Is the Great Shake-Out Finished?

Romans Chapter 15 verse 13 states, "May the God of hope fill you with all joy and peace as you trust in him, so that you may overflow with hope by the power of the Holy Spirit."

For me, hope is essential to life. Without hope, all is lost. So where do I find hope? I find hope in Jesus Christ as my Lord and Savior. No matter how smart I am or how good I can do something, I will inevitably face a difficulty beyond myself. What then? If I don't have hope through my Savior, I will face it alone, which in some cases, may not be enough. But with Jesus, I will be able to have hope, no matter what.

While it sounds foolish to have hope for investing returns, there is some logic to it when we consider how markets move over different durations. Over the short-term, markets are highly inefficient and volatile. From 2020 through today, we have witnessed extreme gyrations in valuation levels for aggressive growth stocks. Premium peaks were wrong in 2020/2021, just as today's discounted valleys will be proven wrong over time.

There are many characterizations of what has been occurring the past 15 months or so with market volatility. Maybe some have heard terms like "sector rotation" or "great reset", among others. My assessment has led me to use the term, Great Shake-Out to describe what has transpired.

Simply put, leading aggressive growth companies have witnessed punishing SP performance during this time. Some of this has been justified to a degree, but most of it has been an oxymoron with respect to common justifications. Namely, the most egregious justification has been inflation. This has been wrong on two accounts. First, inflation has been completely manufactured from global government policies on the supply side and not demand driven, so the logic of a hawkish approach by policy makers has been highly foolish. Second, leading aggressive growth peers have two strengths making them the best hedge against inflation - superior Revenue and Cash Flow performance.

The instability of the supply chain has actually hurt typical mainstream inflation winners, based on commodity goods. This is because these companies are used to seeing volume sustained to modestly increasing, with inflation positively improving Revenue and margin expansion, and further growing Cash Flow. During the supply chain disruptions, pricing has indeed increased, but volumes have been impacted offsetting typical benefits. The market has in turn recognized this fact and retreated holistically in 2022. The recent geopolitical tensions have further exacerbated these developments.

Regardless, the mainstream foolish banter continues as it always does. Those following the herd will likely miss out on one of the best investment opportunities since the Great Recession. Some may argue that the pandemic has necessitated government intervention, but this is clearly not the case as across the world, COVID-19 has essentially gone through the same progression, whether highly regulated or not. I for one, don't believe for a second that one part of a country is impacted differently than any other. Politics has forsaken health at the expense of centralized control and power, which has had two additional negative consequences with respect to freedom and economy.

What is the Great Shake-Out?

It essentially relates to Wallstreet's abuse of the retail investor. Wallstreet is privy to smarter human capital, unlimited resources, and many other collusion-based tactics allowing for complete manipulation of the stock market. Case-in-point, Company A misses EPS by a penny, analyst downgrades lead to a 15% SP decline. Was it really warranted for Company A to see such a steep decline by missing by a penny? Of course not, but the gambit of Revenue and EPS estimates affords Wallstreet the control levers it needs to take actions. This is why I don't "play the game" and rely upon true ROI metrics.

How does this impact retail investors?

Retail investors tend to develop convictions over time and as an increasing interest in investing occurred during the pandemic, a higher proportion of stock activity has been derived by them of late. Wallstreet functions in a vacuum, and it is very easy for them to begin targeting companies that won out during the pandemic. In today's news world, lies are far too common from mainstream sources, so it was easy for Wallstreet to make statements back in the fall of 2020 that pandemic winners would see Revenue declines in 2021, which clearly wasn't the case. This misinformation quickly turned to the generic "slowing growth" banter that could be applied to every company under the sun, but was strictly related to aggressive growth winners. Wallstreet gradually increased the intensity of trading and selling leading aggressive growth peers.

An important point as part of this is that there have been weaker aggressive growth companies which have seen stronger slowing growth, especially recent IPOs. And this is why it is always highly important to distinguish between winners and losers, despite Wallstreet's herd mentality approach. In the short-term, anything and everything can move in tandem, or out of parity. Over 5, 10, 20 year increments, it gets a lot harder to manipulate this as information becomes more clear and transparent with respect to performance. Wallstreet has used the Great Shake-Out to punish retail investors, while at the same time, allow larger institutional clients opportunities to receive much better investment returns over time.

What is the solution?

The solution is creating a way to provide more transparency to investors that clearly illustrate inconsistencies and investment traps.

As I've said many times before, there are two utmost important metrics to analyze and value a company - Revenue and Cash Flow performance. Revenue represents the top-line growth of a company (essential for ROI), while Cash Flow is the company's ROI. The tool above is meant to track SP performance, while also accounting for key valuation metrics - EV/Revenue and SP/OCF per Share.

While the Great Shake-Out has been in full effect for over a year now, something interesting can be observed in the table above. There are still Big Tech and aggressive growth leaders that remain extremely overvalued. These include GOOG, AAPL, ANET, TEAM, DDOG, MSFT, and NVDA just to name a few.

Big Tech has clearly received a free pass as they share two common traits with government - one they are centralists/socialists, and two, they are actually highly prevalent in politician stock portfolios. Other companies have simply bucked the trend as Wallstreet has decided to play some favorites. One could argue that DDOG's over 30% and 25% estimated Revenue and OCF/share growth over the next five years is enough to justify 43 and 155 times EV/Revenue and OCF/share. But I can find companies like ROKU and TDOC with higher growth expectations for these metrics, even from larger comparative Revenue baselines, and yet they are trading 5 and 70/55 times EV/Revenue and OCF/Share respectively. Something has to give and I suspect that over the mid-term, DDOG will substantially underperform ROKU and TDOC.

There are of course, unique reasons why each aggressive growth leader has been targeted to be sold off - mostly with respect to legacy/incumbent pressures to paint a fear-based story, as market erosion intensifies. Wallstreet has recycled this approach since the Tech Bubble with notable players like AMZN and NFLX, former fear-mongering abuse cases. Investors need to remember that the same fear-tactics have been used over and over again, and this time is no different.

So what's the takeaway?

This tool is meant to help investors navigate pitfalls. Granted Big Tech collusion with the government and Wallstreet's ability to control the markets can always contradict the transparent and clear data above in the short-term. But over longer time periods, weaknesses and misconducts will be exposed and markets will eventually get it right.

I am in the process of building this tool out further to encompass many other companies, each with detailed financial models and historical financial information. This Competitors List will compliment existing IPO Dog and EV Pretenders lists, hopefully providing valuable informational resources for investors to have access to, versus Wallstreet's self-fulfilling analysis and metrics, or mainstream media's rampant misinformation tactics.

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