Finding the Silver Lining

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Why Louis Navellier is optimistic … the case for a short bear market … signs that the smart money is already buying in this “divergence” opportunity

While it’s hard to remain optimistic in the current market environment, I encourage you to remain patient and not panic-sell like the rest of Wall Street.

The reality is that earnings growth is still robust, and some companies are reporting record results – and this will ultimately help the market firm up in the upcoming weeks and months.

So says legendary investor Louis Navellier.

Yesterday, Louis updated his Accelerated Profits subscribers on the latest market gyrations. And despite the volatility, Louis is finding a reason for optimism.

We’ll get to that in a moment, but let’s begin with Louis’ broad analysis about stocks over the last few weeks:

It’s the usual suspects that are driving the stock market lower: investors’ fears over soaring inflation, ongoing lockdowns in China, global central banks’ tighter monetary policies and the continuing conflict between Russia and Ukraine…

Fed Chairman [Jerome] Powell thinks there is a “good chance” that the U.S. could skirt a recession, though – and based on recent economic data, I think he’s right, at least in the near term.

Unfortunately, Treasury Secretary Janet Yellen doesn’t seem to share Powell’s sentiment, as she stated last week that the Fed would have to be “skillful and also lucky” to engineer a soft economic landing. 

Louis notes that he can’t recall a time when the Fed successfully engineered a soft landing. And for good reason – it’s incredibly challenging.

The higher interest rates that are needed to kill inflation also risk killing economic growth. And, in fact, we’re already seeing signs of companies pulling back.

For example, yesterday, we learned Uber will be cutting down on new hires.

From CNBC:

Uber will cut back on spending and focus on becoming a leaner business to address a “seismic shift” in investor sentiment, CEO Dara Khosrowshahi told employees in an email obtained by CNBC…

To address the shift in economic sentiment, the ride-hailing firm will slash spending on marketing and incentives and treat hiring as a “privilege,” Khosrowshahi said.

This comes after Meta reported it would slow down its pace of hirings for mid-level positions.

And don’t forget Robinhood, which announced it’s slashing its workforce by roughly 9%.

To be fair, Fed Chairman Powell wants some degree of economic slowdown because that will help ease inflation. So, he might view this hiring slowdown as a good thing.

But preventing an economic slowdown from turning into an economic recession is difficult with the tools at the Fed’s disposal. This is what everyone is watching.

***What about the good news Louis is focusing on?

Back to the Accelerated Profits update:

Yardeni Research pointed out that P/E ratios have been crushed despite strong earnings and revenue growth.

We’ve experienced this firsthand, as our average growth stock trades at 15.9 times median current earnings and only 4.1 times median forecasted earnings!

Under no circumstances can I justify such low valuations.

Though Louis is speaking to the P/E ratios of the fundamentally superior stocks he holds in his Accelerated Profits portfolio, this P/E implosion has impacted the entire market.

Below, we look at what’s happened to the P/E ratio for the S&P 500 over the last five years. As you’ll see, since early 2021, this ratio has been falling hard.

It’s now down to 20.84. That’s still above the long-term average of about 16. But it’s miles below the ballpark 40 level it reached around a year ago.

Chart showing the PE Ratio of the S&P falling from around 40 to roughly 20 over the last year ballpark
Source: StockCharts.com

Back to Louis and the good news:

Yardeni Research points out that while the stock market appears to be heading to a P/E-led bear market, stocks wouldn’t remain in bear territory for long.

It noted that once a bottom is made in P/E ratios, the market would start to climb higher.

Let’s make sure we’re on the same page.

“Heading to a P/E-led bear market” doesn’t sound wonderful. And, of course, no one wants a bear market (officially measured as down 20% from the most recent high).

But the reality is the S&P is already very close to a bear market. It’s down about 17% from its high at the turn of the year. If we’re going to have a full-on bear market, it’s better to have this type of “P/E contraction” bear market rather than one led by collapsing earnings.

That’s because a P/E-led bear is based primarily on sentiment as investors reprice assets to more reasonable levels. Once that reprice is done, prices stabilize and investors begin dipping their toes back in the water at more attractive prices.

In an earnings bear market, investors don’t want anything to do with stocks until earnings recover. And that can take quarters or even years.

Fortunately, that’s not where things stand today. As Louis noted, earnings and revenues today remain generally strong despite tumbling asset prices.

***If the idea of tumbling prices despite strong earnings and revenues sounds familiar, there’s a reason

Our hypergrowth expert Luke Lango has been shouting about this incongruence for several weeks.

It’s something he calls a divergence.

In short, the prices of certain, elite technology companies have become wildly decoupled from the intrinsic value of those companies, as measured relative to their revenues/earnings.

It’s rare that this happens. But when it does, it opens up a “divergence window.”

These windows create the opportunity for a huge snap-back, wherein prices race higher toward their equilibrium level relative to revenues and earnings.

Last Friday, we quoted Luke speaking about this divergence, saying: “The greatest stock market phenomenon in the history of capitalism has arrived on Wall Street for the first time in 14 years.”

Now, it’s one thing for Luke to tell you that prices have decoupled from the intrinsic value of top-tier technology stocks. It’s another to show you that “the smart money” believes this to be the case as well, and is acting on it.

For more on this, let’s turn to Luke’s issue of Hypergrowth Investing from yesterday:

It seems as good a time as any to ditch the stock market to look for less risky ventures… but a select and influential few are attempting to pull out of the tailspin. Who are these bullish investors capitalizing on today’s market fear?

Insiders.

I’m talking about CEOs, CFOs, COOs, board members and big-time hedge funds. These corporate insiders are buying the dip.

This group makes up the so-called “smart money” in the market. They’re the folks who know more about their businesses than anyone in the world – and that group of people went on a buying spree last week.  

Insider buying across the whole market soared to levels not seen since mid-March.

Luke points toward last Wednesday, when a board member at PayPal (PYPL) bought nearly $100,00 worth of PayPal stock. That same day, the CEO of Align (ALGN) bought nearly $2 million worth of his company’s stock. The day before that, a board member at Rockwell Automation (ROK) bought over $240,000 worth of Rockwell stock.

There was also the CEO of Playstudios (MYPS) buying company shares, a hedge fund buying Appian (APPN), and the CEO of Rocket Companies (RKT) buying another $600,000 worth of stock, all from last week.

Back to Luke:

Honestly this is just the tip of iceberg.

Over the past few months, insiders have been loading up on tech stocks amid this sell-off in a way that I’ve only seen once before in my investment career – during March 2020, before tech stocks went from crashing to soaring…

From late February to mid-March, over 50 corporate insiders bought $470 million-plus worth of various hypergrowth tech stocks.

CEOs and CFOs were buying. Board members and hedge funds were buying. And they were buying in huge chunks, across multiple purchases.

All that insider buying has continued since then, with another spike coming last week.

This is a buying spree like I’ve never seen before.

***Get ready for amazing entry prices as the rolling bear market continues

To be clear, Luke isn’t claiming we’ve hit the bottom yet. In fact, he says that things will get worse before they get better.

But when the markets eventually right themselves – which they will – Luke is expecting growth stocks to lead the market higher:

The next few months could be ugly for the S&P, the Dow, and the Nasdaq.

However, amid that chaos, our analysis suggests that washed-out hypergrowth stocks will soar.

Sounds counterintuitive, sure  but it happens every single time we find ourselves in a position like this. Hypergrowth stocks are always the first to fall into a bear market. They’re also always the first to rebound.

Hypergrowth stocks bottomed in November 2008  five months before the market flatlined in March 2009. Over that stretch, many hypergrowth stocks doubled while the broader indices dropped 10%.

Back in 2001-02, hypergrowth stocks bottomed in April 2001  more than a year before the broader market did. Over that stretch, certain hypergrowth stocks rose 100% or even 200%, while the broader indices dropped 20%.

We’re seeing history repeat, and we’re nearing that critical inflection point.

We’re running long, so I’ll wrap it up for the day.

Yes, this is a painful market. But if Louis is right, a P/E-led bear market will be short. And if Luke’s right, the first stocks to recover and surge higher will be hypergrowth tech.

It’s not too early to get your buy list ready to go. On that note, if you’d like more of Luke’s research on the divergence and which specific stocks he’s most bullish on today, click here.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2022/05/finding-the-silver-lining/.

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