Earnings season brings endless headlines.
And with all those headlines, you get an endless array of talking heads hyper-ventilating about some number or another.
It’s hard to make sense what these numbers mean for the general market because they’re usually meaningless.
But Lyft (LYFT) and Uber’s (UBER) earnings releases this week were telling…
It confirmed the types of stocks that’ll survive the paradigm shift that’s been underway since January 5. Stocks like these will outperform over the long haul.
You see, January 5 was an important date.
Aside from marking the top of the market, that was the day that the market started to actively bet against the Fed.
That’s important because before that date, the Fed has been telegraphing three rate hikes this year – and the market was buying their narrative.
Which is why even though it was common knowledge that rates are heading up, the market was still making all-time highs.
But on January 5, the market started to price in even more rate hikes. With this, the market basically told the Fed, “Not only is inflation not transitory, but we think you’re clueless and so far behind the curve that we’re making the decision for you,” figuratively speaking of course.
Short-term rates exploded, and interest rate-sensitive stocks collapsed.
Of course, not all stocks cratered.
Stocks like Archer-Daniels-Midland (ADM), John Deere (DE), and FMC Corporation (FMC) have been making new highs.
But this doesn’t mean that all growth stocks should be ignored.
On the contrary…
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Investors should include the right type of growth in their portfolio and buy on every dip they can.
These aren’t just growth names with all of the hype and none of the substance.
They’re actually all about to swing towards profitability… and the recent re-shuffling in the market is presenting great long-term opportunities.
That’s because when markets adjust like they’re doing now, they take everything down with them… The good, the bad, and the ugly.
Take a look at the chart below….
It shows a basket of two types of stocks plotted against the Invesco QQQ Trust Series 1 (QQQ).
The blue line represents an equally weighted basket of 122 stocks that had negative earnings before interest, taxes, depreciation, and amortization (EBITDA) over the last 12 months but are projected to swing positive this year.
The red line is a basket of stocks whose projections continue to show operations in the red – or the hype that was and the hype that will continue to be.
And the blackline is QQQ – an exchange-traded fund (ETF) tracking the Nasdaq 100 and full of big-cap tech names.
Notice What’s Happening…
Coming out of the pandemic the hype basket outperformed everything.
But now that fundamentals matter again, the growth with substance basket is outpacing them all.
The hype basket is now in last place, and it’ll stay there.
For the stock market, it’s time to put up or shut up. The survival of the fittest is in action… meaning they earn, or they get left behind.
You see, at the end of the day earnings are the only thing that matters in the long run. Only the strongest stocks will be profitable when the hype runs out.
And this dispersion is set to pick up steam.
So, what kinds of companies are we talking about?
Lyft and Uber are good examples. As we mentioned before, Lyft is actually up on the year rising 3% in a down market.
Squarespace (SQSP) is another one that was once a hype name yet is now up 10% in a down market.
Since these companies spent years in the red, now all that growth and R&D development are set to translate into profits.
These stocks are currently at the bottom of the hype life cycle where investors can safely pick them up.
Investors shouldn’t ignore growth. They should just be more mindful to invest in growth with substance.
Regards,
Eric Shamilov
Analyst, Market Minute
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