The Magnificent 6 and “That Other Guy”
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Reassessing the Magnificent 7… Big trouble in China… An A.I. earnings blowout, and a promising speculation… The “A.I. endgame” is in sight?
By Michael Salvatore, Editor, TradeSmith Daily
A little less “Magnificent 7,” a little more “Magnificent 6… and that other guy.”
Tesla has proven itself to be the black sheep of 2023’s most celebrated flock of stocks.
It’s down more than 24% year-to-date, the biggest loser among not just the other Magnificent names… but the entire S&P 500.
Just look at the chart below, with the Magnificent 7 (various colors, see legend at right) charted against the benchmark S&P 500 (dark blue).
It begs the question: Does Tesla belong in this group? And if it doesn’t… and we’re married enough to the idea of a “Magnificent 7” to replace it… what should take its place?
One strong candidate is drug giant Eli Lilly (LLY). Its charge higher — fueled by speculation that its obesity and diabetes drug portfolio will keep growing — recently helped it eclipse Tesla’s market cap by close to $100 billion.
Now, I’m of two minds on this. Yes, LLY’s performance is impressive. Tack on the fact it’s considerably larger than TSLA and you have a great argument for its “magnificent” status.
But I’m also on the record as a skeptic about these drugs’ use as a weight-loss shortcut. To me, speaking purely from intuition here, TSLA’s achievements in electric vehicles and future ambitions in robotics will have more lasting impact.
And I’m not just shooting from the hip. There’s also the valuation picture. TSLA is by no means cheap at 43 times earnings… But compared to LLY’s 125x multiple, it looks like a downright bargain right now.
Also consider how violently overbought LLY is… and how excruciatingly oversold TSLA is… on the purple-shaded Relative Strength Index (RSI) indicator beneath each chart below.
TSLA is a rollercoaster of a stock to own. But it’s rarely been a good idea to bet against Elon Musk over the past decade. And today, you can get it at a cool 55% discount from its all-time high. Something to think about…
There are some falling knives you shouldn’t try to catch, though. Take China, for example…
❖ China faces a lot of headwinds…
At the start of the year, I stuck my neck out to say emerging markets would outperform U.S. markets in 2024.The year is still young, but that idea has not borne fruit. The Vanguard Total International Stock ETF (VXUS) is basically flat year-to-date, while the Vanguard Total Stock Market Index Fund ETF (VTI) is up 4.6%.
One reason is the trouble in Chinese markets.
China’s been dealing with a worsening deflationary crisis, with the country’s Consumer Price Index falling 0.8% from a year ago and its Producer Price Index — which measures the cost of goods — down 2.5%. — On top of this is a slump in real estate, which makes up a huge part of China’s economy.
Kyle Bass, founder of Hayman Capital Management, likened it to a 2008-style financial crisis on steroids. From Business Insider:
“They have 3 ½ times more banking leverage than we did going into the crisis, and they’ve only been at this banking thing for a couple of decades.”
Bass said the years of economic growth China enjoyed prior to the pandemic were made possible by an unregulated real-estate market, which leaned too heavily on debt to expand.
With defaults now plaguing the industry, this could spell trouble for the country’s broader economy. The real-estate sector makes up about a quarter of the country’s GDP and 70% of household wealth.
“The basic architecture of the Chinese economy is broken,” Bass said.
Bass said the years of economic growth China enjoyed prior to the pandemic were made possible by an unregulated real-estate market, which leaned too heavily on debt to expand.
With defaults now plaguing the industry, this could spell trouble for the country’s broader economy. The real-estate sector makes up about a quarter of the country’s GDP and 70% of household wealth.
“The basic architecture of the Chinese economy is broken,” Bass said.
China is the world’s second-largest economy, giving it a lot of weight in global markets. The threat of its debt and deflationary issues spilling over to Europe and other Asian countries is significant.
There are lots of reasons not to own Chinese stocks — the primary one being that they’re notoriously tied to the whims of the Chinese government. But these systemic risks are just the latest and greatest reason to steer clear.
I’ll keep tracking the broader VXUS as part of my foreign-market-outperformance thesis for 2024. But China-averse investors should consider the iShares MSCI Emerging Markets ex China ETF (EMXC) instead. While it hasn’t beaten the U.S. stock market this year, it is up 1% and is relatively more insulated from Chinese economic trouble.
❖ ARM stages an A.I.-fueled comeback…
The “beat and raise” strikes again…ARM Holdings (ARM), a chip designer whose products power most modern smartphones, surged more than 50% yesterday after reporting higher revenue than Wall Street’s expectations, and raising its forecast for the current quarter.
This surge was a welcome change for ARM investors, who’ve sat through a relatively modest 28% rise from its September IPO, before Thursday’s report.
It’s a remarkable, yet somehow also unsurprising level of enthusiasm for a semiconductor company in the age of A.I.
Any company building out hardware that’s set to meet the growing demand for A.I. is sure to see an applause from Wall Street.
And here’s something more to keep in mind about ARM…
Rumors swirled several months ago that renowned Apple designer Jony Ive was teaming up with OpenAI CEO Sam Altman to create a device that would be the “iPhone of artificial intelligence.” Softbank CEO Masayoshi Son is said to be funding the project with $1 billion.
And wouldn’t you know it, ARM is also part of the potential deal.
Here are details from Reuters:
ChatGPT maker OpenAI is in advanced talks with former Apple designer Jony Ive and SoftBank’s Masayoshi Son to build the “iPhone of artificial intelligence”, fueled by more than $1 billion in funding from the Japanese conglomerate, the Financial Times reported on Thursday.
Sam Altman, OpenAI’s chief, has tapped Ive’s company LoveFrom to develop the ChatGPT creator’s first consumer device, the report said.
Discussions are said to be “serious” but no deal has been agreed on, and it could be several months before a venture is formally announced, the report said, adding that Son, Altman and Ive have discussed creating a company that would draw on talent and technology from their three groups.
Sam Altman, OpenAI’s chief, has tapped Ive’s company LoveFrom to develop the ChatGPT creator’s first consumer device, the report said.
Discussions are said to be “serious” but no deal has been agreed on, and it could be several months before a venture is formally announced, the report said, adding that Son, Altman and Ive have discussed creating a company that would draw on talent and technology from their three groups.
Nothing has been formally announced on this venture yet, and no news has come of this reporting since September. But this is something to keep an ear out for.
An A.I.-focused consumer device from the design pedigree of Jony Ive could easily catch on just like the iPhone did. And the involvement of Masayoshi Son, who holds a 90% stake in ARM, strongly suggests that the company’s chips will take center stage.
That’s worthy of a speculation, especially as reports suggest we’ll hear more about this venture in 2024. Just be quick to cash in gains… ARM is an expensive stock, trading at 685 times earnings. It’s sure to be volatile no matter what winds up happening.
However, ARM is far from the only A.I. opportunity in the market…
❖ Luke Lango believes we’re entering the A.I. endgame…
And it could officially start as soon as the end of this month. Let me back up…The “white whale” of A.I. breakthroughs is the Artificial General Intelligence, or AGI. This is when an A.I. model becomes advanced enough that it can learn new information without human input.
Thus far, A.I. has only been able to return information it’s been trained on, with limitations on what it can do based on how recently it’s received new data.
An AGI would be able to train itself, using its own deductive reasoning to parse fresh data and form conclusions without human intervention.
The potential for such a breakthrough is enormous, and even dangerous. It all depends on how it’s used.
Regardless, Luke Lango believes the chase for A.I. profits in the stock market will accelerate as the technology advances toward this milestone.
That’s why he’s on the hunt for the best A.I. growth stocks in the market. These stocks serve wildly different business niches, giving investors the opportunity of a lifetime to create an A.I.—focused portfolio that covers the entire spectrum of market sectors.
And he’s already cashing in wins on this strategy. Just yesterday, Luke recommended his readers take partial profits on their position in ARM for a 140% gain.
Luke’s going live with his full findings this coming Tuesday, Feb. 13 in an exclusive presentation. I urge you to get more information here and sign up, so you’re ready for the day AGI becomes a reality.
To your health and wealth,
Michael Salvatore
Editor, TradeSmith Daily