~ By Ashutosh Gowli, Marketplace Specialist
Thank you to all readers of our first part of the 2023 Look Ahead Roundtable Series. So far we've covered Macro, Value Stocks, Commodities and Dividends, Income And REITs. Today, we continue with Growth, Tech and Crypto, and Quantitative, and Technical analysis coverage with analysis and top ideas from eight of our contributors.
Once again, the questions we asked were:
What are you expecting and/or looking for in your area of focus for 2023?
What is one of your top ideas for 2023 and why?
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JD Henning of Value & Momentum Breakouts: My quantitative analysis of the Fed QE/QT effects since 2018 suggest that strong similarities of the 2018 /2022 market volatility will continue to dominate market conditions into early 2023. What I'm most looking forward to is the Fed Pivot that's highly likely to occur (near midyear.) - ($) Article link. Volatility is the most significant characteristic during periods of liquidity drain (QT), while adding liquidity (QE) to markets greatly improves market stability in times of crisis. SPY weekly chart - notice the width of the trading ranges between QE and QT activity.
I plan to follow the Momentum Gauge signals, particularly the longer weekly and monthly indicators to determine when it's safest to greatly increase my market exposure again. The extreme daily volatility will certainly present a challenge for short-term trading as aggressive dip-buyers have pursued more than a year of trying to time a market bottom.
IDEA: ""For only the third time since 1926, both US stocks and bonds lost money in 2022 (the other two occurrences were 1931 and 1969)." ~ Goldman Sachs
I expect this combination of both stocks and bonds declining will not sustain through 2023. This leads me to believe that it will be bonds that break the pattern and outperform equities for three reasons:
1) Equity markets are still highly overvalued at over 17.5 times earnings based on multi-decade valuation ratios.
2) Bonds have suffered some of the worst one-year declines in more than 200 years.
3) Interest rates are scheduled for at least three more rate hikes into 2023 according to the Fed. Higher rates greatly increases borrowing costs which sharply reduces equity buybacks from the highest levels in US history. Without trillions in corporate buybacks we can expect similar market direction as 2008, 2018, and 2020 prior to Fed intervention. Hopefully we will not experience similar downside magnitudes.
My long-term idea is the (TMF) fund or similar bond bull funds. Many technical indicators are at the most oversold levels since 2010. The timing for this move however may not occur until closer to midyear of 2023.
Idea: The Trade Desk (TTD). No recession (GDP +3.2% = no recession) = ad spend healthy = adtech taking folks by surprise.
Disclosure: Long TTD in staff personal accounts.
Andres Cardenal of The Data Driven Investor: The first one or two quarters of 2023 will probably remain tough and uncertain as the economy decelerates and we probably enter a recession or at the very least a sharp slowdown. But then inflation and monetary policy will finally normalize, and this could be a powerful tailwind for growth stocks. Many high-quality growth companies are trading at historically low valuations, and this is setting the conditions for generational wealth creation over multiple years. The time of maximum pessimism is also the time of maximum opportunity for long-term investors, and we're entering the year 2023 with extreme pessimism levels.
Idea: MercadoLibre (MELI) is the undisputed leader in fintech and e-commerce in Latin America, and the company is just getting started in areas such as online advertising. The business keeps growing at high speed in spite of tough year-over-year comparisons, with revenue increasing 60.6% in constant currency terms last quarter. The total Payment Volume in fintech was $32.2 billion, a vigorous increase of 76.4% in constant currency.
MELI is generating positive earnings and profit margins are expanding due to cost disciplines, the operating profit margin expanded from 8.6% of revenue to 11%. This is not an “unprofitable growth stock” by any means, and chances are that profitability will continue expanding as revenue keeps growing faster than expenses in the years ahead. Vigorous revenue growth combined with higher profit margins should provide a double boost to earnings.
The network effect and scale in logistics provide key sources of competitive strength for MercadoLibre, and the stock is trading at record low valuations of 4.5 times revenue due to extremely negative market sentiment towards growth stocks.
Disclosure: Long MELI stock
Mike Fay of BlockChain Reaction: 2023 in crypto has the potential to be a monumental year. Since the FTX collapse in November, the call for greater regulation of the space has only intensified even though it is, at best, debatable how the recently proposed Digital Assets Anti-Money Laundering Bill would have prevented a centralized exchange that already practiced AML protocols domestically from allowing a sister company to gamble away customer funds. If DeFi has any say, 2023 may see a continued migration of assets off centralized exchanges and into self-custodial wallets. From an investment perspective, can the "ETH Killer" layer 1 chains catch the momentum we're seeing in Ethereum's (ETH-USD) layer 2 scalers? The success of Ethereum's long awaited PoS merge has been completely overshadowed by FTX over the last two months. Will the focus shift back to Ethereum if ETH's market cap approaches 'the flippening' of BTC? We may find out.
Idea: I believe Polygon (MATIC-USD) will be a huge winner in 2023. The Ethereum scaling chain has some of the best growth metrics in the entire cryptocurrency landscape. DAUs are regularly well over 300k and the chain has averaged over a million weekly active users every week since September. The core team is onboarding millions of non-crypto native users through the sale of digital collectibles via non-crypto companies like Reddit and Starbucks. There has been widespread wreckage in the crypto ecosystem in 2022. But "Crypto Winter" hasn't stopped Polygon at all and I think that growth is going to continue even if the broader crypto industry continues to struggle in 2023.
Benjamin (Simple Investing) of Outperforming the Market: Growth and tech as a style was a relatively unfavored style in 2022 as value made a comeback. For 2023, I think that there are many areas in the growth and tech space that are looking attractive with valuations coming down so much in 2022. Ultimately, I think the focus should be on fundamentals and valuation. I would focus and add positions in high conviction growth and tech stocks with a favourable risk reward profile and with solid business fundamentals. While the market will likely still be volatile especially in the first half of 2023, attempting to time the bottom is unadvisable in my view and thus, valuation will be a key metric for me to choose which growth and tech companies to add to in 2023.
Idea: Origin Materials (ORGN) is my top idea for 2023. Firstly, Origin has an impressive $9 billion customer demand that fills up its first three plants, meaning that revenue growth until 2025 is largely secured. Secondly, Origin benefits from the strong structural tailwinds of the green transition as a leading carbon-zero player. Thirdly, the team has been executing well on its timeline and budget schedules, showing strong competence in the management team. Lastly, it has sufficient funding for these three funds and will not require additional funding.
Disclosure: Position in Origin Materials
Victor Dergunov of The Financial Prophet: Quality technology stocks got demolished in 2022. Yes, they were significantly overbought and overvalued. However, we're seeing many compelling deals in the market now. While we're not going to time the bottom perfectly, the downside is likely limited in many large-cap tech stocks. I own several tech titans, including Amazon (AMZN), Alphabet (GOOG) (GOOGL), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA), and I expect significant upside in 2023.
Idea: There are many quality stocks on sale now. However, one name that I want to underline is Palantir (PLTR). Palantir often gets overlooked as it's a controversial company. Also, Palantir gets criticized for its valuation, stock-based compensation, dilution, and other transitory phenomena. Nevertheless, Palantir is an excellent company with significant growth prospects and immense profitability potential.
Ranjit Thomas, CFA of Stock Scanner: 2022 was a bad year for growth and tech stocks. I expect this trend to continue in 2023. Bulls think a stabilization in interest rates (and possibly a minor cut in the latter half of the year) will result in rising valuations. However, we have a decade of excesses to excise from the system. Even if rates stabilize, they will be at a high level. At zero percent, people will take a flyer on anything. When cash earns 4%, the bar is higher. Profitable, big tech may hold its own as the companies use their profits to buy back stock, but unprofitable software stocks have little hope as insiders continue to sell. The only salvation for them is being acquired by larger firms or private equity, which will eventually lose money on the deals, but won't find out for a while. But there is not enough money in the world for every unprofitable company to be bought out. I would recommend selling calls against tech/growth positions, and buying puts or outright shorting a basket of unprofitable growth stocks.
Idea: Rather than focusing on large positions in conviction ideas, I prefer to maintain a diversified portfolio of a large number of stocks. A recent idea is a short recommendation on Twist Bioscience (TWST), a company that is rapidly burning through its cash balance ($) Twist And Short (NASDAQ:TWST)
Disclosure: Short TWST
The Fortune Teller of Wheel of Fortune: Although we're not solely focused on growth/tech (surely not crypto) stocks, we do cover all asset-classes and investment themes on Wheel of Fortune and although we're generally bearish on tech/growth stocks in 2023, we do find China to be an exception.
Abandoning the "Zero COVID" policy, reopening the country, refocusing on and dedicated to growth provide for a favorable setup off a very low/attractive starting point.
Chinese stocks are way cheaper than US stocks and while economic growth in the US is slowing, it's accelerating in China.
As we ($) wrote a month ago: "We believe that China is a global force that investors mustn't ignore, subject to two preliminary conditions/requirements: 1) Long-term investment horizon. China is only suitable for those who are willing to adopt a 'buy and forget' investment strategy. This is an investment that is likely to run over a course of (at least) 5-10 years, if not more than that, and it requires durability and patience. 2) Low level of risk aversion. If you can't handle/afford extreme volatility, and/or if you lose sleep over large drawdowns - China isn't for you. This is an investment for those with a strong stomach and self-restraint."
Idea: If you're a long-only investor, $KWEB is ($) our suggestion. To wit: "if history is any guide, KWEB has good chances"... "when we analyze what the future holds for the global economy - the last thing we wish to do is to ignore, let alone bet against, China."... "Once it's clear (to you as it's to us) that being long China makes sense, there's no better Chinese ETF to implement that strategic exposure through than KWEB."
If you're willing to spice things up you can use $CWEB which is an ETF seeking to track twice the daily performance of $KWEB.
And if you wish to be even more creative and potentially hedge the associated risk, a combination of long $KWEB+short $QQQ (or $XLK) makes sense to us too. If US ""Big Tech"" somehow pull it together and (out)perform well in 2023 - so will Chinese tech stocks (in such case, the latter is likely to perform even better that former), and if both disappoint - we believe that KWEB should still perform better than QQQ on a relative basis.
Therefore, we see a fairly small risk playing the China-US (H)edge."
From Growth To Value of Potential Multibaggers: "2022 was a horrible year for growth stocks. Nobody really knows what the future brings, but there seems to be a consensus now that a recession will come in 2023. Growth stocks usually bottom earlier than the broad market, which means we could see them do better over the next year than the broad market. Maybe the October lows were already the bottom? Of course, I have no crystal ball.
Many investors invest in growth when the markets go up, but now that valuations are much more attractive, they shy away from them and buy index funds or dividend stocks. I’m for a slow approach. I invest money every two weeks and with the crash, I add double the amount. I scale into positions over years and that gives me the advantage I can constantly evaluate my holdings. It also allows me to average down now in companies that keep performing, despite their big stock price drops.
If the market goes up in 2023, and I think that possibility is higher than most investors anticipate, growth stocks will go up much more and much faster. Most are down 60%, 70% or 80% already, so while some may even go down a bit more with the broad market, most damage is done and now we can look to the upside."
Idea: "I see more opportunities now than in a very long time when it comes to growth stocks. Many have sold off to a level where the upside is very enticing.
Take CrowdStrike (CRWD), for example. Its stock is down 68% from its high. Most will agree that companies need better security. If they are hacked, which happens more often, it costs them much more than paying for a good endpoint protection solution. The company keeps adding more modules and that results in dollar-based net retention rates of more than 120%. That means revenue increases by 20% without attracting 1 single new customer. But CrowdStrike's customer base is up 44% YoY.
Big customers, paying more than $1 million per year, were up 67% YoY. CrowdStrike also has a free-cash flow margin of 30%. If you subtract its stock-based compensation, it's still 6% in FCF. CrowdStrike is expected to have $5 billion in revenue in 2025 and with an FCF margin of 30%, it now trades at about 15 times 2025 FCF. For a company still expected to grow at 30%+ then, this looks cheap to me if you have the patience to invest for the long term. "
Disclosure: Long CRWD
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.