Market Update
As of time of writing (7/24), the most valuable public companies in the world are as follows:
For context, here’s what the top 5 looked like in early March:
Since then, there’s been a bit of shuffling at the top. Currently, the 5 most valuable companies are US-based tech giants. NVIDIA briefly held the #1 spot but has since been eclipsed by Microsoft and Apple.
At June’s WWDC event, Apple unveiled Apple Intelligence, which will act as a personal AI agent across all your apps. This propelled Apple to #1 on the list.
The S&P 500 is up about 16% YTD, fueled by big tech and the AI theme driving the market higher.
Soft June CPI data (with the 12-month rate at 3%, its lowest level in over three years) has reignited market hopes for quicker Fed rate cuts. Will central banks start cutting rates this fall, or will they hold rates higher for longer given persistent inflation pressures?
More so than the macroeconomic factors, I believe the market is being driven by structural shifts like AI that investors view as transformative. It will be especially important to monitor Big Tech’s Q2 earnings reports.
March Picks
Back in March, I highlighted a couple of stocks I had been buying: NVIDIA NVDA 0.00%↑ and Novo Nordisk NVO 0.00%↑. I’ve since closed out both trades, so let’s revisit how these went.
Locked in almost 40% profit on the NVDA trade and just over 14% on NVO. I also sized my NVDA position 4x larger than NVO. Not too bad for a ~4-month trade.
When I initiated these positions, my justification was as follows:
Both companies continue to beat earnings estimates and guide higher
Based on consensus estimates, they weren’t trading at overly expensive multiples
Product demand is outpacing supply for the foreseeable future
Animal spirits are high, so lean into the bubble
I ended up selling NVO because the valuation became too demanding and competition in the weight loss drug industry continues to intensify. Some competing drugs show signs of potentially being superior to Novo’s products.
NVDA
Now up almost 700% since January 2023, NVIDIA has been a stock market darling ever since the AI theme took hold. Some employees in middle management have seen their equity appreciate enough to sail off into early retirement.
For the most part, NVDA’s business performance has justified its stock’s meteoric rise. Yet, I decided to sell for a few reasons (I still have direct and indirect exposure via an investment club and index funds):
Overly demanding valuation and general over-exuberance
Tougher comps in the short/medium term
Based on what I’ve observed (e.g. TSLA), it’s usually prudent to trim or sell after a stock split that follows a huge run-up
My thesis that NVDA would become the most valuable company on the planet played out
Nobody rings a bell at the top of a market, but I figured that when the CEO is going around in a leather jacket like a rockstar signing his name on women’s breasts, it might be time to take some chips off the table.
SPWH
For better or for worse, my stock picks haven’t all worked out as well as NVO and NVDA. Sportsman’s Warehouse (SPWH 0.00%↑) is a specialty retailer of outdoor sporting goods—they sell hunting equipment, guns, camping products, and other outdoor offerings.
When I started buying shares in April, my rationale was that SPWH was a retail business that was hated and left for dead but structurally fine (and cheap). While the business was facing declining demand and margins, I believed that it was close to bottoming and on a path to restructuring and turning the corner.
In late 2023/early 2024, I saw a similar story play out with Aritzia and was able to pocket a 75% gain in 3 months. Albeit, Aritizia was (and is) a much stronger business than Sportsman’s, but I figured why not take a shot on SPWH?
SPWH reported Q1 earnings on June 4th and they were disappointing, to say the least:
Missed EPS and revenue estimates
First-quarter net sales were down to $244 million compared to $267 million in the prior year, with same-store sales down 13.5%
Net loss increased to $18.1 million due to higher rent, depreciation, and interest expenses
My investment thesis was busted, plain and simple. The turnaround story had clearly hit a bump in the road and was taking longer to play out than I originally expected.
Given the underwhelming quarter, I promptly sold ~70% of my shares. Thankfully I sized the initial position fairly small to mitigate risk and I’m down just over 16%. I’m letting the rest of my shares ride for the time being:
Portfolio Update
Currently, I have ~15% of my equity portfolio invested in individual stocks (including vested RSUs) while the remainder is in index funds (S&P 500 and QQQ). I typically try to keep my exposure to individual stocks at 15% or lower, so I’ll probably keep things as is for now.
2024 has been a tougher market to navigate than 2023, but the bulls remain in control. I think the back half of this year could be an even more difficult environment to traverse.
AI
While AI sentiment remains generally positive, it appears that peak excitement may be in the rearview. Investors are beginning to ask more questions about AI capex and ROIC.
For example, here’s an excerpt from Alphabet’s Q2 earnings call:
Alphabet is not seeing adequate current ROIC on AI capex, is likely over-investing, and struggled to provide concrete examples of killer apps deployed at scale, but emphasized that adoption of new technologies takes time, and the risks from over-investing in AI are smaller than those from under-investing.
I agree that the risks of under-investing will likely outweigh those of over-investing, but we'll need to wait and see how much longer it takes for investors to become impatient. On that note, Goldman Sachs’ recent report is worth a read - Gen AI: too much spend, too little benefit?
Recent Reads, Listens, and Watches (pun intended)
Apple Intelligence is Right On Time (Stratechery)
What’s Gone Wrong in Software and Why We’re Optimistic - Excellent deck from Jared Sleeper, a Partner at Avenir, covering current happenings and reasons for optimism within the SaaS landscape. We’re observing many of the same themes in our business, so these slides may also be helpful for other software operators and investors.
A couple more software reads that I found interesting: Winds of Change (via Buck on Software) & Vertical Software | Riches in Niches (via OnlyCFO).
Michael Mauboussin, Bill Gurley - Putting Theory into Practice (Invest Like the Best podcast)
Modest Proposal - AI Commoditization and Capital Dynamics (Invest Like the Best podcast)
Genius Makers: The Mavericks Who Brought AI to Google, Facebook, and the World (Amazon)
Sabre Arc Capital June 2024 Review - A quick update from our fearless leader, including a performance recap, notes on a few of our portfolio companies, and recent buys and sells
Alphabet 2Q'24 Update (MBI Deep Dives)
Watch Talk with Larry June | Wrist Check Pod — Talking brand and business building, wrist pieces, numbers, and Bay Area culture. Good job Larry!
Nello at 214 Mulberry | Aimé Leon Dore — Whether you’re sipping an iced coffee while getting work done, or on vacation savoring a bottle of natural wine in Europe, dive into this 1-hour disco/house mix - just in time for summer.