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It's Time to Let Go of the Pandemic-Trade

1 Corinthians Chapter 1 verse 18 states, "For the message of the cross is foolishness to those who are perishing, but to us who are being saved it is the power of God."


First, I would like to wish everyone a Happy Easter! For myself, it is a joyous day as I celebrate the resurrection of Jesus Christ, my Lord and Savior with my family and friends. The core message of the Bible is that everyone needs Jesus. This isn't because I say so, it's simply the word of God. We were all created by God, and we are all perishing as we age. But the beauty of the Good News or Gospel, is that despite death, Jesus Christ has given us the ability to be saved through His power and to have eternity with our loved ones. I can't think of anything better than that.


Clearly there isn't a direct connection to investing from the message of Jesus Christ's crucifixion and resurrection. But God's word is full of truths to help us deal with life's circumstances. As a Christian, I continually benefit from God's word as it impacts my life, and investing is no different. The benefit isn't the prosperity of gains, rather, it is the wisdom, patience, commitment, and insight to deal with the markets challenges and difficulties.


Letting go of the pandemic trade is a hard pill for today's traders to swallow as it has been a trader's paradise since Q1 of 2021. We have experienced a solid 13 months of extreme volatility with any "buy the dip" having failed. Ironically, this is not broadly reflected for major indices like the Dow Jones Industrial, or S&P 500, so it's not worth showing any broad charts on this. There continues to be a push-pull against legacy/incumbents, including Big-Tech falling in this labeling, against the next wave of innovators.


The trading volatility has been predominantly focused on risky assets including Cryptocurrencies and aggressive growth stocks. My opinion is that we are in a massive transition on two fronts. First, the Baby Boom generation is going to fall as the most wealthy generation in the world over the coming decades. Second, in concert, Big Tech and most legacy/incumbent corporations will see a stronger acceleration of lost market share during this transition. Industrial Revolution 2.0 is coming and legacy/incumbent peers are not leading the innovation charge.


The pandemic has been an eye opening experience on multiple fronts whether it be politics, economics, or more micro areas within sectors and industries. There have been extreme weaknesses exposed across the board, as politics has failed and economies have suffered. For investments, one thing has become clear - companies that were leading market share gains pre-pandemic, during and post-pandemic have not changed. The challenge is, traders don't want to let go of the pandemic trade for the same reason that governments, Big-Tech, and legacy/incumbents haven't created transparent policies or pivoted to more flexible work arrangements, or pushed towards better innovative practices. In a couple words, centralized control remains the objective.


Unfortunately centralized control, without a revisit to newer approaches, is not going to survive as no generation below the Baby Boomers wants it to remain the way it is today. Even within the Baby Boom generation, there is substantial division. Centralization changes over time and has its own cycles, granted they are slower moving and longer-term. Newer technologies and innovation are pushing against these longer-term control gyrations.


I'm not a trader so I don't have a big concern with where markets or the portfolio is today. And I firmly believe that traders are a good element of the market. I don't have any desire to see anyone lose a lot of money in investing, I'm focused on the trends and opportunities from a mid- and long-term perspective and hopefully this approach benefits both sides.


How to Determine the Winners

There are a lot of ways this can be sliced and diced, but for investors, the key is the future opportunity. This is predicated on future Revenue and OCF/Share growth and valuation relationships that equate to potential investment returns.

Behind the paywall is the Stock Screener List. This currently includes nearly 45 companies with fully built out financial models including historical information and 5-year forecasts for financial performance and valuation assumptions to get at potential annualized investment growth. The listing of companies can be found below.

As can be seen, not many companies are expected to generate annualized investment returns north of 15%. 40% of these companies are forecast to return an annualized 10% or lower return, with 32% expected to return 10-15%, 14% expected to return from 15-18%, and only 9% to return above 20%. Upon looking at the top options, the theme is consistent that those looking to take risk and innovate are where the best opportunities lie. Valuation has a lot to do with things, as well as growth potential. In many cases either companies like Big Tech are overvalued and investment potential will wane, or growth potential, notably for legacy/incumbent companies will further slow.


We've even got some major outliers like Snowflake, Inc. (SNOW) who is poised to see 50% annualized Revenue growth the next five years, but because the SP is currently so overvalued, mid-term returns are not anticipated to be as robust. Of course the market can always inflate the SP because growth is so robust. But savvy investors will only act when the valuation is conservatively justified and the risk/reward is ideal.

The portfolio under management is the complete opposite as only two current holdings have a less than 20% potential annualized investment return expectation over the mid-term. Revenue performance expectations are also much more robust, with 26% of the holdings forecast to see greater than 50% annualized growth over the mid-term, and 37% within the 30-40% range, 26% within the 20-30% range, and the remaining 11% just below 20%.


There are many other variables at play like EVs, industry nuances, competitive risks, human capital, the list goes on, and these are covered through the individual financial model development and quarterly updates. Revenue growth is the key at driving all other core valuation metrics so the plots above are meant to provide this high-level relationship.

Another tool of comparison is the portfolio's current cost basis for each holding versus the current SP and relative future return potential between the two. The grey line indicates the proportional difference. Anything over 100% signifies that the cost basis is positioned to see a higher annualized return over the mid-term versus the current SP and vice versa. Clearly with 2022 being a beat-down year for aggressive growth, most holdings cost basis are above today's SP. This is expected to change dramatically over time.


Conclusion

The key point I want to emphasize here is that many stocks on the Stock Screener List are not going to do as well as those within the portfolio as many will see a much more rapid decline in growth characteristics as the pandemic continues to fade. For aggressive growth investors and those thinking that Big Tech will only continue to lead, it's important to recognize historical trends, relative/peer analysis, and future potential.


I recognize also that some of the holdings within the portfolio are pushing innovation limits aggressively and that there are risks associated with their attempts, and this is a big reason why tools like the Stock Screener List and EV Pretenders List will be key. Each quarter financial models are updated and through these tools, mid-term trajectories are fine-tuned.


Lastly, while the Stock Screener List only includes nearly 45 companies, the goal is to continue building this out towards hundreds of companies initially, with the longer-term objective to encompass all potential public company investments listed on U.S. exchanges.






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