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9 FEB 2024
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DISCLAIMER
This report by Adam Khoo, Adam Khoo Learning Technologies Group Pte Ltd and Piranha
Ltd. is in no way a solicitation or offer to sell securities or investment advisory services.
Adam Khoo, Adam Khoo Learning Technologies Group Pte Ltd and Piranha Ltd. is not
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9 Feb 2024

Dear Investors and Traders,

US markets carried their bullish momentum over to the first month+ of the year. Although
there was a very small pullback in late January as a result of the Fed indicating that they will
not cut interest rates in March, markets quickly bounced back when stronger than expected
GDP (Q4 2023 +3.3%, Q1 2024 tracking +3.4%) and employment data (payrolls up 535,000
versus 180,000 expected) showed that the US economy remained strong.

At the same time, inflation continues to fall towards the Fed’s target of 2%. The Personal
Consumption Expenditures (PCE) index grew 2.6% year over year in December. Core PCE
inflation, on a six-month annualized basis, registered at 1.9% in December, trailing the Fed’s
2% target for a second month.

Year to date, the S&P 500 (SPX) is up 4.41%, Nasdaq 100 up +6.22% and the Dow Jones
Industrials up +2.14%. A strong January is usually a good omen for the markets in a new
year. Over past 74 years, when the prior year gained more than 15% and the month of
January was positive, the full year return was positive 92% of the time and the median return
was +16%.
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As previously mentioned, besides being a US Presidential Election Year (which is bullish),

2024 is also the second year of the new bull market. Since the 1930s, second year of Bull
Markets have been bullish 93% of the time, with an average annual return of 11%. So,
historical statistics show that we can expect 2024 to deliver a return of 11% to 16%, with an
over 90% probability.

Market Short-Term Overextended…Expecting a Pullback in Late Feb to March

While 2024 is expected to end with a double-digit gain, remember that stock prices do not go
up in a straight line. Stock prices move in wave patterns. After going through a strong wave
up in the last 3 months, we should expect a wave down pullback/correction of 5% to 10%
soon. Individual high-quality stocks like Nvidia (NVDA), Amazon (AMZN), Microsoft
(MSFT), Mastercard (MA), S&P Global (SPGI) are also technically overextended and ripe
for a pullback to moving averages.
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I will be looking forward to this wave down to deploy my allocated cash into high quality
stocks for the year. So far, I have hardly made any investments in the past 3 months, except
into specific stocks, like LVMH (LVMUY) and Pepsi (PEP) that were undervalued and
retraced down to support levels. Since then, they have both started waving back up.

It is impossible to predict exactly when a pullback/correction will take place. However, we

can look at historical seasonal patterns. Since 1928, the most bearish period of the year takes
place in the second half of February (2H Feb), after a strong first half (1H Feb).

This bearish February pattern seems to match with the Election Year chart below. In prior US
election years, pullbacks occurred during February to March and September to October.

Chart from Fundstrat, Bloomberg

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Sell, Hold or Buy?

As markets make new all-time highs and many stocks are up double digit-returns in the last
12 months (MSFT+59%, AMZN +65%, META +144%, NVDA +233%, BKNG +47%),
many investors would be wondering if they should sell and buy back after an anticipated
correction occurs. That seems like a great idea.

Of course, the risk of selling a high-quality stock is that the price may continue going up
without you. There is also the risk of not being able to buy back in time, before prices surge
back to new highs. As a long-term investor, I have come to realize that the risk of staying out
of the markets is higher than the risk of staying invested.

Although I do expect a coming correction, I am not selling my long-term investments. I am

prepared to ride through the short-term volatility and take the opportunity to add more shares
when prices fall far enough to my pre-determined buy levels (at significant levels of support).

It does not matter that my stock has gone up 50% or even 150% over the last 12 months.
As long as it continues to be a great business that will keep growing its revenue, net income,
free cash flow and intrinsic value, it makes sense to hold for the long run and allow it to
compound my wealth. I will only sell a stock under the follow circumstances:

1. I would sell if the economic moat of the business deteriorates or if there is a structural
(long-term) problem with the business. Example would be Boeing (BA)
2. The price is grossly overvalued. The price is more than 100% above its intrinsic value
3. There is an even higher quality stock I would like to replace it with.

Even though my portfolio stocks like Amazon (AMZN), Microsoft (MSFT), Meta Platforms
(META), Palantir (PLTR), Nvidia (NVDA), ASML (ASML), Mastercard (MA) have
increased significantly in price, they do not meet my 3 criteria to sell.

For example, Amazon (AMZN) is still below my intrinsic value of $182. However, short
term, it is overextended and I would not add more until it retraces back down to at least
$151(first support level). Do note that intrinsic values will increase over time and support
levels should be updated regularly. I update both every month for Ultimate Investors
Playbook (UIP) subscribers (insight.piranhaprofits.com)
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In the case of Nvidia, the stock price ($697) is 30%+ above my base case intrinsic value of
$564. It is not grossly overvalued but it is technically overextended and price has gone
parabolic. What I have done is to sell OTM (out of the money) covered call options on some
of these stocks so that I can collect some premium while they go through their expected
pullbacks and corrections.

It is Reasonable to Sell if You Need to Raise Cash

Every year, I spend much less than I earn. This is how I ensure I have cash to keep deploying
into high quality businesses in the stock market. This is why I see no need to sell the high-
quality stocks I already own. Even though prices may go down in the short-term, I have high
conviction they will be worth many more fold in the next 5 to 10 years.

For investors who are fully invested and are not able to deploy more cash into the markets
(for whatever reason), then there is nothing wrong with selling some stocks that are
overextended and overvalued (e.g. Nvidia (NVDA), ASML (ASML)) in order to raise cash in
the portfolio. This way, they would have cash to deploy during coming market corrections.

Another reason for investors to sell stocks now is if they are on margin. It is very risky to
hold stocks on margin currently as margin rates are high and prices are overextended.
Investors on margin should definitely sell stocks at high prices to reduce margin to zero.
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Q4 2023 Earnings Better Than Expected for High Quality Portfolio Stocks

Q4 2023 Earnings Reporting is now underway and so far, the majority of stocks in my
portfolio have announced better than expected earnings results, leading to significant gains in
their share prices. Some of the biggest beats have come from Amazon (AMZN), Palantir
(PLTR), Meta Platforms (META), ASML (ASML) and Mastercard (MA). Alphabet
(GOOGL), Apple (AAPL) and Microsoft (MSFT) also posted better than expected results but
share price reactions have been muted. Overall, I am happy with how my portfolio companies
have performed.

As for the broader market, the S&P 500 is now reporting earnings growth of 1.6% for Q4
2023 which would be the 2nd straight quarter of earnings growth for the index. This recovery
in earnings growth will support the bull market in its second year. However, as you can see
from the chart below, financial, health care stocks, materials and energy are yet to recover
from the earnings recession. I do expect financials and heath care to start reporting earnings
growth from Q1 2024 onwards. One of the reasons financial stocks are showing a negative
earnings growth is the result of the FDIC insurance fund assessing a $23 billion fee to cover
the bailouts of regional banks. If you exclude this fee, earnings growth would already be
positive.

72% of S&P 500 companies have beaten EPS estimates to date for Q4, which is below the 5-
year average of 77% and below the 10-year average of 74%.
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On the whole, the US market is slightly overvalued. The forward 12-month P/E ratio for the
S&P 500 is 20.0. This is above the 5-year average (18.9) and above the 10-year average
(17.6). With the market fundamentally overvalued and price technically overextended, this is
not the time I would be adding shares. I would wait for a pullback/correction during the next
few months before I put new cash to work.

Source:Factset

Which Sectors Could Outperform in 2024?

In my recent Market outlook event in late January, I talked about the sectors which I believed
could outperform in the 2024.

Sectors that could outperform are sectors that would a) benefit from falling interest rates as
well as b) benefit from the A.I Secular Growth Trend. c) Sectors that under performed in
2023 but expected to show earnings recovery could also rebound in 2024.

Technology Stocks

Even though technology stocks led in 2023, I believe they will continue to do well in 2024
and beyond. Tech stocks will continue benefit from the AI technological revolution and
secular growth.

In particular, Cloud computing stocks like Amazon (AMZN), Microsoft (MSFT) and
Alphabet (GOOGL). Together, these 3 behemoths control over 65% of the cloud market. AI
semiconductor stocks like Nvidia (NVDA) and AMD are also riding on the 24% annualised
growth of the AI accelerator growth industry over the next 10 years.

I am also bullish on Cybersecurity stocks like Fortinet (FTNT) and Palo Alta (PANW). A
great way to get exposure to the cybersecurity sector is through ETFs like IHAK. Finally, I
am also invested in AI enterprise software companies like Palantir (PLTR) which jumped a
massive 40% in the last 2 days after reporting blowout earnings.
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I must emphasize that I have already been invested in all these stocks for the last few years.
While I expect them to compound in value this year and the years to come, they are
technically overextended after a strong runup. I would only add more to them after I see a
10% to 20% pullback in Feb/March or Sept/October this year.

Financials and Health Care Stocks

I also expect to see a rebound in financial and health care stocks. Both sectors reported
negative earnings growth in 2023 but are expected to post positive earnings growth in 2024.
Financials are expected to report a 6% growth while Healthcare is expected to report a 17.8%
growth.

For financial stocks, my preference has been in the payment technology companies like
Mastercard (MA) and Visa (V) as well as Financial ratings and analytics companies like S&P
Global (SPGI) and Moodys (MCO).

For healthcare stocks, I am invested in medical devices stocks like Medpace (MEDP),
Thermofisher (TMO) as well as Managed Healthcare stocks like United Health (UNH). I am
also eyeing an entry into Intuitive Surgical (ISRG) when it gets to an attractive buy level.
Many of these healthcare stocks were down significantly last year but have already started to
rebound in the early 2024.

Singapore Listed REITs

I hold Singapore listed REITs (SREITS) are part of my dividend portfolio. My preference for
SREITs come from the fact that dividends are not taxable and they have lower gearing ratios
(Debt/Asset Ratio) than their US listed counterparts.

As long-term interest rates come down (10-year treasury yield), REITs would be prime
beneficiaries. As REITs prices rebound up, their dividend yields will fall. Currently, I think
their dividend yields remain at attractive levels.
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While the 10-year yield has come down from a high 5%, it rebounded back to 4.1% (from a
low of 3.78%). This is the main reason for SREITs recent pullback. I am taking the
opportunity to add to my SREIT portfolio, focusing only on the highest quality REITs that
have low gearing ratios (below 40 ideally) and resilient DPU growth.

I would avoid SREITs that are the most vulnerable to higher interest rates. Just in case rates
jump back up again, vulnerable REITs would see the biggest decline in portfolio valuation
and the highest jump in gearing ratios. The table from DBS research shows the highest risks
to avoid are Suntec REIT, CLCT (Capitaland China trust), KORE (Kappel Pacific Oak),
MUST (Manulife US REIT), Prime US REIT and Elite REIT.
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The most resilient REITs that I have been focused on adding include; Capitaland Integrated
Commercial Trust C38U (dividend yield 5.36%), Frasers Centrepoint trust J69U (dividend
yield 5.38%), Frasers Logistics and Commercial trust BUOU (dividend yield 6.46%) and
Mapletree Industrial REIT ME8U (dividend yield 5.57%) to name a few. I prefer to hold
REITs and Singapore Banks as compared to Bonds for income as the former has dividend
growth whereas bonds interest coupon payments are fixed.

China Stocks…Any Hope?

The Hang Seng index is down -7% for the year (down over 50% since the 2018 peak) and the
mainland CSI 300 index is also down -1.79% year to date (down over 40% since the 2021
peak).

Recently, the Chinese authorities have shown increasing desperation in trying to stabilize
their equity markets. Measures included curbing short selling and derivatives, getting state-
owned investment funds to buy stocks and encouraging companies to do share buy backs.

Most recently, China replaced the head of its securities regulator with ex-banker Wu Qing, a
surprise move that may foreshadow more forceful measures by the CCP to end the rout in the
country’s $8 trillion stock market.

China’s previous moves to replace heads of the securities regulator have helped in boosting
the market. The CSI 300 Index rose more than 40% in almost a two-year span after Liu Shiyu
was assigned to replace Xiao Gang in February 2016. The index also rose more than 80%
over two years after Liu was replaced by Yi five years ago. Will it work this time? Let’s hope
so.

As previously shared, China stocks only now make-up less than 4% of my investment
portfolio. I do not intend to add any more exposure as I am no longer bullish on the Chinese
markets over the long run. Even if China can succeed in boosting its economic recovery, it
does not mean that it woud translate into higher earnings growth and stock market return.
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Even though China GDP increased 40X (3,939%) over the last 30 years, the Shanghai
composite index only increased 270% and the Hang Seng Index only gained 66.4%.

In the last 30 years, corporate earnings have been essentially flat, despite the 40X growth in
China GDP. For some reason, GDP growth in China does not translate to corporate earnings
growth and stock market performance.
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Moving forward, I would just focus on US stocks. You can see from the chart below while
US GDP has grown 3.7X (270.92%) in the last 30 years, it has translated to an 8X (723%)
return in the S&P 500. This is because S&P 500 Earnings growth has been over +836% over
the last 30 years.

China stocks are currently very undervalued, so I would only start to exit my China exposure
(to reinvest in US stocks) only after a rebound to higher prices, when prices are nearer their
intrinsic values.
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For example, Alibaba (BABA) just announced their Q3 results they showed lackluster growth
in both their ecommerce (up 2%) and cloud business (up 2.6%). Overall, group revenue is up
5% but adjusted net profit down -4%, The only bright spot was international commerce
growing 44% (but still a very small part of the business) and a US$35.3 billion share buy-
back program (equivalent to 20% of the stock’s market cap).

BABA has definitely seen its moat deteriorate (losing market share to PDD and Bytedance)
and is no longer a high-quality business. It is just a very very cheap mediocre business.
Analyst’s growth projections range from a low of 2% to a high of 12.09%.

If I take the most pessimistic growth of 2% into my DCF valuation, I get an intrinsic value of
US$125.

If I assume zero growth for the business in the next 20 years, I get an intrinsic value of
US$110. At the current market price of US$70, it is still cheap. This is not taking into
account the proposed share buybacks that would increase the intrinsic value per share
significantly. So, while I do not want to add shares to a mediocre business, I also am in no
hurry to sell until I get a higher bid in the market above $125.
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Happy Investing and May the Markets Be with You!

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