Happy Sunday everyone. We have to be ready for lightning earnings coming this week.
The 3rd week of January, April, July and October are usually the biggest earnings week of each reporting season. Please keep in mind we are near a bear market on the Nasdaq and a correction on the SP. [20% is considered bear and 10% correction] This is important because most new traders have not experienced a bear market and do not understand it is extremely different from a bull market. We have not had a bear market since 2008! The covid induced 2020 bear market only lasted about 30 days as money was pumped in and rates were cut to .25%. Not only was money printed, rates cut, analysts estimates were dropped so hard we had a perfect storm for easy rally and the biggest and fastest bull market ever seen. Many of new retail came after pandemic. As can be see with commission free trading and the fact that retail trading volume was 15% in 2019 and it now stands near 30% on bull days… In the 90s retail was under 5%… What this all means is that you may want to pivot, change game plans, unless you have been doing great since January 1st. I was up near 25% in 2021 until many of my puts expired 4/14, man if I had another week! I am still up 10%!
What I am doing now on my options is that I am making sure that I have no more than 5 expire on a certain date. I am still leaning 80%-90% puts and 10-20% options but that’s me….. If I buy a stock it must be growing sales at least 30% and have a PE ratio of under 20! The SP500 historically trades near 20x…. That said many of retail, in this bear market are still talking about companies with No PE ratio, losing money, bad cash flows and has no choice but to dilute shareholders to stay in business.
In the past, when the market would come down, I would often go super defensive and trade my banks or dividend stocks. I still have many dividend stocks. Remember the stock market is a live auction and this is a popularity contest. I have dividend stocks that have a yield of 10-15% because the stocks just keep dropping as retail wants something else…. Remember if the company is solid and has earnings they will continue to pay this dividend, so although it does suck that I will be down on the stock I will collect my 10-15% while the company continues to execute, make money and even raise dividends. Stuff like AINV, NLY, BRMK, PSEC, NEWT these are just 5. These would go up, much of value would go up while growth goes down. At the moment everything except energy and utility is being sold off. I will continue to hold the dividend stuff I have now, whether or not retail pivots out of speculation.
What you need to ask yourself is, if this is a popularity contest, does DOCU, Z, RDFN or DKNG really make money? What is the growth? What are the cash flows? Is business better now over 2019? 2020? 2021? Are the margins getting better? Worse? A lot of these growth stocks are no longer growing at 50%. If you are now growing sales at 10% and losing more money now than last year, is that good? Many people do not want to embrace the facts. AMZN last earnings was artificially inflated with RIVN. Many, even analysts pumped it, but did they know sales only grew at 9% and margins fell off a cliff? Off a cliff! So does that indicate this coming quarter.
Many people were asking me over the weekend if I would short/puts on FB….. What is the risk reward? FB now has a PE ratio of around 16-17. They have over 100 million cash and have + cash flow. If the stock stays low they can buy shares, pay a dividend, make an acquisition. That is up to you, but I do not see the risk reward at this price. Maybe at 220-230… But 185? Can it go lower of course, this is an auction…I have been trading ONEW with a PE of near 5, LOVE a PE near 17 [Slamming earnings] so anything can go lower but they are making cash and cant be happy with the stock price…. A couple of people asked me about CMG, if you check a several weeks ago I wanted puts. The PE ratio is high, growth is lower and margins have eroded.. I wouldn’t go crazy but the risk reward on something like this is far better than FB…
What about your artificially inflated speculative stock. It has no earnings, will lose money for 1+ years and has negative cash flows…Take a look at the Dow 30. How many of those stocks have over a 25 PE ratio and those are the great 30! The SP500 how many of those have a PE ratio of over 50? That is 500! Historically the DOW 30 the stocks inside grow sales at 5-10% and bottom line earnings 1-3%… The SP500 grows 10-20% sales, earnings 5-10% over the year.. The stock you are looking at?
Finally, I end with this. Since the stock market has traded in the late 1800s how many stocks over a long period of time keep a high pe ratio of 50-100? APPL, MSFT, GOOG, AMZN, FB, these 5 used to have super high PE ratios but as growth has slowed the PE ratio has also come down… So be careful in what you trade, own, are looking at… All it takes is a bear market for your 100x PE or No PE to come into reality. I am not a Debbie downer once again. I have been trading since I was 14 in 1994, experience matters, you have to weigh everything surrounding you and everything was pointing negative. In October when speculation was still high and earnings beats started to dwindle, it had my on heavy alert. 1st and 2nd Quarter of 2021 was absolutely amazing beats… So here we are 1st quarter earnings season 2022. GOOD LUCK!
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