Update 498: Contrarian Views, Layoffs, Position Weightings, Portfolio Changes, Island Life
18Feb23 $OC and $EW on NYSE, $GOOGL on NASDAQ.
Dear Friends of Purple Chips,
On Thursday the Dow was at 33,700, down slightly from 2 weeks ago. The market is nervously focused on every hint of a change in the rate of inflation. In this weekend's video, we look at the following:
A contrarian view that suggests the market could go higher;
Company layoffs;
How to calculate the weightings of our positions;
Recent changes to the portfolio in Owens Corning, Edwards Lifesciences and Alphabet/Google
Life on the island;
Next video is March 4th.
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Welcome to Purple Chips Update number 498 for February 18th 2023. I'm John Schwinghamer, the author of Purple Chips. Please pause the video to read our disclaimer.
On Thursday, the Dow slid about 400 points to 33,700, which is slightly lower than where it was two weeks ago. The market has been twitching with every shift in the inflationary winds. My perspective on this is that I believe inflation will be harder to tame than what's being presented by the Fed. The global movement towards onshoring and securing supply chains will have a lasting effect on the prices of all goods. The last 30 years have been characterized by expanding trade across borders in the name of cost efficiency. Now the pendulum has changed course. The industrialized economies are looking at repatriating their processes and keeping their technology where they can control it and keep it safe.
Here's an example of how globalization knocks places down. I recall buying a Makita miter saw at Home Depot about 20 years ago for around $500. And today, a similar miter saw can be bought for actually under $200. This is just one example. And there are many more like that.
Before I go further, I want to present this potentially contrarian view of why the market could surprise us and go higher. Jurrien Timmer is Fidelity's director of Global Macro Strategy. He states here that we're at an inflection point with earnings and the market could go higher based on the way that it behaved during previous earnings downturns. I try to keep an open mind on the direction of the market, because it's so hard to figure out whether it will rise or fall. And that's why we focus on individual stocks and their valuations. And speaking of valuations, it's hard to imagine that companies will be doing better in the next year because we see earnings deteriorating over the next few quarters, which should lead to lower stock prices. And then some buying opportunities.
The amount of people laid off by tech companies in the last month is huge, and it reinforces our belief that earnings will fall. This slide shows a few of the more notable layoffs that happened in the last two weeks.
And here's another slide that shows some layoffs in percentage terms. If you can imagine that what we see here represents over 100,000 people laid off - when you add the small companies that will be impacted by this, the total number of people laid off could easily be in the several 100,000 people.
Now here are the stocks that are trading at low valuations.
And there were some changes in our US positions. We reduced Owens Corning at $104 30 to an underweight position, which is 1.25%. And that's down from 3%. We added to Edwards at $77.21 to take the position to 3.75%, which is overweight - and we were at overweight before but we only have 3%. So we talked up the position to reach the right level. We added to Alphabet/Google at $94.48. And we were at regular rate, which is 2.5%. And now we're at overweight, which is 3.75%.
Here's a reminder of the position sizes that we use for US and Canadian stocks. For underweight, the US position size is 1.25%. In Canadian stocks, it's 2.5%. For regular rate the US position size is 2.5% - Canadian stocks is 5%. And for overweight, the US position size is 3.75% and Canadian is 7.5%.
A simple way to understand the weighting is to know that we aim for a 50% total weighting in US stocks and a 50% weighting in Canadian stocks. And because our goal is to hold 20 stocks in the US portfolio, this means 50% divided by 20 stocks equals 2.5% as a regular weighting. Now our goal is to hold 10 stocks in the Canadian portfolio. So 50% divided by 10 stocks means a regular weighting of 5%. An underweight position is 50% less than a regular weight position and an overweight position is 50% more than a regular weight position.
Let's talk about why we made these changes in our holdings. Owens Corning is expected to see weaker earnings for the next year. So it would be surprising if the stock moves any higher - we think it's best to stand aside and put our money on stocks that have earnings rising. Here you can see the earnings forecasts where earnings are not expected to rise until 2024. In addition, the analysts have a target of $103 on the stock which is lower than where we actually got out.
We added to Edwards for the opposite reason: earnings are expected to rise and the valuation is low. Eighteen analysts raised their forecasts after the latest quarterly report and four lowered them. You can also see how the earnings are expected to rise and keep growing for the next few years.
Alphabet/Google's earnings have been weakening but are now expected to begin rising. So we should have seen the worst on this stock. And here you can see how Google's earnings seem to have bottomed out and the current multiple is among the lowest that we've seen in the last decade.
Our next video will be on March 4th. We have two more videos until we reach number 500 - then we'll be going to blog style/interview that promises to be more flexible and more interactive. So stay tuned on that. Of course if you have any questions about this video or about Purple Chips, contact me at info@purplechips.com.
Here are a few snapshots of island life. This was my first winter on this island. And I have to say it wasn't bad. The temperature hovers between +5C and -5C. And when it snows that only lasts a few days. The shot on the left is my backyard. And those are my neighbor's horses that graze on my land. The middle shots are a barn owl that seems to visit us every few days. And the shot on the right is one of these spectacular sunsets that which seem happen quite often.
So that's it for this week. I'm John Schwinghamer, the author Purple Chips and thanks for listening. Have a great weekend.
Transcribed by https://otter.ai