Good MORNING

Here is the link to the spreadsheet for this week:

Take me there now!

There was a quite a bit of activity in the account last week, so I wanted to jump straight into that to begin with.

Last week was a weird on. Some stocks in the portfolio looked to be heading towards new lows on Wednesday. Then the news was released around inflation being lower than expectations and the market took off like a rocket!

Most of the stocks in the account were up. $FVRR in particular was up 44% for the week! In summary, growth was up huge and everything else was up too. That said, the account only finished up around 3% due to the declines from the week and days prior to this.

Summary of changes

As I mentioned, there was a lot of activity in the account on both the buying and selling side. Before I go over that, I want to be clear: The sells you're seeing here are not driven by underlying performance of the stocks. All of the sell's were made in my second account.

Here's why: The goal of this account was to invest over a 5 year period to pay off a portion of our mortgage (16%) which had a 5 year interest-free term against it. After that 5 years, the interest starts building, so we want it gone by then. We started with a goal to accumulate this money over the 5 year term. However, as I always say, a lot can change over a matter of years. And it has. Fortunately for us, we're able to achieve this goal ahead of our original 5-year timeline due to increases in both of our incomes. Therefore, it makes sense for us to begin trimming and selling the positions in the second account and holding the cash as we earn 3% interest on cash balances in the account and do not need the potential returns these stocks may yield.

Now that this is clear, here is what I sold:

- In the second account I sold everything you can see in red: $QCOM $O $STAG $UPST $DHR

In regards to the first 3, these are now no longer held in either of my accounts. $UPST and $DHR on the other hand I do still hold in my main account and intend on keeping it that way for now.

In orange, you can see that I've highlighted both $MELI. This is because I sold the position in my second account but purchased more shares in my main account.

From next week, $QCOM $STAG and $O will be removed from the main tab of the tracker and will be only found on the SOLD tab

- In green are all the positions I added too. I'm pleased to say that I added to these on Monday and Wednesday before the rally. Savvy Investing Club members would have seen this in the Trade Alerts channel: $TSLA $CRWD $ABNB $MELI $AMZN $AMD $DOCN £VUAG

The rally on Thursday was impressive, but it comes from exceptionally low valuation levels for growth stocks. Many of the leading growth stocks in the market are experiencing their sharpest drawdowns in history, so a short-term rally from deeply oversold levels does not change the big picture.

If we want to have a look at risk appetite among investors, it is worth noting that both ARK Innovation (ARKK) and Renaissance IPO (IPO) have recently touched levels close to the bottom of the COVID crash in 2020. There is no appetitive for risk in this market.

Before the inflation numbers came out on Thursday morning, growth stocks were facing tremendous selling, with cloud software companies being particularly affected in recent days. In addition to all the macro factors causing anxiety among investors this year, the complete mayhem in crypto markets most probably had a considerable effect on growth companies.

The recent collapse of FTX has affected many of the most prominent growth-oriented hedge funds in the market, including names like Tiger Global.

The funds with crypto exposure are taking big losses and they need to sell stocks in order to raise cash. They sell whatever they can sell, not what they want to sell, and this makes price moves particularly sharp and unpredictable.

In this context, the valuation levels in growth stocks are at historically attractive prices.

Let's focus only on the companies that are delivering excellent numbers and outperforming expectations so that we don't need to worry about the fundamental quality of the business when assessing valuation.

MercadoLibre (MELI) is the cheapest it has ever been. This does not make any sense when considering that the company keeps delivering outstanding numbers quarter after quarter. This valuation for MELI can only be explained on the basis of negative market sentiment toward growth stocks and emerging markets.

The Trade Desk (TTD) is a good case study to understand the market dynamics that we have been experiencing lately. The company delivered a brilliant quarter, growing 3 times faster than the industry and obliterating the competition with massive market share gains in Q3 of 2022.

However, the stock was down more than 8% on the day of the report because investors were concerned about the FTX collapse. After that, The Trade Desk was up 19% on Thursday due to good inflation numbers.

This shows very clearly that the market is not paying much attention to company-specific fundamentals because everyone is obsessed with inflation, interest rates, the recession risk, the war, and now the crypto meltdown.

Sooner or later the path of the economy will be more visible and predictable. We don't even need the economy to be in good shape for stocks to do well, but it really helps when investors have a better idea about what can be expected. When the macro is more predictable, even if the data is mediocre, the market tends to pay more attention to company-specific drivers.

Back to The Trade Desk, the stock is expensive in comparison to other companies in the sector, but it is quite cheap by recent historical standards. We are using revenue and EBITDA ratios in this case.

We can also use ratios based on earnings and cash flows for the more mature companies in the portfolio and reach a similar conclusion about valuations. Many of these companies, even the ones performing very well on the fundamental side, are trading at historically low valuations.

AMD (AMD), for example, is trading at less than 20 times forward earnings and 16 times EBITDA.

Alphabet (GOOGL) is just too cheap at a price-to-earnings ratio below 19.

Here is Amazon (AMZN) trading at valuation ratios not seen since the Great Financial Crisis in 2008

Airbnb (ABNB) is also trading at 20 times EBITDA estimates for next year.

What we have experienced in the past two years is one of the worst bear markets in history for growth stocks.

Part of this bear market is the valuation adjustment after the bull market in 2020, but only the initial part accounts for that.

Valuations went from very expensive in early 2021 to reasonable and even cheap in early 2022. After that, growth stocks continued declining and reaching historically low valuations.

Keep in mind that these companies are growing revenue and earnings at a very good speed. When sales are growing rapidly, the price-to-sales ratio can come down substantially even if the stock price does not decline by much.

This is what happened from 2021 to early 2022. These companies delivered vigorous growth and mediocre price performance, so valuations returned to very reasonable levels.

Then came the war in Ukraine, with a big spike in energy costs and inflation. The Fed embarked on the most aggressive tightening campaign since the 1980s, and valuations continued declining to historical lows. Making things worse, the problems in the international bond market and in the crypto markets accelerated the price declines for growth stocks.

We have a portfolio of high-quality growth stocks delivering excellent performance and abundant growth opportunities going forward. Most of the companies in the portfolio will produce sustained revenue growth and expanding profit margins, so cash flows are set to increase due to both factors: growing revenue and a larger percentage of revenue being retained as earnings.

The price that the market is paying for those earnings is now historically low. It can always decline a little bit more, but it makes much more sense to expect valuation levels to stabilize and perhaps even expand somewhat in the years ahead.

We also have some companies facing severe difficulties such as Upstart (UPST) and Roku (ROKU) as well as other names like Cazoo (CZOO) and Ondas (ONDS) which are highly speculative and extremely young. These companies will be assessed on a case-by-case basis depending on how the thesis evolves.

These companies together - distressed and speculative investments - account for less than 20% of portfolio capital. More than 80% of the portfolio capital is allocated to companies with solid cash flow capabilities and abundant growth prospects.

And these companies are now trading at valuation levels that we have not seen in a long time. In some cases, the valuations are the lowest in history for these companies, or very close to that.

This is what I mean when I use the term generational opportunities: Fundamentally strong companies trading at valuation levels that you generally see every 10 years or even less frequently.

Until next time

FS

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