Editors' Note: This is the transcript version of the show we recorded on Wednesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the show embedded above, if you need any clarification. Enjoy!
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- Here we go. Welcome, welcome, welcome back to Stock Market Live. If you can't tell, we've got the whole crew here today. Obviously, you know Mike Saul. He's been hanging out with us the last two weeks. I'm Daniel Snyder, and Austin Hankwitz is back with us. We've got everybody showing up with us right now. Alfonso, Dennis, Dan, Jeffrey, Hans. I see you all joining us. We love... Oh, look at these people that are coming back week over week. I love this. John, there you are. I see all of you.
Just a reminder, this is the show where you get to interact with us directly. You get to ask questions, you get to get answers on the spot as we're going through everything. We got a really packed show for you. Obviously we want to kick things off, not only looking at the overall markets, but we've got two different stocks that we're going into today. One, it's probably one of my all time personal favorites. Let's look into. The other is from Austin. We'll get into that here in a second.
But first, we got an email from Christian who I hope is joining us. I didn't even check and look, but Christian, if you're here welcome. Oh yeah, hanging out with us today. - I see a Christian Rainer might be tuning in, hanging out.
- Yeah, yeah, yeah, yeah, well, I think that's what we're doing. I'm telling you, you can interact with us directly. That's what we're here and we're doing all about, and Christian Rainer is the one that sent in the email asking for clarification about a chart, a graph that Mike has been talking about. Mike, you've been talking about this chart for weeks now every time you do "What's Happening In The Stock Market with Mike Saul" on Mondays. If you aren't watching it, I highly encourage everybody to watch that. He breaks down the markets flawlessly in my opinion. But Mike, we gotta talk about this chart. They need a little bit of clarification. So Josh, can you go ahead and throw up the chart that I'm talking about? There we are. All right, Mike, what are we looking at here?
- So this is a, you know, but just to be crystal clear, I did not draw this chart from hand or invented this. You could see the source below, global studies and geography, Hoftsra University. So what it is, is it's just a chart that shows kind of what the path that a stock or the markets overall take in a cycle. Let's call it a big picture cycle. Now you could apply this to individual stocks, but since we had such a big move in the market over the last few years, when I talk about it on Mondays, I apply it to the broad market, right? So what happens? So for a couple of years before the last pandemic hit us right back in 2020, we were moving up, but it was a stealth move, right? A lot of people calling it the most hated rally. Now they're calling, you know, whatever. They've since changed that. But back then, it was another most hated rally, right?
So we started to move, we started to move, then we started to take off. And everybody may not remember 'cause all they remember is that big pump when the Fed, you know, dropped the liquidity bomb on us. But we were moving up and then all of a sudden what happens, COVID, the unknown, boom, we get a sharp sell off. Bear market, bear market, bear market. And I remember I was at another place, I was not at Seeking Alpha yet, but I will never forget. We had a big meeting and we're talking about how are we gonna handle this bear market? And I said, "Whoa, cool your jets. Let's make sure it's a bear market first before we totally, you know, turn things around here, okay?" And I was right, granted. Pat myself on the back.
- My man.
- [Mike] I'm not always right. So don't take it like I was right then and I'm right now. No, but I was like, take it easy, take it easy. This is a big overreaction, and what happened was we got this part, which is the bear trap. I don't know if you could see my pointer here. So we sold off, the world was coming to an end, right? We were never gonna travel again. Nothing. And look, I am not diminishing COVID. I know a lot of people that got sick, I know a few people that died from it. Again, so I'm not minimizing what happened with COVID, but we're talking about the market here, right? Anyway, there was huge panic. There was a big thing. The world is coming to an end. The Fed came in with a liquidity bomb and then all of a sudden, boom, we start, we went off to the races. And by the way, just to be clear, guys, this was not drawn based on what just happened, okay? This was drawn years, years, years ago. Why am I making that point is because this cycle tends to repeat itself over and over and over again. You could put this on a chart of Tesla (TSLA) if you wanted, or of Amazon (AMZN), or of Apple (AAPL).
- [Austin] Or Bitcoin. Bitcoin, don't forget Bitcoin.
- [Mike] Oh, sorry. Who could forget Bitcoin, right? Absolutely Bitcoin, and any of the other alt coins, right? A lot of this is similar. A lot of those are more compressed of course, but Bitcoin is a beautiful example of this. So then what happened? Okay, the liquidity came in. Boom, here we go. We're off to the race, off to the races. And what do I hear? I am hearing from people with 40 years of Wall Street experience. No, this is different. No, it's much different than what happened before, right? What are the four most dangerous words in investing? This time it's different. Notice I had to use my fingers to make sure. This time it's different. The most dangerous four words.
Now, this is not the topic of today's webinar, but believe it or not, the person that said that, and I forgot who it was 'cause I'm having to, you know, I'm a little too excited. He said, but 20% of the time, it's not different, right? So just keep that in mind, regardless of that. But new paradigm, no, things are different. People are gonna pay $3,000 for a coat rack, which is what a Peloton bike is for most people, right? Or people are they don't wanna go to doctor's offices anymore. Oh no, we're gonna use this one. No offense to Zoom (ZM) 'cause we're on it now. People are gonna wanna use this. Yeah, no, don't worry. I know Microsoft (MSFT) has a gazillion dollars and so does Google (GOOG) (GOOGL), and they could come in and disrupt Zoom without even blinking. But no, don't worry. Zoom has a moat because people like to say, let's get on a Zoom meeting. No, no, it's not gonna happen. It's not gonna happen.
It's not a new paradigm. It's the same thing. What happened on the first dip? Denial? Don't worry. Just another spot to buy. Just another spot to buy. Then what happens? We go down, we come up, up. Here we go, we're returning to normal, and then boom, we pushed down, which is right around where we are now. I think right now we are in the bull trap slash fear phase of this cycle, right? A lot of people were thinking we were returned to normal just a couple of weeks ago. They got way out ahead of themselves because they're looking for any excuse. Oh, here's a bounce, let's get on board. And I don't wanna be Debbie downer, I don't wanna be Mr. Bear. Oh, you're so negative. It's not the point, right? There's plenty of opportunities here in the market.
So I'm not saying, you know what, we're gonna go lower. Let's all move into a cave and we'll see you in a couple of years. No, absolutely not. There's still plenty of opportunities out there. But right now we are in, in my opinion, the bull trap fear area. Now does that mean we have to go next to capitulation? No, that is the beauty of this. Even though this looks like, okay, this is a permanent illustration, it doesn't mean it absolutely has to work this way.
Maybe we're just in a bull trap phase here. I don't know where we are, but it feels to me, and I would love your comments on this too, Austin, 'cause this is the first time I'm on with you. I think we're in the bull trap, I think we were in the bull trap until yesterday's inflation number, and now I think we're creeping back into the fear mode. So I would love yours, and of course, Daniel, your commentary too on this.
- [Daniel] Awesome, take it over. What's your take, Austin?
- [Austin] Most definitely. How's it going, everyone? So, so happy to be back. I was on a little vacation. I was traveling for work, but now we're back. We're having fun. Mike is a rockstar. Had no idea the guy's a blast. I'm so excited to be here. So Mike to answer your question, I'm right there with you, man. I'm right there with you. We saw this bear market rally happen in March, right? I think it was what call it maybe 13, 15%. Then we had the sell off in June. We saw this bear market rally go into August. I think it was about August 16 we peaked. We had this massive sell off since. I'm right there with you.
I think that things are gonna have to get worse, and that kinda even goes back to what Jerome Powell was saying in Jackson Hall, right? Have a nice little quote here for you if you guys are interested. Says, "While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the committee will need to see before we're confident that inflation's moving down," right? And to me, this means the Fed is saying, they're happy to see inflation move down a little bit in July, but they need inflation to come down a lot and quickly and to accomplish that, not only do they need to continue being aggressive, but they're gonna continue to be aggressive even after inflation is back to normal to keep it there, right?
And I don't think the market has yet priced that in. I think that we're gonna have to continue to move down a little bit. I don't know what that number's gonna be. I'm right there with you, right? Are we gonna go back to what was it, the highs of 2020? Like the 3,200 range? Maybe, maybe not. I'm really not too sure, but it just doesn't feel like a bottom yet to me. Daniel, what do you think?
- [Daniel] Guys, I am in this boat right now and Mike and I were discussing this yesterday as well. You know, the CPI number came out. We all saw it, it's still running a little bit high. The market freaked out. 75 basis points is fully priced in for next week. In my opinion, I kinda feel like this might be the start of the fear phase, right? We're going into winter time coming around. We know what's going up with Europe and energy. We know that rates have to continue to rise until inflation stops. I feel like we might have just seen our bull trap, but maybe this isn't the bull trap because in bear markets, you tend to see multiple bear traps or yeah, bull traps.
Sorry, not bear traps, bull traps. You tend to see multiple bull traps within bear markets. So keep that in mind. If you go back and look historically, you see it time and time again in the data, whether it's the great financial crisis, whether it's dot-com, whether it's inflation back. I mean, go back and look at those charts. You see this time and time again. So just because we had this rapid bull trap that happened so quickly, I mean, that pace of change sort of gave you the tell that it wasn't normal. So when it comes to this chart, I think we might start being on that tippy turn rollercoaster down.
Like Mike says, I don't wanna be a bear, I don't wanna be a permanent bear. I love making money, but I also know that there's ways to make money on the bear side and the bull side whether we're going up or down. And that's why we're here to discuss specific stocks, we're breaking down valuations, we're getting into it today. So with that being said, let's go ahead and go to the next slide, Josh. As always, Josh is in the back. Our rockstar guy. Love that he's here with us today. Mike, we're looking in the overall market. Christian also asked about gap fills. We're gonna get into that here in a second. Why don't you go ahead and give us what you're seeing on the SPY.
- [Mike] Okay, so last week I talked about this trendline, and now it's being retested. So here's how I drew this trend line just so everybody knows. I started with the June low, I connected it to the July low, and then I projected it out. Since it was only testing two points at the time, I said, it's not a valid trend line. Valid trend line has to test three points 'cause you can basically connect any two points in the market, right? Then what happened is we actually came down, we tested that trend line, we pushed below it, but we didn't close below it. That, in my opinion, is a sign that support is holding. We got a nice ripper bounce, right? Even with Mr. Powell speaking at the rotary club or wherever he was last week, it was like some little thing. Hey, Mr. Powell, come up and speak for 10 minutes. All right, you know, it's like getting me on here. It's like, hey, get up and talk. And he came up and he said, "Yeah, the job isn't done."
Basically said we're gonna keep raising rates. Okay, regardless. So here we go, we rallied. And then what happened? The CPI number came out. We had a 94% down volume day, which usually leads to a bounce by the way. We had the worst day since 2020. I don't know. People love do that, right? Yes, whatever it was. And people love to plot like that, and that's fine. It's good to have landmarks to go back to, but really not that important, right. It's like, you know, when, oh, this is the first time he's been at bats since it's like sports. This is the first time he's been at bat since 2019. All right, what does that mean? What's he gonna do now at the plate? And it's the same thing here. Okay, it was the worst day since 2020. What are we gonna do now?
So today I was expecting consolidation because well, people don't understand and that's okay because they're not used to just looking at the charts and looking at past history is when you get large, really big days like this and even though we're only seeing it doesn't look that big, we have to connect it to where we closed the previous day. So it really is all the way from here all the way down. Usually we get some digestion here, but in my opinion, stocks are like real estate. And what is the most, what are the three most important factors when buying a piece of real estate, Daniel? Location, location, location, right?
And with stocks and in this case, it's the SPY, and we're looking at it at the S&P 500, location is incredibly important. What I look for are what's known as inflection points, which is the Latin word for saying the place where something happens, right? So what that means is we're not gonna sit on this trend line. We could sit there a couple of hours, we could sit there a couple of days. Maybe we sit there a couple of weeks, but more than likely we are gonna move away from this trend line.
Are we gonna move up? And what are we gonna do when we get into that gap, Daniel? I'm sure you're gonna talk about the gaps 'cause you know that, you love talking about them. You do a great job with it. Or are we gonna fall through that trend line and look at this gap below here. And then of course we have the June lows. Now again, I don't know if you want me to talk about my whole date confluence October 5th or not. I did that Monday, but I could do it again. That's no problem.
- [Daniel] Do a quick recap for anybody that wasn't on then.
- [Mike] So in my opinion, I am hoping, and I know, right? Austin's like-
- [Daniel] Hope is not a strategy, Mike.
- [Mike] Hope is not a strategy, but hope is a strategy. It's just a bad strategy, right? It's still a strategy.
- [Austin] My man. - No, it's like, I love these people. I trade options. I don't use stops. Well, of course you use stops. Your stop is zero. If you lose all your money, you're still gonna stop, right? So, but anyway, hope is a strategy. It's just a poor strategy. So what I am hoping for, and I'm gonna tell you how that plays into things, I am hoping for us to decline here. I would like to see us come down, test the June lows, maybe break the June lows. Maybe we're high, low, whatever it is because we have three convergences of time areas on October 5th.
Let's talk about 'em real quick. We are in a midterm election year. This is a year that Congress is up for their seats. During midterm election years, October 5th on average since 1950, which is the first midterm after World War II. A lot of people when they look at the market, they always start after World War II, right? So the first midterm, 1950 and forward, the average day is October 5th where we start a fourth quarter rally on midterm election years. Number two, October 5th is Yom Kippur. There is a seasonal trend in the market. Sell rush shutter, buy Yom Kippur. That's two things. The third thing is we're just about a little bit less two weeks out from earning season, right? Earning season starts the 14th or whatever, and it's the fifth. So it's about two weeks, right? So give or take.
So those are three separate time zones that are converging around October 5th. Now how does my hoping we go down come into play? Or I can hope as much as I want, as long as I don't put money behind it. So I'm not sitting here going, gee, I hope we go down. Let's buy some puts. Gee, I hope we go down. Let's short some stocks. No, I'm standing on the sideline watching for what, hoping for what I... Actually, I'm expecting us to pull back. So it's more than just a little hope, it's expecting. But it's more hope than anything. I'm on the sideline, I'm waiting for it to pull back, I'm gonna wait for a technical setup, and then I'm gonna look to get long down there. So you can hope and dream as much as you want as long as you don't risk any real capital.
At least that's my rules. Austin, Daniel, you guys can do whatever you want with your money. You can burn it if you want and burn it for heat if you want, right? But for me, I can hope all I want as long as I'm not risking money, and that's not what I'm doing. I'm waiting to see if we pull back. Does that make sense? - That makes complete sense. And, you know, it's kind of funny. I'm not gonna lie to you, fellas. I knew the CPI print was coming out like everyone else, and I was very pessimistic about it. And so I bought a bunch of puts, and those puts printed yesterday and I sold 'em all before market closed.
And to Mike's point now, I'm kinda on the sidelines, right? I'm thinking, I'm still thinking that whether things are gonna come move down. During this October 5th year, that's really interesting to me. I'm gonna look more into that, Mike. Thanks for sharing. But I'm right there with you. I'm kind of expecting things to move down back to those sort of June lows, and just there's not a lot of catalyst to move us up, right?
- Yeah, and I'll tell you guys my viewpoint. I mean, I'm doing the strategy what's called SOH. I am sitting on my hands. I am preparing, I am getting my watch list ready. I am waiting to see that moment where I believe that now is going to be the time to start allocating bits of capital as a time. Obviously like I tell people all the time, I'm not gonna call the tops and I'm not gonna get the bottoms, but I can get levels that I like to look at and have companies with strong fundamentals, great management, and also look at the technicals like we do right here on this show so that everybody can maybe see some levels that we're looking at, and as a collective, might be able to help you just like you guys help us. So I wanna go-
- Real quick, Daniel. Dan, I know you wanted to go, but you are doing the two most important things, right? Which are the two Ps, right? What really leads to success in investing, patience and preparing, right? And you're doing those two things. You are having patience by sitting on your hands, and you are preparing by putting together your watch list. I don't know, you know, again, everybody thinks it's great. Everybody thinks it's no, no, make money tomorrow and you're gonna be all, you know, it's okay. It's okay to get rich slowly, it's okay.
Right, I get it, I understand that, and sometimes I know it's a cliche, but it doesn't mean it's not valid. Being flat is a position. I know that a lot of people say that and oh, that's just a cliche. Okay, well, you know what? It's a powerful cliche. You know what another cliche is, let your winners run and cut your loses short. That's what made a lot of people a lot of money. That's why Warren Buffet is the greatest investor of all time. He didn't do it by cutting his winners short, right? By whatever it is, watering the weeds as they call it, right? He watered the roses, and that's what we wanna do here. Apologize, Daniel. Go ahead.
- You're all right. We're gonna keep the show moving along 'cause we do wanna get to the two stocks that we're talking about today. So Josh, if you go to the next slide there, 'cause Jorge is asking as well a couple questions here. Could you explain the concept of the gap? I'm gonna get into that here just in a second. Is there any ETF that could be used as a reference for bond performance? I mean, you've got the AGG, you've got the BND. Those are some popular bond ETFs that you can look at over there. I mean, there's a ton of ETFs out there. Like, so if you go to seeking alpha, you can definitely go into the ETF screener and we have a whole screener that'll help you with that as well. So let's talk about the gap, right?
So this is the SPY. I'm gonna run through this pretty quick 'cause we're also gonna look at the queues, we're gonna look at IWM, and there's some gaps across the market. So this chart to me is absolutely horrible. I mean, this is probably one of the worst charts I see in the market right now. Why? Because there are so many gaps. So what is a gap? A gap is just an area where the market hasn't tested the price levels. So think about it. When you have overnight moves in the market, sometimes we have gap ups, we have gap downs. Well, the market wants to go back and test those levels to see if there's additional supply and demand at those prices.
And that's why we say 80% of the time, the correlation is 80% of the time, which is extremely positive. Those gaps will fill, right? So obviously this is SPY. We had the bull market rally what we've been talking about, but there you go back on what is that? June 17th market, bottom on the left side of the screen. You see 362.17 there. There was a gap up that day. Not only that, it went up and there's another gap. I believe that's around the beginning of August. Of course we shoot all the way to the top. Now ever since we've been pulling back, we're leaving gaps as we go. There's the gap yesterday from the CPI number. Gapping down from where we close on Monday. I mean, these gaps, the market is going to want to test those levels eventually. Now the difference about gaps though, sure 80% of the time they fill, but there's also what is called the gap and go. So these gaps don't always have to fill. So keep that in mind. Sometimes the markets move, you'll see it in stacks you'll see it in a lot of the meme stocks at times.
PayPal (PYPL) was a brilliant example of a gap and go where there is a massive gap after earnings and the market just wants out. They just wanna continue to sell. They don't wanna go back and retest. They just want out and that's typically when you'll see a gap and go. So those two at the top, I might consider those being gap and go. It might take a year, two years, five years for those levels to retest. I keep that in mind when I'm looking at the charts on the technical side. And if I believe that the market's pulling down lower, I am expecting the fill point of a gap to act as resistance or support.
So keep that in mind. So as we enter the gap, as they say, typically, once the gap is filled, you'll see a pivot point if you're an intra day trader or looking for resistance levels, or looking to set a target for maybe exiting a portion of your trade. So that's kind of the thought and the theory behind gaps. 80% of the time they fill, there is no timeframe on that, but keep that in mind. Typically, you know, when you have earnings, when you have certain economic events like data prints, you'll typically see gaps. It's just another thing to watch at from the TA level. So that hopefully clarifies gaps a little bit. If you have any questions that I didn't explain that well enough, please leave them in the chat box and I will try to get to those. Now, Mike, let's go through the queues real quick if you don't mind.
- Okay, so the cues. Now the cues have a different story. So they had this trend line. It actually came down a couple of weeks before the S&P, never bounced, got through it, came up, wiggled around it, and then it broke through again. Now a lot of people question, okay, well look at all the messy action around that trend line. Is it still valid? Is it still even watching? Me, I'll keep it on for a little bit more again. But once again, I wanna be crystal clear on this. Any levels that I point out, whether it's moving averages, or gaps, or trend lines. They're reference levels, okay? You still gotta see market action, and price action. Confirm it. They're not magic. You still gotta use...
Sometimes they're magic, sometimes you're like, Daniel is witness to this. I will send Daniel a message and go, did you see it bounce right off the 61.8%? Like, you know, we're amazed, but it's not all the time. And Daniel, you know, it's not all the time. So I wanna use those levels, but I also wanna put something else into them. Okay, let's take a look at what happened yesterday. We gap down below the trend line and this 50% mark. So what is this 50% mark? It's the low from June up until this bear market rally high in August. 50% back is just a much watched level, and we were kinda hanging around that, but now we're below it. And then down here, I will leave this for Daniel, but this is a gap that is open. That could be the next support. Again, big down day for the NASDAQ. Today so far we are digesting.
It's a little different than what it is here, but overall it's just digesting it's day here. And by the way real quick, these numbers up here, all I'm doing here is taking the low of year and adding 20% to it. That's 1.2, which would be the official rule of thumb. Hey, we're out of the bear market. I don't agree with that. That's topic for another webinar. I don't think they're 20% down or 20% up. All of a sudden we're in or out of a bear market. I think that's ridiculous. But other people look at it, I wanna look at it. That's that's what those numbers mean. Back to you, Daniel.
- [Daniel] Yeah, absolutely. Let's go to the next slide, Josh. I see some questions coming in as well. We'll get to those in just a second. This is the cues. Obviously with the gap, the CPI, you've got some moving averages that are starting to consolidate a little bit. That 200 day obviously at the top is very much in a down trend. Keep that in mind, but I always love you mean, we talk about the 0.618 Fibonacci. I'm a huge Fibonacci guy.
I say that time and time again, because we talk about targets, right? If I'm gonna go short on something, if I'm gonna have a put option, if I'm gonna do a vertical spread or if I'm gonna do anything like that, I wanna make sure I have a target. And typically the 618, I mean, we're bouncing today on the 0.618. Is that coincidence? I don't know. I'm watching the price action just like you said, Mike. So something to keep in mind. Why don't you go ahead and walk us through IWM?
- [Mike] Okay, so IWM is the easiest one because now IWM did come officially out of its bear market. by going more than 20%. Again, this doesn't look like a fresh bull market to me though, right? So I don't know, you know? Oh, it's 20% off the loans on a bull market. Yeah, not to me. It was also the only one of the three that we go over that got over the 200 day moving average. Came right back down, but it hasn't. So remember I talked about a projected trend line, right? Here's the June low, here's the July low. These are what that trend line on the other two on the cues and the SPY looked like before they tested them. This is what a projected trend line is. I'm just watching that as reference.
The Russell never got there yet. Showing some relative strength, small capture showing relative strength, which is usually bullish, okay? That's why, once again, hoping I would love for us to pull back. I would love for the Russell to maintain a relative strength, being relatively strong. That will give me more confidence along with my October 5th-ish date, and whatever price action I see to perhaps try some longs, okay?
- [Daniel] Josh, let's go next slide. IWM, gonna go ahead and wrap this up so we can get into our stock talks today at the analyzation. Austin's been waiting patiently. I know he's got takes. He's ready to dish it all out.
- [Austin] Ooh, I'm excited. I'm also really excited to add October 5th to my calendar. Mike, you are opening my eyes to how all these things converge. I'm really excited, man. This is gonna be fun.
- We follow what other, I mean, that's the whole thing, right? You gotta know the research, you gotta know what people are putting into Quant systems, which we know exists in the data and everything in the correlation. So I mean, obviously that's why we're here talking about it. 'Cause October 5th, now everybody here is gonna be watching it to see what happens. Obviously, so here's the Russell. We're seeing obviously we had the bounce off the 618 earlier. I'll point that out time and time again, we are still in a big down trend, moving averages, you know, consolidating. We might get the trading range that Mike's talking about. But remember, the Russell is usually the first to go. It's usually that small cap company market that will feel the pain before everybody else.
Obviously we know that Mike has been talking about months, how the generals DIA lasts. But Russell usually leads the pack, right? So real quick, Sye asks "Will you be able to share more about how you see price action from the charts?" Mike, do you have anything that comes to mind? I'm kinda wondering what specifically you'd like to knows, Sye?
- So look, so depending on what you're looking at, if you're a swing trader, right? Even if you're an intra day trader too, but if you're a swing trader, maybe you wanna look at candlesticks. That's Daniel and my preferred way to chart. Austin's shaking his head so maybe him too. What I love about candles is you can have patterns, right? So in the old days, which is a couple years ago. No, whatever it was, actually candlesticks are all the way back to the seventh century. So they are really the old days. But anyway, but when you use open high low closed bar charts, you are looking more for bigger patterns like the classic double bottoms, or inverted head and shoulders, or whatever it is. But with candlesticks, you can get a lot of information on just one candle. Now there are multi candle patterns. I'm not saying that they're useless, right?
But what why I love candles is there's so much power in them by the color, by the shape, by where we're opening relative to where we close. You can see all of that on bar charts, but it's so much easier to see them on candlestick charts. It's like a very great visual representation. If you want a great book, I love "Beyond Candlesticks" by Steve Nison. It is my go to. It's not his first book, I think it was the second. I love it. Love that book. I wore out my first copy with the highlighter, right? By the way, for those of you who don't know what a book is, it's this thing made of paper that they-
-All right, all right, hold on.
- We're not that young.
- So anyway, you can learn all about candlesticks there, and of course we have some tutorials I believe on Seeking Alpha as well, Daniel. So if you just wanna use Seeking Alpha for that. But so that's what I'm looking at when I'm talking at price action. Now let's go to intra day charts if you're a day trader or you're a day swing trader, right? Which you're looking on a day to day basis. Yeah, you can look for multiple candle patterns as well there, but candle sticks are just as powerful on the short term as well, right? The market is what's known as fractal. So things that exist in the bigger timeframe, exist in the medium timeframe, and in the small timeframe. So a candle stick is a candle stick is a candle stick. Here is what I wanna warn everybody with. This is a warning. A warning.
Make sure the timeframe you are analyzing in is the timeframe you are executing and more importantly managing in, right? You can't look at a one minute chart and say, oh, this looks like a good investment for my son who hasn't been born yet for his college fund, right? That doesn't make any sense, okay? And the same thing, you can't look at a daily chart and go, oh, this looks like a nice setup for a scalp into lunchtime. No, just make sure the timeframe you're using is the timeframe you execute in. Analysis, execute, manage all have to be the same timeframe. Yes, you can look. If you're looking at a one minute chart, it's good to look at the five, and the 15, and the 60 as reference points. But analyze, execute, manage in the same timeframe. Austin, what do think of that?
- We got a request if you would pull up the chat here in a second and drop the name of the book so that people can look it up and potentially-
- I absolutely will.
- All right, now
- I'm gonna look this book up too. Sounds like a great book. I need to do some reading. I think someone mentioned something about pages on a book, paper. I don't know what y'all talking about with that. I thought all books were just online.
- Yeah, and this highlighter thing that I actually use.
- Oh, highlighters. Got it. Got it, yeah. Need to buy one of those.
- Get outta here, get outta here. Obviously you don't buy stock in that. Anyways, all right, let's keep it moving. Obviously, we looked at the overall market. We could talk about it all day. Everybody's here, they wanna know. But before we dive into stock analysis, just a reminder to everyone that's here with us. These are our own opinions. Obviously, do the research, think about risk management. I mean, we are just here sharing our thoughts, but it is not investment advice. Just gotta say that. You hear it all the time. It's what we gotta do. Now, I think this might be a little fun. So we have everybody here joining us today.
Alan, Alfonso, everybody's here, right? Let's play a little game. Can you guess the stock? So obviously we haven't mentioned the stock that we're covering today. I've been teasing it. It was in the description all across social media platforms. Everybody that's joining there. So I'm gonna go ahead and read a little bit of a description, and I want you guys to jump in the chat and see if you can guess what this stock is. And then we're gonna dive into the analysis, the ratings, the factor grades, everything that Austin is prepared.
Probably about the revenues and the growth of the year over year and the international expansion 'cause this company is huge. So let's get into it, shall we? So this large cap global company is based outta is Issaquah, Washington. I think that's how you say that city. Hopefully I didn't butcher it. The market cap is 239 billion. It operates within the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Ireland, China, and Taiwan.
One, the company likes to focus on volume of their selling, and their business model makes it so that they don't have to rely on margin really. I mean, of course they get their margin, but they don't force it down the consumers' throats. What else is unique about this company? Well, it doesn't keep its shareholders guessing about how the company is doing because it releases numbers every single month. And not only that, but the company pays a dividend, and every few years they usually pays a special dividend.
We're talking a special dividend is like $10 all at once, right? Pretty significant. Let's see, they recently in 2020 purchased their own last mile business for logistics. That company was Innovel Solutions, and its membership model probably inspired companies like Amazon, just a guess, 'cause this company has been around since 1976. Anybody have a take? Oh, we've got some question. Or wait, here we go. - I will add just to make... I see a lot of good guesses here in the chat, I will add. This might give it away. This same company has been selling a hot dog and a Coca-Cola for a $ 1.50 since 1985, and they haven't raised those prices yet. So if you guys know what we're talking about here-
- Not to mention rotisserie chickens, the ribs, they sell eyeglasses. Did you know, I was actually doing the research, so they manufactured their own hotdogs? Which is why they can keep the cost down. They manufacture their own lenses, which is how they keep their eyewear down. I mean, this company is the ultimate treasure hunt. I'm gonna go ahead and give it to everybody that's jumped in the chat. You guys are all right. It is Costco Wholesale Corporation. Take your symbol (NASDAQ:COST). You guys got it. Great job. Great job. And I'm gonna go ahead and step back for a second. Austin, I would love for you to take it away and share with us what you found during your research.
- Happy to. Happy to, Daniel. And wow, what a very smart chat. I mean, not gonna lie, like those were, you know, pretty straightforward hints, but I mean the market cap global. I mean, I wouldn't have guessed Costco off the rip. So let's jump into Costco, right? So one, what a company, right? Costco's been around for several decades now. And to your point, they pay these special dividends. A lot of interesting things happening with this company. So before we think about the most recent earnings call, I just wanna like take some time to step back and think about how much this company's grown over the last 10 years, right? So in 2012, they reported revenue, annual revenue of $99.1 billion. In 2022, this number should land around the $226 billion mark. That's a 9% compounded annual growth rate for the last 10 years. Insane.
Taking a peak now at that annual dividend payment, 17 years of consecutive payment increases, and the safety is looking absolutely incredible. I'm sure we're gonna jump into that dividend safety chart there, but we're seeing a payout ratio of only 25%. And the five year CAGR is 13% growth rate there on that dividend. So let's now dive into the recent earnings call. Sales came in at $51.6 billion, which was an increase of 16%. Year to date sales is so this was about three quarters in, right? So about nine months came in at $152 billion up from 130.6 last year. With that being said, 984 million of that 51.6 billion this quarter came from membership fees, which is up from 9.1 million... I'm sorry, 901 million last year. But here's what's interesting about that. Despite the membership fee revenue being up, the percent of revenue, percent of total revenue, is down 10 basis points.
So 2% of total revenue came from these membership fees last year. And now only 1.9% as a percent of total revenue came from these membership fees, which to me means that their members are spending more and more and more money shopping when compared to last year, which is a really good thing. SG&A costs as a percent of total revenue was down, which is great, right? This quarter was 8.5%, last year it was 9.3%. So we're seeing some really cool scaling there. Love to see it. Operating income came at 1.8 billion, which was up 8%. Profits before taxes were 1.4 billion, up 11%. So we're seeing some outpacing and profits for it's operating income.
Really fun stuff. And so that was like the high level finances, but I think there's a lot of interesting quotes that I saw inside their earnings call here. So let me walk through those now. The first one kinda goes back into the transactions, right? The thing that we just called out with that percentage total revenue 2% versus 1.9. So this is all quotes from the earnings call, right?
Our average transaction was up 7.6% worldwide and 10.4% in the United States. Incredible. The best performing categories in Q3 were candy, sundries, tires, toys, jewelry, kiosks, home furnishing, apparel, bakery, deli. all the things that now that we're sort of out of this COVID lull make a lot of sense. And the underperforming departments were liquor, office, sporting goods, and hardware, which were quite strong a year ago makes a lot of sense, right? Sporting goods, you know, liquor, all at home drinking.
Makes a lot of sense. So in terms of renewal rates, we hit an all time high. At the end of the quarter, our US and Canada renewal rates were 92.3%. Up 30 basis points from 12 weeks earlier at the end of Q3. And the worldwide rate came in at 90% for the first time in company history, and that's up 40 basis points from the previous quarter. Incredible. At the end of the quarter, our paid executive memberships were 27.9 million, and that's an increase of about 800,000 people during the last three months since the last quarter. And executive members now represent 43% of our member base and over 71% of our worldwide sales. Think about that for a moment, right?
Nearly half of their members are so excited to be shopping and benefiting from Costco, they're paying higher prices for those membership fees. Those are sticky, sticky customers. In that last quarter, we opened one net new warehouse, plus two relocations. Year to date, we have opened 17 warehouses, including three locations for a net new of 14 new warehouses so far during the year. And for the remainder of the year, they expect to open an additional 10 new warehouses, which will put 'em at 27 for the year, which includes three relocations rather.
And to your point, Daniel, about this Costco logistics, Costco logistics continues to drive big and bulky sales for us. We averaged more than 58,000 stops a week in the third quarter. And for the full year we estimate total deliveries to be up 23%, and we'll exceed 3 million with logistics. We continue to transition from vendor drop ship to direct ship from our own inventory, particularly in big and bulky items. Overall, this lowers the cost of merchandise and improves delivery times and service levels for our members. You know what that drives? That drives higher renewal rates, baby, and Costco is doing it.
So here's why I'm getting excited. Couple reasons to get excited, right? Comparable sales results reported for the Q3 on their IR website are great, and they displayed continued momentum during this macroeconomic uncertainty, right? Despite everything that's going on in the markets, Jerome Powell's, you know, telling us at this rotary club, what to expect, people getting laid off. All these people are just not doing the best, right? We've kind of seen that. Costco's not seeing that, Costco's not experiencing that. So that's one reason to get excited. Another reason to get excited is the product mix. Product mix remains diverse, but competitive, especially when you think about the mishaps that have happened with Target (TGT) and Walmart (WMT), right?
Costco's not doing that. They're seeing the demand, they're not having to put stuff on sale, they're not having to, hey, clearance over here, big red sale. They're not doing that, which means the margins maintain. Their balance sheets' clean. Bring on those dividends, baby. 17 consecutive years, and as Daniel mentioned, we've got these special dividend payments that are coming here and there. They have a very sticky customer base, they've got the highest global retention ever. Elevated ticket sales numbers show people are not only spending now at Costco, but they're spending more and more and more and more and more at Costco.
And so to those points, I remain generally bullish here on their expansion, both domestically and internationally, right? We saw 27 location changes and three relocations to continue driving this earnings per share growth going forward. So all in all, Costco's awesome. I think they're gonna continue to crush it. The dividend's healthy, worth talking about, and if you're, you know, into those dividends and those consecutive growths, I would say, keep Costco on your radar. I don't know if they're immune to this market wide selloff. Yesterday, we saw their stock trade down about 5%, which is what the overall market did. So definitely be careful with that, but the fundamentals of this business seem really exciting, and I'd love to get your thoughts, Daniel and Mike here.
- Man, that is the bull take right there. I love that. I mean, so this is a company, I gotta be honest with you, I don't own any shares right now. I know people that do own shares, but I am currently not a shareholder myself. It is on my watch list. I am watching this company because you know what? Just like you mentioned, I am that customer that goes there all the time. I'm executive membership and you know what's great about the executive membership is yeah, you pay more, but you're spending the money there anyways. And at the end of the year, they cut you a check that is like a gift card and you get to go use it and you can offset the cost.
- I mean, that is brilliant. And I mean, we're gonna talk about another company here in a little bit that you have a take on that also does the reward model. We know reward models work, and it keeps people excited. Now the couple things that I just wanted to point out, like, as you mentioned, the membership, right? So they have two tiers of membership. One I think is like 60, the other is 120 and that's paid annually. I mean, they're competitors. You've got BJ's Wholesale (BJ) and you've got Sam's Club, which is owned by Walmart, right? And Sam's Club actually at the end of August, just raised their membership prices. So everybody's kinda looking at the membership prices at Costco going, okay, well, are you gonna do it now?
And what was interesting is the timing of this, you know, we picked this company weeks ago from a recommendation is last night, the CEO was actually interviewed on "Cramer's Mad Money." So of course I had to watch this segment. I'd be like, okay, what is this guy saying? He said on the program that they are not planning at this time to raise their membership fee. But if they were ready to just come out, I mean, they raise it every five to six year on average. The last time they raised it was 2017 so that's why people are kind of like, okay, we're doing this now? Is it coming? Because if they raise that membership fee by just $5 for every single household that they have, and these are loyal customers, their balance sheet pretty much increases by a half a billion dollars in that year just from a $5 raise.
And you can blame inflation, you can blame whatever, but inflation's the other thing, right? People go to Costco, they load up on the toilet paper, they're laid up on the paper towels, the garbage. Like, during the pandemic when stores were out of supplies, I would go to Costco and they would have a tower of TP, right? If you needed it, Costco had it.
They have been crushing it with their supply chain. I think I read they chartered three or three to seven cargo ships for the next three years. I forget exactly what the number is, but they're already thinking ahead. They're trying to, you know, insulate their supply chain for their customers. And not only that, the brilliant thing that management does, I don't know who started this within Costco, but you go to Costco and you think you have the store layout down like the back of your hand.
And then every once in a while, they turn things around on you, which is brilliant because you think that you're gonna go to the back of the store. Of course, you're gonna find the meat, you're gonna find everything else. You think the supplies for your house are back there? Nope, now it's TVs and massage chairs, right? And everything that you're looking for is now in the front of the store where the vitamins used to be.
You just don't know and so you end up spending more time within those warehouses, and you go there with a list, but you end up being like, I was just talking to a financial planner friend of mine the other day. He's like, "Man, I went to Costco before I knew it, I was walking out with new windshield wipers for my car because I realized on the way over like my windshield wipers were a little messed up. And then I was walking out with like all these snacks that I didn't need, but I thought they were on sale."
Like, people go in there and they end up spending more than they actually need because it's a treasure hunt, right? They are brilliant on that fact. I think their private brand, Kirkland brand.
- Oh, Kirkland. Don't even get me started, bro.
- I thought you were gonna get into it. Kirkland brand, which started with trash bags by the way, I don't know if you knew that, has expanded. And I mean, people are loyal to that brand because it is quality product. They test every product themselves. Everything is quality. They won't sell it unless it's quality. They're phenomenal on that front. Their people that source the specific products for specific regions know their demographics. I mean, it is beautifully ran. And then we get into international, right? I believe they mentioned they have four stores open right now in China with another four under construction right now. I mean, that is a massive market. Think about that. They have, like I said, there's stores internationally. So the one worry is I wanna see how they handle the forex exchange headwinds with the dollar rising and everything else going on. So obviously that's something I'm cautious about at this time. But I mean, they have it going on. Let's see, what am I missing?
Oh, stock buybacks. People are wondering about stock buybacks and the fundamentals and everything. They don't buy back stock right now because they're growing internationally. And I think personally, because my time horizon for this company would be super into the future, I'm cool with that, right? Like, let's boost the revenues, you're paying the dividends. You mentioned the dividend growth history. Actually, let's get into that real quick. 'Cause I see people in the comments section the chat over here, talking about fundamentals. Unless, Mike, you have something you wanna add real quick.
- No, just I'm a BJ's member, not a Costco member. It's not that I hate on Costco. Costco's actually more convenient with me, but for some reason my wife said, "I like this." So we left. We didn't renew. And she actually did talk like that too. I know it sounded like I was mocking her, but that is exactly how she sounded. She's right in the room. I bring her in here.
- She's listening to you? All right, you're on the record. You're on the record. - But so now she wanted to go to BJ's and guess what she said to me the other day? "I think we should go back to Costco."
- Hey, that's it right there.
- For the record, for the record.
- We're married 23 years. It's not surprising, right? And it is her right to change her mind. So we may be going back to Costco. I don't buy the chickens, I don't buy the hot dogs, but I love it. And I was before you guys were born, boy, I sound old. But I was a member of Price Club, which Costco actually acquired, but I was going to Price Club back in '88, '87, '88. You had to actually have a real business and all that. And yeah, I think it's a great model. I think it's awesome. Recession resistant, yes. Nothing's recession proof; recession resistant, absolutely. Why? Because what happens when things get expensive, where does it hit first? It hits first and the supermarkets, and of course the bodegas and the smaller stores of course, but the supermarkets then you're like, you know what? I'm tired of going and paying $5 for a roll of toilet paper every week.
Let's go and buy 20 rolls for $4.50 each instead. And that's what they do. So that's why it's recession resistant. But of course, nothing is recession proof. - For the record, Skip here in the chat says if you ever are in North Carolina and you wanna get lunch, my stock club buddies and I would be pleased to buy him a hot dog. I'm guessing from Costco, hopefully it's from Costco, At least help other shareholders though. So you got a nice little lunch invite there.
- I appreciate that.
- All right, Josh. Josh, let's go ahead and throw up the slides. We're gonna run through these because obviously, I mean, we can do this all day. We're running out time. Time flies, obviously. So here's the ratings from Seeking Alpha on Costco Wholesale right now. Seeking Authors are a hold, Wall Street analysts have a buy, and the Quant system is a hold as well. Next slide, talk about the factor grades. The valuation is an F, which actually correlates to a lot of the chat that I was seeing going on about the PE at 38.82. Seems a little expensive. I mean, we look at the yield and everything else. So obviously an F on valuation has been an effort quite a while.
Now these factor grades, I mean, you look between the three and the six months ago. They're pretty consistent over the last half year. Let's go ahead and go to the next slide. I went ahead and pulled the valuation just so that you can see exactly what they're talking about. That PE is a little bit high even compared to the company's own five year average price. The prices might be a little high, and that's why I'm kinda little cautious.
That's why I have it on my watch list. I don't feel like now is the time to enter. I'm kinda watching the levels. And also the overall market. So then we mentioned the dividend grades. Next slide, Josh. So it was pointed out the dividend looks a little low, right? It is, let's be honest. It is, it's a low dividend, but the payout ratio's low. They've been growing it for 17 years. I think there's just one of those company plays where it's just like, let's keep the dividend low. Let's increase it a little bit over time just so we can get to that 50 year status.
We wanna be included in, you know, the ETFs that go for the companies that are dividend kings and aristocrats and everything else. But they do the special dividend, right? So that's something to keep in mind, but they do it periodically over the years. And then of course, next slide, Josh. Pull up the revenue numbers. Austin, you touched on this brilliantly about the revenue projections coming up between this year and next year. I mean, look how far it's come even from 2017. It's almost a double. I mean, that's incredible. Next slide, Josh.
Talking about earnings per share. These are the estimates going forward. I mean, the companies a power house. We're talking about it here. They can manipulate prices if they need to. They have room to raise prices a little bit if inflation continues outta control in my opinion. Loyal customer base. Keep an eye on that. And then I think this is lastly, next one. There you go, quick little earnings snapshot of what we're projecting for sales. Where the PE is expected and the EPS over the next two years. And this is all pulled from Seeking Alpha, by the way. Just so you guys, you can head to the Costco symbol page. It is all there. Now, Mike, you pulled this chart real quick on the weekly for Costco. Can you walk us through what you're seeing here?
- Yeah, it's looking to me like, I mean, it's looking like it's not looking like to me. It has a lower high in place, right? And at first, everybody wants to call this a head and shoulders. Okay, I don't like declining neck line so I'm not gonna talk like that. But let's look at what happen, right? With nice big rally and if we go back, it looks like a monster run and it was. Absolute monster run. Hit a high, pull back, hit another high, hit a lower low, and now it's in a potential lower high. If that is the case here, that is a change of trend, right? So an up trend is higher highs and higher lows. A down trend is lower lows and lower highs. So this could be a possible change of trend.
Look, I'm not telling everybody short Costco or get out of this thing 'cause it is a monster stock and, you know, but again, to me, it may be out in front of its skis, too far out in front of its skis. I know we talk a lot of that with tech and the hyper growth stocks. Costco is not a hyper growth stock, but that doesn't mean that it can't pull back either, right? And it doesn't mean it's going out of business. No, probably not. Everything that Austin said, everything that, you know, the stats you showed Daniel.
Okay, great, you know, those numbers don't lie, but that doesn't mean that it has to be at 500, right? Why can't it be 300? I don't know. Again, I'm not predicting. I'm just showing the chart. And if you wanna go to the next chart, I think I have a daily chart. Yeah, and just sloppy to me. I don't see anything here. Oh, it's below the moving. No, the 50 and the 200. To me, it overall just looks a little sloppy here, which what does that tell me? That tells me that I don't see an entry right now. That's all. You might, I don't see an entry. That's what a sloppy chart means to me, but in a longer term, which we looked at the weekly, yeah, let's see it improve from there. Not predicting, but you have to prepare there.
- [Austin] Right there with you, Mike. I think what's interesting too, is, you know, at that end of that little summary I ran through, you kinda looked back what happened yesterday, right? The markets had sold off yesterday and you'd think to the point of Costco being recession resistant or recession proof or whatever you wanna call it, right? That didn't happen yesterday. Stock was down nearly 6%, right? So it's certainly moving with the markets in the near term. I think there's a lot of value that's being baked into this. You know, we saw the PE ratio being much higher than the five year average.
And to Daniel's point earlier about this dividend kind of being lower, I mean, it'd be a little bit different, if the dividend was higher and things were, you know, reasons to get excited about that, but I don't see a real path to them hiking their dividend anytime soon.
So I'm right there with you, man. I think that Costco is sort of in this kind of limbo where it's like, we don't really know what's gonna happen from the... Like, there's no big catalyst pushing it higher. It's moving with the markets. We kinda know over the last, you know, call it 30, 45 minutes that the markets are gonna be moving or should to be expected to be moved a little bit lower. I would think Costco's gonna follow that as well.
- Right, 'cause and also remember real, real quick, you know, sorry just to interject again, but it's like, okay, just because we lay out the logical argument and that people are gonna wanna go to a wholesale club and people are gonna wanna this, it doesn't, you know, a lot of times, most of the time I would say, 'cause especially in my field, people don't act on logic. They act on emotion, okay?
Oh, we're in a recession. Inflation's going up. They're gonna stop spending places. Costco's not gonna be immune to that. Let's sell it. Great. And as soon as it bottoms out, it starts to bounce, you're gonna get everybody in the rear view, the Monday morning quarterbacks going, wow, that caught what a deal that was down there. Great! But that doesn't mean that it can't be subject to short term pressures, right? So again, it's an emotional thing and people make emotional decisions.
That's why we do these webinars, right? I'm not telling you take the emotion out of your trading. Impossible. Money is the most emotional commodity in the world, okay? It's stronger than love. Don't believe me? Why do most divorces happen? They cite money, right? So money is the most important factor, the most important commodity. So, and it's highly emotional. So that's why maybe the business model is recession resistant. That doesn't mean the stock is gonna be.
Again, we're way into... I'd be happy to talk about this at another time, but a lot of times you have to separate the stock from the business. So just because the business is recession resistant, doesn't mean the stock isn't gonna see a pullback. - That's a great point. You gotta remember the stock is not the company. We hear that time and time again. Austin, real quick, I wanna go ahead and run through these next two charts real quick, Josh. 'Cause we gotta get to something super important about Austin, and we're gonna let Austin have the spotlight. Obviously, we're getting into time.
So obviously I pulled the weekly chart as well. We're looking at the Fibonacci level there, .618 is kinda where we found a low resistance on that last pullback. So what is that? 423 is kind of what I'm watching. This is on the weekly chart as I mentioned. Go ahead and go to the next slide. And on the daily, the short term of this recent rally takes you down to about 470. So a couple of levels watching there on the Fibonacci side of things.
Now, go ahead and chart off please for me, Josh. I don't know if you guys know this. We've been hanging out. Austin's been on this show since the beginning. And Austin, this has been a long time coming. I've been waiting for this moment for so long that we finally get to tell the people. Everybody joining, everybody on social media, everybody here in the chat, in the Zoom. I should start running some PR press. I should get somebody for you. I mean, this is huge.
- My man.
- Austin, everybody let's give 'em some. Do I have the applause? I have the applause. He is an author on Seeking Alpha.
- It's happened, baby.
- It's on the presses.
- It's happened.
- And you wrote this first article and it's all about a competitor to Starbucks (SBUX). Josh, go ahead and throw up that slide showing people what it is. Austin, give us the take. What's going on here? What is this company, and what's the rundown?
- Let's do it. So if you guys don't know, I, and as we just saw a little bit with Costco, I absolutely love nerding out on the fundamental analysis around companies, right? So that's reading those earnings calls, reading those 10Ks, better trying to understand what the financials are moving toward. If it's free cash flow positive, what the earnings per share are. All that fun stuff. I love nerding out on that. And about 12 months ago, I was nerding out on this idea of an IPO of a company called Dutch Bros. (NYSE:BROS).
If you guys aren't familiar, it's a coffee company. It started over I think it was in Seattle, Washington and it has gone country wide. They're pushing for 4,000 coffee shops to be opened by 2036, and I did a little analysis on the company. And so what this is, is my first post on Seeking Alpha's website as a actual author, which is an update to that original IPO idea. So if you guys want to, be happy to walk you all through this, but generally speaking here, I think the summary does a good job, right?
Dutch Bros reported inflation induced margin compression in Q1. The companies seem to kind of turn this around and turn this into an opportunity to raise prices in Q2. And despite their recent operational momentum, however, the stock seems overvalued at $40 a share. So if you guys are into the super fun, fundamental analysis, the earnings call quotes, the investor relation deep dives, the conference call outs, all the numbers, all that fun stuff, please give this article a read, give me a follow on Seeking Alpha, and expect more like this. I'm really into free cashflow positive companies. I'm really trying to get into those more cyber security companies. Just anything that's in a secular growth trend, right? I think that's what's really important.
Despite being in a recession, despite being in a bear market, I think we're able to, to Daniel's point kind of sit in our hands; and to Mike's point, be patient and prepared with what's going on in the markets. So if you're one of those people who's trying to prepare, trying to be patient, think around what's going on and be ready to jump. I'd say I'm an author to follow. I'd say I'm an author to follow. What do you think, Daniel? How do you think I did with my first article? Did you like it?
- Solid, I read it immediately. I kid you not. I read it immediately. Great takes, you obviously broke down about the competition with Starbucks and where they're expanding. I mean, I don't have a Dutch Bros near me, but I know that there's so much talk, and there was definitely a lot of hype about it when it was coming out into the market. So obviously I rely on people like you that can go and visit a Dutch Bros, and didn't you document this on one of your TikTok videos? You went to a Dutch Bros?
- I did. I did. So if you guys don't know, like my whole thing is I really like to share this information bite in size pieces. But beyond just doing that in a written format, I love making TikTok videos. I don't know why. It's just so much fun and people eat 'em up. And so what I did was I made this sort of vlog where I went to a local Dutch Bros Coffee here in Nashville, Tennessee, and I walked through and I showed everyone just how busy it was, what I got, and I kind of walked through the fundamentals, their menu, all that, the margins, the AUV, all that fun stuff. So yeah, actually, I link out that video in the article here. Really highly recommend go reading that. Watch the video and it should pull some things together.
But what's interesting about Dutch Bros actually and they're opening sort of strategy is they find these little pockets of areas that are underserved and they open them very quickly. So what they'll do is they'll open something like they did here in Nashville. I think it was over in Germantown. They see the demand on a daily, weekly, and quarterly basis and then realize, wow, it might be it's higher than we expected. Let's now quickly open two more. And so I kid you not in a three month period, I saw one Dutch Bros, then another Dutch Bros, then another Dutch Bros, very, very fast. And actually we talk about that and how that ate into their margins during this first quarter. But yeah, it's a really cool, interesting opening strategy.
But regardless, go give it a read. If you like it, thank you. If you don't, leave a constructive comment. I saw some awesome constructive comments. I really appreciate the feedback up or down left to right. I wanna see it. Thank you. - Yeah, and we already had, Josh I believe, posted the link to Austin's profile in the chat here in the Zoom. So you guys can go check it out. Click after the webinar. Don't leave us yet. - Don't leave us yet. Don't leave us yet. - We're gonna quickly run through. We're gonna let you get. I mean, we're going past one o'clock. You know we like to honor your time and stuff, but I asked Mike if he could pull this chart for us. Give us a quick read on it. Mike, what do you have?
- Okay, so if we look at the chart here, Josh, you could fill that up. There we go. Okay, so you can see since the IPO it's basically been down. It's gotten a little bit of a bounce here. Can't really use the 50 and the 200 days yet 'cause it hasn't been around that. But 33 and 53 looks like key support. If it closes below that, we have $30.28, which would be next support. And then if it broke that, it's probably gonna go to a full retracement back down to the lows here. Again, now one thing about a coffee shop, right, and that's basically what Dutch Bros is. I know they probably do other stuff too, but is something called the lipstick effect, which I've talked about, right? So in periods of recession, people can't make the big purchases anymore. They can't make because you know what? Times are tight. I'm worried about my job, whatever they're doing. So they have to start not making the big purchases. But consumers, especially here in the United States, are rabid buyers, right?
And what they do is they still like to treat themselves. I'm not giving up my coffee. I'm not giving up my coffee. Coffee shops tend to do good in recess. Again, nothing's recession proof, but they're very recession resistant because people like, I'm gonna go get a nice cup of coffee at Dutch Bros, right? And why it's called the lipstick effect by the way is they don't spend a lot of money, but they'll go spend a lot of money on a high end lipstick, right? They'll say, oh, you know what? I still wanna feel good about myself. What makes me feel good about myself? A blueberry muffin always makes me feel good about myself. I don't drink coffee, but what makes me feel good about myself? A blueberry muffin and a nice cup of coffee from Dutch Bros, right? So that's a good part on the business, that's a good side of the business model. Again, the stock and the company we've talked about that are separate.
But right now, 33.53 and then 30.28 would be my two points of support. And just a quick note, this arrow up here is nothing, but it took me 20 minutes to try to delete it and I couldn't. So I just snagged the chart. Anyway, this is how much of a Luddite I am by the way. So I am definitely the old man in this group.
- [Daniel] Yes, that's a subconscious idea. That's a hot take. Let's go to next slide. Let's wrap this up real quick, Josh. So obviously I pulled the chart from the very beginning. As we were talking about this, this stock just went public not too long ago. So the moving averages are still trying to figure themselves out. Actually I zoomed in, I think it's the next chart. I zoomed in on the recent rally that we had. There you go. We're back in this little down trend line. It's already tested the top twice. Or, I mean, you could call it once, you could call it twice, but obviously you got the 0.618 there at $33 a share.
Probably is gonna act as resistance. Funny how those levels kind of are similar to what Mike points out, right? When you look at this 0.618 Fibonacci, it's just uncanny at times where you're just like, oh my goodness, is this Quant trading systems? Is this large money flows? I don't know. Let's go ahead and go to the last chart, Josh, which is not a chart actually. If you got questions, if you got comments, you can reach all three of us. You can find me on LinkedIn. You can leave stock ideas.
Speaking of stock ideas, as you know, we like to ask you all if you have a stock that you would like us to cover, or analyze, or give you our take based off of research or technical analysis or anything else. You can email us right there, email@example.com.
Obviously we've already pulled a few of those in prior episodes, which you can find on Spotify. You can find the podcast. You can subscribe, you can leave us ratings and reviews. You can see this on YouTube, you can see us on LinkedIn. Obviously, Austin has his Twitter and his LinkedIn. You can reach out and leave comments and questions there.
And Mike Saul, the one the only Mike Saul that does what's happening in the stock market with Mike Saul on Mondays at 12:00 PM Eastern. He is there, Michaels@seekingalpha.com. All opinions are ours. Josh, you gonna take that slide down. Do your own investment research, but we love hanging out with you guys. We really do. Austin, it's great having you back. Let's get some music.
- This was so much fun. Mike, you're a rockstar, man. Thanks for hanging out with us, dude. This is awesome.
- Thanks for having me, Austin. It's just great, man. You guys are awesome. I love this. I watch it every Wednesday. A lot of times I can't watch it live because insert excuse here, but I always catch the replay.
- That's why we put the replays out.
- That's it. All right, everyone. Well, thanks for hanging out again with us today. You guys all have a great rest of the day. And if you did miss the special webinar, I will say that is coming to a YouTube Seeking Alpha channel near you. So keep your eyes out. And if you didn't watch that yesterday with us, which we had a blast. It was awesome. But you can check it out here soon. That's all for us. Josh, get it on outta here.
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