"An Amazing Turnaround"

Brit Ryle

Posted January 17, 2024

It’s really cold out and my dumb dog won’t come inside. 

We actually got a freeze down here in southern Georgia last night. The mid-day temp still hasn’t broken above 40. And Maxie is sitting outside waiting for her walk. I’ve told her several times “it’s g%d&$#$m freezing out and we’re not going anywhere” but she just stares at me with her fruit-bat ears standing at full attention…

Coastal Georgia, between Cumberland and Amelia Islands, we get a couple days of near-winter every year. Today’s the first. And it looks like we’ll have the second day of winter this weekend. And I’m gonna miss it: I’m heading to Baltimore for a couple days of real winter and meetings with my Pro Trader Today partners. 

Plus I’ll get to catch the Ravens playoff game with my son. 

I found my boots, but my winter coat is still missing. Haven’t needed it in 2 years, and I’m getting worried I might have donated it. 

If it seems like I’m stalling, well, I guess I am. The stock market has a definite chill to it so far this week, as I thought it might. 

I told you on Friday (purple arrow) that the CBOE Volatility Index (VIX) was ripe for a spike higher: 

The VIX measures the increase in put option prices that happens when investors and traders start buying puts in anticipation of a move lower for stocks. It’s kind of a self-fulfilling prophecy for stock prices – even if the big institutions aren’t actively selling, they aren’t actively buying either. And that’s all it takes to get a little downside action…

Stock prices move to meet buy orders. If those buy orders are all lower than current prices, well then there you go. 

And there are buyers. 401K allocations to S&P 500 index funds are pretty constant, for instance. The lion’s share of 401K gets taken up by the biggest companies, which drives the performance of the Big Tech/Magnificent 7 stocks. 

It’s an economy of scale thing for these stocks. The whole argument that it’s somehow disastrous that the performance of S&P 500 is concentrated in a handful of stocks, the Big Tech/Magnificent 7, really misses the point. 

There’s a reason Microsoft and Nvidia and Apple are so valuable. Whether it was the pandemic or the inflation/rate hikes – most companies hit some kind of challenge to revenue and profit growth over the last few years. 

Not these companies – they thrived during the most challenging times we’ve seen since 2008-9. As an investor, why wouldn’t you invest in companies that can grow in good times and bad? It’s like using the Holy Grail to drink from the Fountain of Youth…

Apples to Oranges, Dust to Dust, Yeah…

Comparing today’s economy to that of previous eras when companies like General Electric or Exxon were dominant is silly. These kids today(!), they can take or leave the iconic symbol of American freedom – driving a car. But take away that iPhone? 

There might not be a better example of the apples to oranges comparison than Nvidia (NASDAQ: NVDA). Just about a year ago, Nvidia was valued at $693 billion dollars and had a forward Price to Earning ratio of 60… 

It’s a bubble! Irrational exuberance! It’s the year 2000 all over again!

Today, the stock has doubled. Its market valuation is $1.4 trillion dollars. And that forward P/E? It has been cut in half – down to 28. Mind-boggling growth – and it isn’t even allowed to sell its best chips to China. 

Or take Apple (NASDAQ: AAPL)…

I know there’s some concern out there about Apple. A couple downgrades for the stock, slowing smartphone sales, especially in China where the government seems to be actively promoting home-grown smartphones and banning iPhones…

I’ll admit – I worry about stocks with significant exposure to China, too. 

But, Apple just took out Samsung as the global market share leader for smartphones. 

10 years ago, Samsung had 30% of global smartphone sales. Apple had 19%. The number of smartphones sold worldwide has just about doubled since then. Apple now sells 20% of them, Samsung down to 19%. That’s a dominant performance.

“…An Amazing Turnaround”

The other day I read an article that said Amazon staged an “amazing turnaround” in 2023. Um, the truth is, Amazon didn’t do anything amazing. It was investors and their fickle sentiment that staged the amazing turnaround.

Amazon was the very first stock I recommended to Pro Trader Today readers. It was December 19, 2022. The aforementioned “…amazing turnaround…” hadn’t started, I guess, because the stock was $87 a share. Obvious bargain, as far as I was concerned…

The same author breathlessly stated that Amazon’s “amazing turnaround” led to a 47% jump in free cash flow last year, to $16 billion. I didn’t look it up, but I’m pretty sure the author is wrong about that cash flow number. And I know he or she is wrong for implying that the $63 billion in free cash flow that Microsoft produces is a better performance than Amazon’s… 

Because Amazon spent $84 billion on R&D last year, while Microsoft spent $27 billion. Those numbers aren’t typos. Amazon spent $57 billion dollars more on R&D than Microsoft. 

You wanna see an amazing turnaround? Wait till Amazon turns around and drops $50 billion onto its bottom line, cuts its forward P/E in half and still outspends Microsoft on R&D… 

I’m not saying Amazon will drop that much down to the bottom line. That’d be a tax bill. Point is: Amazon is a cash cow, and its R&D spending should be considered, even though it usually isn’t.

The fact that Amazon has grown its share of the US e-commerce market from 34% in 2016 to over 50% today is just gravy.

This is why I said in my 2024 Predictions that Amazon shares would double and hit a market cap of $3 trillion in 2024.

For the record, my bullish view on Amazon is not meant to be a knock on Microsoft. 

That’s what I got for you today. The temp is finally over 40 and I’m gonna take my dumb dog for a walk. Take care, and I’ll talk to you Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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