Brownstone sucks without Jeff. Glad to be back. Quick question, how do you see the everything bubble affecting the timing of your picks? Are you prepared for a crash? — Dusty H.
Hi Dusty,
Thank you. Your question actually speaks to how things will be different at my new home, Brownridge Research.
This is an extremely unusual market right now. We’re experiencing all-time highs in the S&P 500, and yet almost all of the gains are being driven by a handful of companies with large exposure to artificial intelligence that have an outsized weighting on the S&P 500 index.
It certainly gives the impression that everything is going up, which isn’t true at all.
Let’s have a look at the iShares Russell 2000 ETF (IWM) over the last three years:
3-Year Chart of Russell 2000 ETF (IWM)
Not very inspiring is it? IWM has been in a pretty tight trading band since early 2022 and is nowhere near recovering the late 2021 all-time highs. It’s hard to be generally bullish when the small caps are not moving higher.
And to your point, Dusty, there are a handful of companies that are really overvalued right now.
NVIDIA is at an enterprise value-to-sales (EV/Sales) of 40 right now. 40-times annual sales, not profits!
Microsoft is at a 13 EV/Sales as a $3 trillion company. That’s crazy, and it won’t last.
So yes, I am prepared for a pullback in these kinds of lofty stocks. And I’m also prepared for the possibility of a larger credit event that could cause a legitimate crash. And we’ll definitely be ready for a pullback no matter what it looks like… because that’s when it will be a great time to invest.
I’m currently doing some work on a “Short Report” product that will be able to take advantage of overpriced stocks which are expected to fall (i.e. profit from stocks falling). A research product like this can be amazing in a volatile market.
And when it comes to recommending long positions, I only plan on doing that when conditions are good.
When the market is falling, I do not intend to recommend any long positions just to publish a recommendation every month.
Some months, we might establish 3 or 4 long positions. And then we might step on the sidelines for several months if market conditions are not good.
We’ll always have something interesting to talk about regardless. And we’ll use any slow periods to do deeper dives on individual companies or industries, so we’re better informed for when things turn up.
My goal is for us all to be prepared for when the markets are going up and for when they’re going down.
