Growth Stocks: What I See Ahead
Right to the point:
- What’s going on with our stocks.
- My outlook going forward.
- Catalysts that point to a turning point.
I know it’s been brutal. But if you invest, you’ll go through periods like this — crashes, corrections, declines, losses.
But if you stay in, you’ll get a chance to ride the rally back up. And I think that time is coming…
if bought in February at the top, i know y'all in a deep loss. i really know you must feel this but listen folks, #4IR is not BS, #A2O is real, disruption is real. just look around and look how our companies are changing life as we know it. our time is coming. hang tough.
— 🇺🇸Paul Mampilly (@MampillyGuru) January 24, 2022
Stay Strong Hands folks. I believe in our America 2.0 stocks. More importantly, I believe in you.
Watch my Bold Profits Daily video to see why I believe you should stay in our stocks:
This week I am going to talk about the most obvious thing, which is what’s going on with our stocks, what’s the outlook from here and lay out a few things that I believe point to a turning point. I am hesitant to call a bottom again having gotten this wrong a number of times in 2021.
However, there are a lot of good signs. Actually, I’ve been tweeting a lot about this. We’ll put up some tweets as I talk about this. The first thing I want to say is that for folks who started buying in February, I get it, you are down and down hard. Nonetheless, the only way to invest ever is to look forward.
If you invest for any period of time I am going to break this to you: You’re going to have to go through a period like we just went through. Crashes, corrections, declines, losses are all part of investing. This is one reason why so often on our updates for Profits Unlimited I focus so much on something called Rules of the Game.
You’ll find videos on our channel on Rules of the Game. There’s a report called Rules of the Game we issue and ask everyone to follow. I’m not going to talk about Rules of the Game this week. I am going to talk about looking forward, what is likely to happen and point to some things that are setting up in our favor.
I will also deal with some objections that are commonly cited in regular media.
What Are Some Big Catalysts?
First, let’s start with some of the big catalysts that are suggesting if we’re not at the bottom we are definitely close. Point number one, which I tweeted yesterday, is somehow everyone came up with the same idea to bet on options that expire on January 21, 2022.
You will see this tweet here where I point to this.
You can see an amazing $1.3 trillion of single-stock options which expired on January 21, 2022. In history, this is the second-largest expiration of its time. Tracking back to March 2020 and then through 2021, I remember from the March COVID crash that longest expiration available was actually January 21, 2022.
It seems like many people had the same idea to bet on that date. By betting on that date you expose yourself to market makers who can see these huge number of bets that are building for this date. It turns out everyone had the same idea at the same time: Give it as much time as possible and bet on a higher price.
What happens if everyone bets on one side? The market makers and dealers are on the other side. Truthfully, the dealers and the market makers can never lose. They are the house. For you to collect your bet, they have to win. They are the ones who have to keep taking the trades.
Any time you go to buy or sell a stock or trade an option, most of the time you are dealing with a market maker or a dealer. In the short term, they are the ones that make markets. There’s no way they can be run out of business if everyone takes one side.
It turns out there was a huge historic size bet set up to expire all on the same day: January 21, 2022. I believe this has sat as a massive overhang, particularly on our stocks because that’s where I believe the bets were. I have not been able to find specific evidence, but I believe once you get past the big names there were billions and billions of dollars bet on these stocks going to much higher prices.
What Happens When The Overhang Is Over?
Now, the overhang of this bet is over. It’s gone. It’s expired. People have taken large losses. If you look at that picture, there were also big bets on indices. I am just focusing on single-stock options. It was $1.3 trillion. A massive amount of value in notional value.
That overhang is now gone. That’s a big deal. Then I found this chart which talked about something called gamma, which is now at the lowest point since March 2020.
I have to be truthful and say I am not an expert on options. Ian is more of an expert than I am.
We will cover this chart in greater detail on the IanCast. The important thing to remember for this video is the dealers, with respect to this options position, are now positioned in line with us. In other words, from my understanding they are now effectively short puts.
After three or six months of our stocks going down, people have now positioned themselves to think that stocks are going to keep going down. Once again, the market makers are on the other side of that. They have taken these bets. It means it’s now in their interest to push stocks higher and make these put options lose value.
They are the ones on the hook for this. That could be a controversial argument for some people. Remember, this channel is opinion and not advice. These are our interpretations of the data and information we are seeing. Option prices are dictated by two things: the price of the stock and the option premium.
If we’re right and the expiration of all these call options — $1.3 trillion has lifted in overhang for the equity market because those options definitely affected the stock prices — and then we’ve got the dealers and market makers in options positioned where they would benefit from rising prices.
That’s catalyst number two that’s in our favor. I am willing to go on a limb and say I believe a lot of stock options are in our stocks. These are growth stocks, they are very volatile and they have seen the most downside. In all likelihood, most of the puts are in our kinds of stocks.
The Positioning Of Mutual Funds!
It’s in the nature of people to pile on at the end. That’s a definite feature of most markets. Another pointer in this direction is a chart that shows the positioning of mutual fund managers and long equity fund managers. Generally it’s a contrarian indicator.
It shows that many or maybe even most mutual fund managers have positioned themselves in banks, late cyclicals that usually mark the end of that type of trade and are a bad sign. Once again, if those folks are long it means the market makers and dealers have no interest in marking that up anymore.
They’re positioned in all the wrong places. One of the things Ian and I covered in our last two IanCasts was we showed you three stocks — Zoom, Teladoc and DocuSign — that our stocks despite the crash in their prices have continued to grow at significant levels — 20%, 25%, 30%.
This is after seeing massive surges in 2020 and 2021 where they grew by hundreds of percent. Zoom had consecutive quarters of 300% growth. One thing I believe is going to unfold as 2022 unfolds, is their growth is going to be something that is unusual and different.
The America 1.0 companies, the old world companies, are going to go back to slow growth or slow decline. Once again, high-growth companies like ours are going to be something that is different and you can’t find in the market. With that, I believe you will see people come in and start to bid prices higher.
The critical event around that is their earnings. People who have sold these companies thinking these companies are never going to grow again or are going to grow at such slow rates they don’t’ justify the premium, are going to see that even if they grow at modest rates at a price to sales ratio of 6, 8 or 10, they are cheaper than companies that are growing far slower.
Stock markets are usually driven by comparisons based on growth and comparisons based on quarters. As the fourth quarter earnings get announced, we are going to hear companies tell you what happened in the fourth quarter and, more importantly, project forward.
They’ll say, “We’re not really seeing any signs of a massive slowdown in our business. It’s still at a 15%, 20% level.” Then what portfolio managers will do is compare that relative to their various things they use to value their companies. For growth companies it’s always sales growth and price to sales.
I believe they are going to say, “Whoa, these companies are too cheap relative to their growth.” They are going to come to bid them up. As they come to bid them up, you will find other people will come to cover their shorts or build positions themselves. Now the momentum rolls in the other direction.
That’s another significant catalyst that is coming in our favor as well.
The Massive Build Up Of Inventory
The fourth thing is a little complicated. This video will go long because I need to explain it. I tweeted about this as well. There is a massive buildup of inventory that is mostly downstream.
By downstream I mean it’s closer to the ports rather than at the store level. However, even at those levels there is a lot of inventory that is sitting there and building. Earlier this month I tweeted about 100-plus ships clustered around the U.S. waiting to unload.
Those ships represent even more inventory. I follow something called the Logistics Managers’ Index. In their December report they said very unusually that inventories are continuing to build after December. That’s unusual because after the holidays most people would report lower inventory, having sold gifts and merchandise for the holidays.
It’s very unusual. Their report also pointed to the fact these inventories are starting to build even more and they are not counting the ships that are all clustered around the United States waiting to unload. We are setting up for a scenario where we are going to see more and more inventory get pushed into the system.
We will face pressure on transportation, warehousing and, more importantly, pressure on prices. When there is too much inventory, retailers are now going to be incented to cut prices. If you think about the central concern that has driven our stocks down if you believe the media, it’s the question of inflation and interest rates.
When I go and research it, the question of inflation is about a lack of inventory at many levels which is allowing retailers to lift prices. If you have a surplus of inventory, you would have the reverse happen. In other words, there would be plenty of inventory.
Not only that, companies have to carry inventory on their balance sheet and finance it. It’s a cost. If those prices are being cut, it’s a cost that has increasing impact. Now you have to report on your inventory and if the prices are being lowered, you have to take a charge on your income statement.
That’s tough because a lot of the companies that have over ordered are America 1.0 companies and old world companies because they are the ones that make goods. A lot of our companies are in the business of intellectual property. They are not in this game at all.
We have this scenario where the central concern around inflation and interest rates, we believe, can go in reverse. And dramatically in reverse because, as I’ve mentioned, inventories are already piled up and we have more coming in. There’s no sign of a letup.
It does seem like people have over ordered by a factor of three, four or five. We are going to see prices reverse. With that, the inflation fears will reverse. With that, the pressure on needing to lift interest rates to whatever it is people fear, is also going to reverse.
The markets will sniff that out and sense it well ahead of the Federal Reserve actually saying anything. People will start to report it with the fourth quarter earnings that are happening now. People say inventories are beginning to rise and they don’t foresee supply chain problems going out past March or April.
The markets will take that observation from one company and extrapolate it to all the other companies in the same business. They will quickly work out there is too much inventory in the system. That will reverberate through inflation and interest rates.
The bottom line to this video is that we’ve got a number of things setting up to reverse a difficult 2021 and thus far in 2022. One is a massive expiration of options, the second-largest in history. $1.3 trillion in single-stock options.
I believe the vast majority of those were calls because the setup prior to that was of rising markets where people were betting on even higher prices. They were wiped out. It’s a massive overhang on the market that is gone.
Positioning Of Option Dealers
The other one is the positioning of option dealers who are now in the same place they were in March 2020. I believe they are sitting on inventory of our stocks, options on our stocks, put options. They want the put options to go down in value and they want our stocks to go up.
The dealers and market makers are on our side. We have quarterly earnings coming up where I believe into a scenario where our stocks have gone down by 30%, 50%, 70%, they are cheap. They are still going to show growth in a period where many others are going to be showing slowing growth or a reversion of growth.
Then we have this macro thing going on where concerns about inflation and interest rates which is driven around a lack of supply related to pandemic shutdowns is about to reverse itself in dramatic fashion completely to the other side. It will then offset people’s concerns about inflation and interest rates.
The bottom line for all of this to us is that it drives demand for our stocks which are high growth, low multiple. In a growth constrained world, in a world with oversupply of goods, their growth rates are unique and different and are once again going to be valued at a premium.
In other words, people are going to come in and bid them higher and keep bidding them higher. This oversupply is not going to be cured anytime soon. I tweeted about four forces of deflation.
One is the over ordering I have gone through. Second, the pandemic is going to recede.
It’s not going to last forever. Every pandemic I have studied the biggest effects are in the first two years. It starts to recede after that. What’s going to happen after that? The world’s going to go back to production. We are going to produce even more stuff.
In the meantime, because of supply chain issues the United States and other countries are reshoring and putting production even closer to where the end demand is. Even more production is coming. Finally, if you look at our technologies and what we’re invested in, people are putting these in as they reshore and put up new manufacturing facilities.
They are way more productive. They are so much more efficient. They are so much cheaper. They are going to represent low-priced inventory that will be even more inventory that’s going to come in. More stuff is going to be made at cheaper prices. It has the effect of lowering prices, lowering inflation, causing outright deflation.
It will pressure interest rates. Once again, it makes our stocks scarce, unique and worth bidding up. They have the most scarce thing if you are looking out one, three, five years: growth and growth through innovation. I know it’s been a difficult 2022 following a difficult 2021.
However, I believe we now have significant catalysts to turn this around. Please, I know the trolls will come at me for saying it, but try to be strong hands. Try to stay bullish, optimistic, positive. Our time is coming. Follow me on Twitter so you can see all the tweets I put up.
Until next week, this is Paul saying bye.
Editor, Profits Unlimited