quarters ago; however, it is still not an outcome I would bet on blindly due to very real deflation and stagflation risks! The Fed could end up being too late or too early in easing up monetary policy, which could result in a recession (+ deflationary bust) or stagflation. While the Fed's aggressive monetary policy tightening hasn't driven the economy off a cliff just yet, we could still end up in a recession of some sort in 2024, which is my base case scenario. The bond market is pricing in 6-7 rate cuts for 2024, well ahead of the Fed's guidance for 3 rate cuts. Yes, inflation is collapsing; but the bond market's positioning seems too aggressive and indicative of an impending recession. In my base case scenario, I see mid-single-digit earnings growth and a trading multiple compression that takes the S&P-500 down to 4,000 by the end of 2024. In the event of a severe hard landing in the economy (recession), S&P-500 earnings can contract by 15-20%. A double whammy of multiple contraction (normalization) and earnings contraction, could lead to a massive 50-70% decline in S&P-500 from current levels. Yes, such a downside move is still very much on the table despite "soft landing" being the prevalent market narrative. While I see deflation as a much bigger risk at this point in the cycle, pre-mature easing of monetary policy could still lead to another wave of inflation like in the 1970s. My Magic Number For S&P 500 Is 4,000 An asset's P/E (price-to-earnings) ratio is directly governed by the risk-free rate in the market. Given the massive amount of treasury supply about to hit the markets, I can see long-duration treasury yields staying elevated for a while (even if we see a recession this year). Assuming the 10-year treasury yield stays in the 4-5% range in 2024, I expect market participants to demand an earnings yield of 6-8% from the S&P 500. Invert that earnings yield and we get a P/E ratio of ~12.5-16.7x. With the Fed expressing a willingness to ease monetary policy (before inflation reaches the target rate of 2%), I believe the S&P 500 can trade closer to the higher end of that P/E range. To formulate my 2024 price target for the S&P 500, I am assuming an exit trading multiple of ~16x P/E (which also happens to be the long-term mean P/E ratio for the S&P 500). As of today, S&P 500 EPS is currently projected to rise by 12% to $250 in 2024 according to consensus analyst estimates. In a garden variety recession, EPS tends to go down by 15-20%, but even if we see only a mild recession, S&P 500 earnings are likely to disappoint bullish investors. In my view, S&P 500 earnings growth for the next couple of years will be in the mid-single-digit range, and we will hit $250 in S&P earnings only in 2025. Assigning a forward P/E of ~16x to 2025 S&P 500 EPS of $250, we reach an end-of-year target of 4,000 for the S&P 500 index ($400 for the SPY ETF). This target implies a downside of -15% from current levels. The immutable laws of money dictate that risk assets such as equities offer a positive risk premium relative to the risk-free rate in the market. Despite the long end of the treasury yield curve moving down to ~4% in recent weeks, the S&P 500 earnings yield still needs to rise to the 6-8% range for equity markets to become attractive once again. Given the current state of the economy (goldilocks - moderating inflation, ultra-low unemployment rate), long-duration treasury yields should stabilize here and potentially move higher in Q1 2024. However, if yields continue to collapse further, the bond market would then, in my view, be signaling an economic recession. At ~20-21x forward P/E, the S&P 500 is priced for a "soft" or "no" landing scenario, and I remain skeptical about the "soft" landing narrative given a deeply inverted yield curve and negative leading economic indicators continue to point toward a hard landing in the economy. Considering the simple yield math behind stock valuations, the S&P 500 is ripe for a significant correction. As my base case scenario, I see the S&P 500 index declining to 4,000 by the end of 2024. The era of free money is over, with long-duration treasury yields likely to stay in the 4-5% range for a while (even if the Fed cuts short-term rates). As you can see in the chart below, the S&P-500 Shiller PE ratio is sitting at ~32x (only lower than 2021 and 2000), and given the immutable laws of money, equity valuations will matter at some point! Heading into a potential recession, the equity market (S&P 500) valuation reflects a high degree of investor complacency. A stock market crash may or may not materialize in 2024; however, prudent investors must prepare themselves for a wide range of possible outcomes [tail events] in this uncertain environment. Yes, the Fed is probably done hiking rates and several cuts are penciled in for 2024; however, the damage could already have been done. Monetary policy works with long and variable lags, which means economic data could still weaken considerably in the next 6-12 months, i.e., an economic recession can strike soon regardless of the Fed cutting rates. Hence, I remain skeptical about the idea of a "soft/no" landing after such an aggressive monetary policy tightening cycle that ended 15 years of free money (ultra-low interest rates). Source: Year-End Review + Portfolio & Market Update - 5th January 2024 Alright, now that we have gone through that refresher, let's see how things have played out in the equities market. S&P 500's Year-To-Date Report Card Amid continued moderation in inflation and a slow crawl up in unemployment, the S&P 500 has rallied by nearly +17% year-to-date (as of writing on 18th July 2024) - climbing from ~4,770 at the start of this year to ~5,563 right now [setting new all-time highs of ~5,670 in early July]. Considering our outlook for 2024, the S&P-500 has already fully baked in the "no" landing scenario! Interestingly, fewer and fewer large capitalization stocks have carried the market higher as the year has gone on, and once again, much of the rally has been driven by P/E multiple expansion, with S&P-500's Shiller PE ratio climbing from 33x to 36x in H1 2024. In the first half of 2024, the S&P 500 gained +15%; however, just backing out Nvidia's (NVDA) stock performance would result in a drop to low-double-digit gains for the rest of the S&P-500. And if the "Magnificent-7" big tech stocks were excluded, the S&P-493 gained just +4%. Looking at it in a different way - with more than 80% of S&P-500's performance coming from 20 largest stocks - the ongoing stock market rally is clearly top-heavy, i.e., concentrated in the largest capitalization stocks. On the flip side, small-cap stocks have refused to participate in this bull run and were interestingly flat year-to-date (until last week, when they (IWM) jumped up by ~10% in 5 sessions) despite boasting relatively attractive valuations. Unfortunately, such poor market breadth resonates with late-cycle behavior and is historically inconsistent with real bull markets, which tend to be broad-based in nature. Outlook For The Rest Of 2024: "Soft/No" Landing Is Consensus, But Caution Is Warranted In Q1 2024, US GDP was up +2.9% y/y, according to the US Bureau of Economic Analysis. While economic growth is widely projected to slow down in upcoming quarters, there's no recession in sight for now. While an early-year spike in CPI inflation from 3% to 3.5% led to fears of stagflation, CPI has cooled off over the past three months, with the latest inflation report showing outright deflation - June CPI: -0.1% m/m. Yes, CPI inflation rate [3.0% y/y in June] is still running well above the Fed's target rate of 2%; however, the underlying drivers of inflation, such as housing services, have a significant lag, which is why inflation is likely to moderate further in upcoming months, barring a commodity price shock of some sort. Now, Fed chair Jerome Powell has re-affirmed the Federal Reserve's willingness to start cutting interest rates before inflation reaches the 2% target rate, and as per CME's FedWatch Tool, the bond market is now pricing in a 95% chance of a 25 bps rate cut at the September FOMC meeting. In the absence of a recession, easing monetary policy [lower interest rates, slower balance sheet reduction] is bullish for risk assets. However, monetary policy works with long and variable lags, which means economic data could still weaken considerably in the next 6-12 months, i.e., an economic recession can strike soon regardless of the Fed cutting rates. Our macroeconomic thesis - "Inflation will collapse, along with consumer demand" has failed to play out thus far; however, US retail sales growth rates have moderated recently. Given the low personal savings rate (3.6% in June), record-high consumer debt levels, and rapidly rising consumer loan delinquency rates, the American consumer seems tapped out! Now, wealth inequalities are distorting the data by hiding the pain being realized by lower-income households; however, recent price action in consumer bellwether stocks like McDonald's (MCD), Nike (NKE), Starbucks (SBUX), PepsiCo (PEP), and Delta (DAL) are telling an interesting tale about the current state of consumer spending - one that resonates with recessionary conditions! As I have said in the past, the labor market will determine if we get a soft or hard landing. With the unemployment rate climbing up from 3.4% at cycle lows to 4.1% in June 2024, the "Sahm Rule" recession indicator has been triggered! From past cycles, we can see that the unemployment rate crawls up initially and then spikes up all at once as the treasury yield curve un-inverts. Are we at the breaking point yet for the labor market? I don't know, but things could break quickly once the yield curve un-inverts. The Fed is expected to start cutting rates in September, and a couple of cuts could be enough to get the uninversion. Since the US Government is expected to issue massive amounts of treasury securities to finance our fiscal deficits, I think long-duration treasury yields could remain stuck in the 4-5% range even after the Fed starts cutting rates. And I wouldn't rule out a bear steepener just yet, i.e., the long-duration yields climbing above short-duration yields. In my view, stagflation risks seem contained at this moment in time; however, the risk of a recession (hard landing + deflationary bust) is still quite elevated as monetary policy lags are only just starting to show up in the economic data and select corporate earnings (primarily consumer companies). Riding high on AI hype, big tech stocks have managed to regain valuation multiples last seen at the peak of the liquidity/ZIRP bubble in 2021. However, as I outlined in QQQ: Beware The Concentration Bubble, an earnings growth slowdown is set to challenge the wild multiple expansion in upcoming quarters. Final Thoughts Missing a market melt-up, such as the one we have witnessed in recent quarters, is a hard pill to swallow. However, as a long-term investor, I believe that capital preservation has to be the No. 1 priority in a highly uncertain macroeconomic environment, especially when we are exiting 15 years of free money policy, i.e., artificially low interest rates. Legendary investor - Warren Buffett once said - Interest rates are like gravity to asset prices While broad equity indices have managed to rebound from a ~30-35% drop in 2022 to scale new all-time highs, market valuations are in bubble territory. Do they need to mean-revert immediately? No, asset bubbles can last for years. Irrationality knows no bounds. However, history shows that sooner or later, trading multiples tend to mean revert! If S&P-500 Shiller P/E were to drop to ~16-18x, we are looking at a 50-55% decline in the S&P-500, assuming flat earnings. Now, in the event of a garden variety recession, corporate earnings tend to decline by 15-20%. Considering the significant downside risks to the broader equity markets, we continue to pursue "Bold, Active Investing With Proactive Risk Management" at my investing group. As of today, the S&P-500 would need to suffer a -28% decline in less than five months to hit my base case target for 2024. While I view such an aggressive drawdown in such little time as highly unlikely, consensus earnings growth projections for 2024 are down to single digits. With the economic data starting to show cracks, I think that the consensus S&P-500 EPS projections for 2025 [~15% y/y growth] will also be revised lower in the upcoming months. At this point, Mr. Market has priced in a "no" landing scenario into equities; however, the risks of a hard landing are rising, with unemployment crawling up to 4.1% into an impending yield curve uninversion. If we do end up getting a spike in unemployment rates, the S&P-500 could suffer an even more catastrophic decline than the one suggested by our base case projection. Key Takeaway: I continue to rate S&P 500 ETF (SPY) a "Sell". Thank you for reading. If you have any thoughts, questions, and/or concerns, please share them in the chats or the comments section below. We Are In An Asset Bubble, And TQI Can Help You Navigate It Profitably! Your investing journey is unique, and so are your investment goals and risk tolerance levels. This is precisely why we designed our investing group - "The Quantamental Investor" - to help you build a robust investing operation that can fulfill (and exceed) your long-term financial goals. At TQI, we are pursuing bold, active investing with proactive risk management to navigate this highly uncertain macroeconomic environment. Join our investing community and take control of your financial future today. JOIN THE QUANTAMENTAL INVESTOR "We're in an asset bubble, and I can help you navigate it profitably" I am Ahan Vashi, a seasoned investor with professional background in equity research, private equity, and software engineering. I currently serve as the Chief Financial Engineer at The Quantamental Investor, a community pursuing financial freedom through bold, active investing with proactive risk management. TQI was established in July 2022 with a singular mission to make investing simple, fun, and profitable for all investors. In alignment with this mission, we publish premium equity research reports on Seeking Alpha - research library - performance tracker. However, there's a lot more on offer within our investing group - features include highly-concentrated, risk-optimized model portfolios that meet investor needs across different stages of the investor lifecycle, access to proprietary software tools, and group chats. Learn more In addition to our work on SeekingAlpha, we publish best-in-class investing tidbits and research insights at TQI Tidbits [free newsletter], Twitter, and LinkedIn. Follow for more investing content. Analyst's Disclosure: I/we have a beneficial short position in the shares of QQQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

S&P 500: The Psychology Behind Corrections And Why Investors Should Buy The Dip

Although we are bullish on U.S. equities in general, we are maintaining our "Hold" rating on the SPX. Instead, we prefer an equal-weighted index like the Invesco S&P 500® Equal Weight ETF, which we maintain a "Buy" rating. Signs of fear are making the headlines again after the S&P 500 Index (SPX) came under moderate selling pressure over the past few trading sessions. The widely anticipated pullback has been relatively mild so far. As of Friday's close, the SPX was down by merely -2.9% from its all-time highs before staging a rebound in the last trading session. Given how well the SPX has performed to date, with valuations on big technology names and AI-related themes running ahead of fundamentals, several Wall Street analysts have been expecting a meaningful correction of 10% to 15% for quite some time. Amid signs that the pullback is finally in motion, analysts jumped at the first opportunity to sell fear on the financial media. Some of these calls include recommendations telling investors not to buy into the dip because prices are bound to head even lower. Even the bullish analysts have begun to hedge their calls by warning of elevated volatility in the near term and recommending that investors buy put options for protection while keeping their lofty year-end targets on the SPX. A Dip Or A Correction, Does It Matter? For disciplined investors with a robust investment plan in place, whether the eventual outcome is a 5% dip or a decent correction of 10%-15% really shouldn't matter that much. Unless one is planning to trade these fluctuations by timing every peak and trough over a multi-year bull market cycle (good luck with that), occasional pullbacks should be more of a distraction in the bigger scheme of things. Perhaps a bear market is a real concern for some who are not keen to ride out lengthy drawdowns. But since the SPX has recovered from every bear market to set new record highs over time, bear markets should not pose a real problem for investors targeting a reasonably long investment horizon. For these long-term investors, these occasional pullbacks have only proven to be great buying opportunities. So why are market participants (investors and analysts alike) so obsessed with short-term market timing? Is It Fear, Or Just Greed In Disguise? The seemingly irresistible temptation of trying to sell down equity positions with the intention to re-enter at a much better price has too often been mistaken as a response to fear. The financial media regularly associates a correction in the equity market with some kind of negative event or potential risk that is causing fearful investors to sell. Quite often, the media will look for the most convenient explanation available to match the market's behaviour of the day. Indeed, it is quite common to read headlines that would initially link some piece of news to fear in the market and then, just a few moments later, claim the same piece of news is now driving the market in the opposite direction. However, we have already pointed out that disciplined investing means rarely having to respond to these occasional pullbacks by making sweeping adjustments to the portfolio. So unless there is a real credible threat to the economy and equity fundamentals, there should be no reason for investors to sell equities as an asset class. To be clear, regular buying and selling of individual stocks as part of rebalancing an equity portfolio or making tactical adjustments to the composition of a portfolio may be necessary from time to time as company fundamentals change. However, indiscriminate selling of an entire asset class in anticipation of a potential correction is pure speculative behaviour. We believe that market corrections are predominantly driven by greed rather than fear. Many begin their investment journey thinking like investors but end up behaving like traders because they fall into the trap of thinking that they can do much better than a simple buy-and-hold strategy. Thus, every piece of news presents a tempting opportunity to deviate from the long-term plan in the hope that one can do much better by buying market bottoms and selling peaks. But when was the last time we came across an investor who had to dump equities because he could no longer contain bear overwhelming fear of a 3% pullback? Because trying to time major bull and bear market cycles means potentially having to wait several years if one makes a wrong move, most traders also tend to lean towards timing short-term cycles. Made a bad trade? No problem, just catch the next signal on the charts. This is why day trading is so attractive for many traders. Imagine just catching a couple of trades and targeting a 1% return each day. Use some leverage, do that consistently, and you are on your way to becoming a billionaire. Simply delusional. Fear is Easy To Trade, But Greed Is Tricky When markets are overwhelmed by fear and equity prices are trading at deeply discounted prices, there is some margin of safety in investing in companies with sound fundamentals. There is a limit to how low prices can fall so long as a company is solvent and profitable. But when markets are overwhelmed by greed, there is really no limit to how high asset prices can go. So long as there is a greater fool who is willing to offer a higher price, there will be a seller willing to transact. Therefore, just because the SPX is in an extended bullish streak does not necessarily mean that a correction is just around the corner. The fact remains that many analysts have been calling for a correction for months and have failed miserably. How about those calls for a recession back in 2023? Or the stagflationary scenarios back in 2022? If one had followed that kind of advice to dump stocks, one would have missed the entire bull market to date. It is puzzling why investors continue to heed advice from Wall Street analysts on taking directional bets on the market when the track record of these calls has been so miserable over the years. On the other hand, good textbook investing principles backed by decades of data and academic research are often cast aside and deemed unhelpful because realistic returns are simply not good enough for greedy investors. Buy The Pullback From our perspective, the recent pullback in the SPX is an opportunity for investors who are implementing Dollar-Cost-Averaging (DCA) or are looking to build bullish positions by buying the pullbacks. Although a 10%- 15% correction at this point is certainly possible, it would, in fact, be a healthy scenario for the bull market. Instead of trying to trade these pullbacks with precision, we think investors will be better off concentrating on picking up undervalued names. More importantly, we are sceptical that this pullback is an early warning sign of a bear market. Recent economic data continues to reinforce our view of a robust macroeconomic outlook and favourable conditions for equities. With the U.S. economy in much better balance -- disinflationary trend and resilient labour market -- and the Federal Reserve sounding less hawkish of late, we suspect that the pullback will amount to nothing more than a 10%- 15% correction. Unless the Federal Reserve surprises the market by delaying rate cuts beyond September, we maintain our overall bullish view on U.S. equities as an asset class for now. Having said that, we also note that with U.S. equity market concentration reaching extremes last seen in the 1960s, investing in the SPX no longer satisfies the objective of achieving adequate diversification for passive investors. Therefore, although we are bullish U.S. equities in general, we are maintaining our "Hold" rating on the SPX. Instead, we prefer an equal-weighted index like the Invesco S&P 500® Equal Weight ETF (RSP), which allows investors to achieve adequate diversification away from expensive technology and AI themes while staying fully invested in equities. We maintain our "Buy" rating on the RSP. Stratos Capital Partners (S.C) was established in 2017 by a small team of professionals from the investment industry with a deep passion for financial markets, macroeconomics, and investment strategy. S.C.'s original goal was to focus exclusively and extensively on the research & development of algorithmic trend-following strategies. The implications of our research over the years have not only strengthened our conviction for systematic strategies but have also led to the profound evolution of our philosophy towards a multi-asset and multi-strategy investment model. Author Bio: An original co-founder of S.C., I am also currently a portfolio manager for a family office with more than US$180 million in assets under management. 15 years of experience in the investment industry, of which I have spent 10 years actively managing investment portfolios for ultra-high net worth families. My investment philosophy is firmly anchored to systematic strategies that are evidence-based and applicable to multiple asset classes and across market cycles. Ideally, an investment portfolio should be systematic by design, multi-asset in composition, and multi-strategy in execution. Rigorous risk management is fundamental to this multi-asset and multi-strategy investment model. For equities specifically, I rely heavily on value investing principles alongside other factors that have proven to generate consistent beta across market cycles. Good equity investing, of course, should not be entirely quantitative in approach. Thus, a certain degree of judgment and strategic thinking is required for making qualitative assessments at the individual stock level. ______________________________________________________Disclaimer: Stratos Capital Partners is a pen name adopted solely for the purpose of contributing independent investment and trading analysis for Seeking Alpha. Stratos Capital Partners is not a registered fund and is not licensed by a financial regulator. Stratos Capital Partners does not receive any form of benefit or compensation from companies mentioned in our analyses. However, the author does receive monetary benefits in the form of payment for article views as a content contributor for Seeking Alpha. The author shall not be held responsible for any losses whatsoever that may arise due to the author's analyses. Readers are advised to exercise due diligence when making investment decisions. Analyst's Disclosure: I/we have a beneficial long position in the shares of RSP, SPX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. 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