Why Louis Navellier is bullish…the case of a short bear market…signs smart money is already buying into this “divergence” opportunity
Although it is difficult to remain optimistic in the current market environment, I encourage you to remain patient and not panic like the rest of Wall Street.
The reality is that earnings growth is still robust and some companies are posting record results – and that will ultimately help the market firm up in the weeks and months ahead.
So says legendary investor Louis Navellier.
Yesterday, Louis updated his Accelerated benefits subscribers on the latest market fluctuations. And despite the volatility, Louis finds reason to be optimistic.
We’ll get to that in a moment, but let’s start with Louis’ general analysis of stocks over the past few weeks:
It’s the usual suspects driving the stock market lower: investor fears of soaring inflation, ongoing lockdowns in China, tighter monetary policies by global central banks, and continued conflict between Russia and China. Ukraine…
Fed Chairman [Jerome] Powell thinks there’s a “good chance” the US can ride out a recession, though – and based on recent economic data, I think he’s right, at least in the short term.
Unfortunately, Treasury Secretary Janet Yellen doesn’t seem to share Powell’s sentiment, as she said last week that the Fed should be “skillful and equally lucky” to engineer a soft economic landing.
Louis notes that he doesn’t remember a time when the Fed managed to stage a soft landing. And for good reason, it is incredibly difficult.
The higher interest rates that are needed to kill inflation also risk killing economic growth. And, in fact, we are already seeing signs of corporate withdrawal.
For example, yesterday we learned that Uber would reduce the number of new hires.
Uber will cut spending and focus on becoming a leaner company to weather a “seismic shift” in investor sentiment, CEO Dara Khosrowshahi told employees in an email obtained by CNBC…
To cope with changing economic sentiment, the ride-sharing company will cut spending on marketing and incentives and treat hiring as a “privilege”, Khosrowshahi said.
This comes after Meta announced that it would slow down its hiring pace for mid-level positions.
And don’t forget Robinhood, which announced it was reducing its workforce by approximately 9%.
To be fair, Fed Chairman Powell wants some economic slowdown as it will help dampen inflation. He could therefore see this slowdown in hiring 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. It’s what everyone is looking at.
*** What about the good news that Louis is focusing on?
back to Accelerated benefits 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 just 4.1 times median expected earnings!
I can in no way justify such low valuations.
Although Louis talks about the P/E ratios of the fundamentally superior stocks he owns in his Accelerated benefits portfolio, this implosion of the P/E impacted the entire market.
Below, we take a look at what has happened to the S&P 500 P/E ratio over the past five years. As you will see, since the start of 2021, this ratio has been falling sharply.
It is now down to 20.84. That’s still above the long-term average of about 16. But it’s miles below the rough 40 level it hit about a year ago.
Back to Louis and the good news:
Yardeni Research points out that while the stock market appears to be headed for a P/E-led bear market, stocks would not stay in bearish territory for long.
He noted that once a bottom is reached in the P/E ratios, the market would start to rise.
Let’s make sure we’re on the same page.
“Heading into a P/E-led bear market” doesn’t sound wonderful. And, of course, nobody wants a bear market (officially measured down 20% from the most recent high).
But the reality is that the S&P is already very close to a bear market. It is down about 17% from its peak at the start of the year. If we’re going to have a full bear market, it’s better to have this type of “price/earnings contraction” bear market than a market led by earnings collapse.
Indeed, a P/E-led bearish is mostly sentiment-based as investors revalue assets to more reasonable levels. Once this repricing is done, prices stabilize and investors start to dive back into the water at more attractive prices.
In an earnings bear market, investors want nothing to do with stocks until earnings pick up. And it can take quarters or even years.
Fortunately, that is not where things stand today. As Louis noted, earnings and revenue today remain generally strong despite falling asset prices.
***If the idea of falling prices despite strong earnings and revenue sounds familiar, there’s a reason
Our hypergrowth expert Luke Lango has been shouting about this incongruity for several weeks.
It’s something he calls a divergence.
In short, the prices of some elite tech companies have decoupled tremendously from the intrinsic value of those companies, measured against their revenue/earnings.
It’s rare that this happens. But when it does, it opens a “divergence window”.
These windows create the opportunity for a huge rollback, in which prices rise towards their equilibrium level against revenue and earnings.
Last Friday, we quoted Luke speaking about this divergence, saying, “The biggest stock market phenomenon in the history of capitalism has come to 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 tech stocks. It’s quite another to show you that the “smart money” believes this is also the case and acts accordingly.
For more, let’s turn to Luke’s number on Investment in hypergrowth from yesterday:
Now seems like the best time to ditch the stock market to seek less risky ventures…but a privileged and influential few are trying to pull themselves out of the dip. Who are these bullish investors capitalizing on market fear today?
I’m talking about CEOs, CFOs, COOs, board members and big hedge funds. These corporate insiders are buying the dip.
This group constitutes the so-called “smart money” in the market. They are the ones who know more about their business than anyone in the world – and this group of people went on a buying spree last week.
Insider buying across the market has reached levels not seen since mid-March.
Luke points to last Wednesday when a PayPal (PYPL) board member purchased nearly $100,000 worth of PayPal stock. On the same day, the CEO of Align (ALGN) purchased nearly $2 million worth of stock in his company. The day before, a Rockwell Automation (ROK) board member purchased over $240,000 worth of Rockwell stock.
There was also the CEO of Playstudios (MYPS) buying shares in the company, a hedge fund buying Appian (APPN) and the CEO of Rocket Companies (RKT) buying $600,000 in additional shares, all from last week .
Back to Luke:
Honestly, that’s just the tip of the iceberg.
Over the past few months, insiders have been filling up on tech stocks amid this selloff in a way I’ve only seen once before in my investing career — in March 2020, before tech stocks only go from crash to soar…
From late February to mid-March, more than 50 company insiders bought more than $470 million worth of various hypergrowth tech stocks.
CEOs and CFOs were buying. Board members and hedge funds were buying. And they were buying in big chunks, over multiple purchases.
All of this insider buying has continued since then, with another spike coming last week.
It’s a shopping spree like I’ve never seen before.
*** Prepare for incredible entry prices as the bear market continues
To be clear, Luke isn’t claiming we’ve hit rock bottom yet. In fact, he says things will get worse before they get better.
But when the markets eventually rally – which they will – Luke expects growth stocks to lead the market higher:
The next few months could be difficult for the S&P, the Dow and the Nasdaq.
However, amidst this chaos, our analysis suggests washed out hypergrowth stocks will soar.
It seems counter-intuitive, of course – but it happens every time we find ourselves in a position like this. Hypergrowth stocks are always the first to fall in a bear market. They are also always the first to bounce back.
Hypergrowth stocks hit a low in November 2008 – five months before the market stalled in March 2009. During this period, many hypergrowth stocks doubled while broader indices fell 10%.
In 2001-2002, hypergrowth stocks bottomed out in April 2001 – more than a year ahead of the overall market. During this period, some hypergrowth stocks rose 100% or even 200%, while broader indices fell 20%.
We see history repeating itself, and we are approaching this critical inflection point.
We’re long, so I’ll wrap up for today.
Yes, it is a painful market. But if Louis is right, a bear market led by the P/E will be short. And if Luke is right, the first stocks to recover and soar will be hypergrowth technologies.
It’s not too early to prepare your shopping list. On that note, if you want to read more about Luke’s research on divergence and the specific stocks he’s most bullish on today, click here.
Have a good evening,