Beachman's investing plan - To AI or not to AI...that is the question
Portfolio: What I am planning to do in the markets and with my portfolio
Wall Street is calling this week the “Nvidia week” as the company prepares to report their Q2 earnings on Wed. Lots of ink is being spent forecasting what the company could report and its implications to the AI investment opportunity and markets in general.
While I agree with the criticality of NVDA’s earnings report for AI, for markets and for my portfolio, I am looking for interesting, ex-NVDA, AI investments. I want to better understand where customers (businesses) are likely to spend their tech budgets over the next 12-18 months. There are several companies reporting this week that will give us such clues. Some others have already provided leading signals.
I am preparing an investor-focused “state of AI” report based on what we have learned in this earnings season…developments over the past 2-3 months. It is time to look past NVDA’s GPUs to find the next set of investment opportunities that could work in 2025. Now might be the time to buy those stocks.
Table of contents
Market signals
Key questions
Beachman’s plan
Conclusion
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Market signals
Last week, on Thu, as I returned from a vacation trip, I did a round up of the latest market signals. Not much has changed since then, so I will not repeat myself.
Rate cuts
However, there was one massively important development on Fri last week.
The US Feds are ready to cut interest rates.
Chair Powell, in his speech at their annual Jackson Hole meeting, delivered a few key messages:
The US Feds are pivoting into a rate cutting regime and are ready to execute their first rate cut in Sept.
They are confident that inflation has been sustainably trending lower, over the past 12 months, towards their 2% target.
The labor market has cooled considerably and is less tight than pre-COVID, 2019 levels.
The US economy continues to grow at a solid pace.
If you think back to Dec 2021, when the FOMC first announced their intention to start raising interest rates. The SP500 lost about -27% over the next 11 months. Investors who stayed in rate-sensitive stocks and in growth stocks got whacked. 2022 was not a pleasant year for many of us.
Now we have a Fed that is pivoting in the opposite direction. Lower rates are coming.
We can debate about the size of the first rate cut that is likely in Sept. We can argue about the pace of further cuts in Nov or Dec. However, these messages from Chair Powell are as crystal clear as they can get. Rate cuts are coming…
We should not ignore this major market signal. The table below from Volumeleaders tells us why…
I have identified a couple of options for how I plan to invest in this macro catalyst.
Election uncertainty
This is an investing substack and I steer clear of politics for the sake of politics in my writings. That said, politics can sometimes affect markets and it behooves us to pay attention when it matters.
As of this past weekend, the US presidential elections are back into toss-up territory. The next 10 weeks are going to be a dog-fight…a slog-fest…between the two major party candidates. October has often thrown up unforeseen surprises.
Markets are going to start pricing in election outcomes or lack thereof…aka uncertainty…as we get closer to Nov 5th (election day).
I have started putting in place my geopolitical hedge. I intend to add more to it in the coming days.
NVDA’s Q2 earnings
We cannot ignore this elephant in the room for this week. All eyes will be on NVDA’s earnings report after hours on Wed Aug 28th.
As per Bespoke, “NVDA has reported six straight earnings triple plays (beat EPS, beat sales, raised guidance) coming into this quarter's report, so needless to say, expectations will be high for the company to deliver once again.”
For now, NVDA’s sales are intact for Q2 and for Q3 and most likely even for Q4. Analysts will seek to understand the company’s product roadmap and revenue projections for 2025. I do not expect management to provide any refined clarity on the matter. So we will be left guessing on what 2025 will look like.
Markets are predicting a +/- 9% move in the stock after the report is out. I trimmed about a fifth of my overweight position on Mon and hedged a major chunk of the rest.
Institutions are underweight tech
We continue to get more signals that institutional investors and traders are underweight tech stocks by a wide margin. As per MS, large funds are underweight tech stocks and mega caps by about 37% as compared to this time last year. They have been net selling tech stocks for 4 straight weeks and for 13 of the last 16 weeks. GS and Deutsche Bank confirmed this trend in their respective reports too.
Microsoft is still the most underowned large cap tech stock, while Meta remains the most overowned.
So who is buying tech stocks from institutions?
Retail investors and corporate share buy back programs.
This is further confirmed by the Fear and Greed index on the cusp of going back into “Greed” territory and options markets signalling some of the lowest Put-to-Call ratios in 52 weeks. All of this on very low daily trading volume…some of the lowest YTD.
There is no doubt in my mind that current markets are frothy and institutions are sitting it out, letting retail investors have the ball.
Key questions
The specific, top-of-mind questions that will shape where and how I invest for the rest of 2024 and leading into 2025:
Who is actually making money in AI now or in the near future?
When will the current AI capex boom turn lower?
Who will be the next beneficiary of hyperscaler and enterprise AI spend?
Are markets underestimating US geopolitical risk?
I am a growth investor, a tech investor. Right now, AI and cybersecurity are the two hottest investing themes with multiple catalysts in play. Therefore, no surprise that most of the questions above are AI-related. I curate such research questions to stay hyper focused on finding the best AI investment opportunities for my portfolio.
I, currently, have 6 stocks and 2 ETFs on my active watchlist. All 6 stocks are possible AI opportunities that I am closely monitoring in terms of earnings, forward business prospects and valuations. The 2 ETFs are interest rate sensitive plays….tied back to the rate cuts catalyst I mentioned above.
Beachman’s plan
Given the market signals that I discussed last week and above…
…given the key questions that I am researching…
…my simple, actionable, measurable investing plan is as follows: