- Zach Scheidt to Mr. Market: Five things I hate about you
- The “crazy” bull market rally fatigues
- The Labor Department’s un-funny Valentine
- The burr(s) in small-business owners’ saddle
- Crypto and “Operation Choke Point 2.0”
- Super Bowl commercials (adjusted for inflation)… “Geez, thanks, Dave, for reminding me”… Don’t give the bastards any ideas… And more!
On Valentine’s Day, Paradigm’s income-and-retirement authority Zach Scheidt declares a handful of stocks he loves… to hate. He calls them, in fact, “some of the most dangerous stocks in the market right now.”
And, he warns: “If you’ve got a position in one of these companies, you may want to consider letting it go before the stock moves lower and hands you a loss.
RIP Grumpy Cat
“Stocks of many worthless companies — or companies that won’t generate profits for years — are up 80% or more,” he adds. “You and I have seen this story before, and we know that it doesn’t end well.
“Eventually, stocks have to trade at a price based on the company’s assets and expected profits. Without tangible assets or legitimate profits, these stocks will soon roll lower.
“Lately, interest rates have been rising, which could turn out to be the catalyst for these speculative stocks once again entering a bear market.
“So consider today’s alert a warning of sorts.”
Zach goes on to list the “five stocks I expect to roll lower over the next few weeks.”
Roku Inc. (ROKU)
“The [video-streaming] platform is very popular with customers,” says Zach. “But ROKU is a money-losing enterprise that’s expected to continue losing money for years to come.
“If you add up the value of all ROKU’s shares, investors still value the company at $8.7 billion. Would you pay $8.7 billion to buy a company that’s losing money? I didn’t think so!
“The stock has been falling for months,” he notes, “but the stock benefited from a relief rally in January…
Source: Rich Retirement Letter
“I would use this rally as an opportunity to sell. It’s just not a quality stock that you want to own in a challenging environment like we have today.”
Shopify Inc. (SHOP)
“Shopify offers an e-commerce platform that helps small and midsize businesses capture payments,” says Zach.
“While this is a valuable service, the stock is simply way too expensive compared with the profits that SHOP generates.” Currently, just $0.08 per share…
“Shares of SHOP are trading for roughly 200 times expected profits two years from now,” Zach continues. “That means you’re paying $200 for every dollar the company might earn in a couple of years. That’s absurd!
“As you can see in the chart below, SHOP has moved sharply higher this year…
Source: Rich Retirement Letter
“But that just means there’s a much bigger risk for investors if SHOP turns back lower,” he says. “Please don’t be caught holding this stock when the bear market rally turns lower.”
Twilio Inc. (TWLO)
“Twilio has a cloud-based software platform that allows developers to create applications that use voice and video functionality,” Zach says.
“While that sounds very exciting, there are dozens of cloud technology companies like TWLO competing for customers and investors.” Plus, the company expects to earn just $0.13 per share this year.
“And as time goes on, expectations have been revised lower,” Zach says. “That’s a big red flag for me when I research a company.
“But that hasn’t kept investors from buying [TWLO]” — not when the company uses “buzzwords like ‘artificial intelligence,’ ‘open architecture’ or ‘integrated applications’…
Source: Rich Retirement Letter
“If you buy shares of TWLO today, you’re paying roughly 87 times expected profits for two years from now,” Zach says.
“It’s not a bet I want to take, and I worry that TWLO will hand investors some big losses again this year.”
Unity Software Inc. (U)
“Unity has created software that allows studios to create 3D content for gaming, virtual reality and other applications,” says Zach.
“You’d think Unity would be making a lot of money,” he says. “But the company will earn just $0.22 per share this year. As more information comes in, expectations have been revised lower.
“Sure, Unity may grow over time. But investors are paying roughly 61 times expected profits for 2024…
Source: Rich Retirement Letter
“It’s difficult to know what the company will earn two years from now,” Zach says. “But I would be very hesitant to own shares of this stock.”
Wayfair Inc. (W)
“Wayfair basically works as a middleman between retailers and a large customer base, selling around 33 million products to consumers in the U.S. and Europe.”
Nevertheless, “the company is not profitable and isn’t expected to generate a profit anytime in the foreseeable future,” Zach says. “”What good is a company” — with an “absurd” valuation of $7.2 billion — “if it can’t turn a profit?
“As the bear market rally runs out of time, I expect Wayfair to trade lower…
Source: Rich Retirement Letter
“This business [is] one that carries a lot of risk,” Zach cautions. “Don’t get caught holding shares when the rally fizzles.
“Now that we’re several weeks into this bear market rally, things are starting to get crazy,” Zach concludes.
“Since the beginning of January, many of the worst stocks in the market have trended higher. This is fairly common during a bear market rally.”
- Something else to contemplate? “If you’re a more aggressive trader, you may even want to consider buying put contracts on some of these names,” says Zach. “Put contracts rise in price when stocks trade lower. So buying puts can be an excellent way to capitalize on stocks expected to trade lower.
“Quality stocks have been biding their time while trash stocks have been rebounding,” he closes. “Don’t get distracted and put your retirement at risk.
“Focusing on the best companies that generate reliable profits and pay dividends will serve you very well in the long run.”
[If you think inflation is high now (more on that below), what happens next will floor you… And if you’re unprepared, you could see your retirement dwindle away in the months and years ahead.
Which is why Zach Scheidt recently released a complete, step-by-step plan to outlast inflation — a plan you can utilize even if you’re a complete beginner.
Because this economic crisis is going to get worse than most people grasp, it’s critical you take action now to protect yourself from America’s deadly inflation crisis.]
Is today the day the bear-market rally rolls over? Mr. Market opened his mailbox, hoping to find a Valentine from the Labor Department — but the box was empty.
The January inflation numbers came in — drumroll, please — hotter than expected. “Stubbornly high,” says CNBC. “Stubborn price pressures,” according to The New York Times.
The month-over-month increase was 0.5%. Year-over-year, it’s 6.4% — not the 6.2% that the typical Wall Street economist was expecting.
Yes, it’s down from a peak of 9.1% last June — but on a chart going back 30 years, it’s still ugly.
Worse, some traders are just now noticing that last week the Labor Department issued its annual revisions to the inflation numbers. Turns out prices did not tick down in December 2022, they actually ticked up. The November and October figures also ran hotter than previously thought.
So of course, Mr. Market is crestfallen — knowing the Federal Reserve is likely to keep raising interest rates higher for longer.
Traders in fed funds futures have begun pricing in three more quarter-point increases in the fed funds rate — the “hiking cycle” not ending until mid-June now.
With that, the Dow is down more than 1% and back below 34,000. The S&P 500 is down 1%, edging below the technically important 4,100 level. And the Nasdaq is down nearly 1% around 11,800.
Not much action in precious metals: Gold languishes at $1,851, silver at $21.72.
Crude is off more than a buck, back below $79. Yesterday’s brief bump over $80 can be chalked up to news that the Biden administration has resumed tapping into the Strategic Petroleum Reserve after a hiatus of only five weeks. (National average gasoline prices are up 32 cents a gallon since Christmastime, but that has nothing to do with this decision, nothing at all, no sirree.)
“While inflation is starting to ease for small businesses, owners remain cynical about future business conditions,” says Bill Dunkelberg, chief economist for the National Federation of Independent Business.
The NFIB is out with its monthly Small Business Optimism Index. At 90.3, the number has now spent 13 months mired below the long-term average going back nearly 50 years.
Asked to identify their “single most important problem,” 26% of survey respondents cited inflation. But “quality of labor” is close behind — cited by 24% — so good help is still hard to find. Nothing else comes close — taxes at 15% and wages at 10%.
“It was called ‘Operation Choke Point,’” says Paradigm’s crypto analyst Chris Campbell. “In 2013, there was a coordinated Obama-era effort by the DOJ, FDIC and OCC to marginalize industries they deemed unsavory.”
(For extra background, The 5 probed the feds’ “diabolical” operation in 2014.)
“In short, regulators threatened bank executives with arbitrary regulations — and even criminal prosecution — if they didn’t stop doing business with illegal online gambling companies,” says Chris.
“It worked. So they doubled down.”
Former U.S. Attorney General Eric Holder on Operation Choke Point: To “protect consumers from scam artists and collaborating institutions” — which is a little on the nose for the USG
“Regulators then extended this operation to go after gun and ammunition dealers, payday lenders and other legal businesses,” Chris notes.
“For example, the FDIC’s Atlanta Regional Office met with a bank chairman and suggested the chairman would face criminal prosecution if he didn’t cut all ties with a payday lender — despite the lender running a 100% legal business.
“Trump ended the program in August 2017,” says Chris, “but that didn’t change much. The damage was done. Banks are to this day still afraid, refusing to work with certain industries.” We see you, cannabusiness.
Why bring this up?
It seems that the federal government is now unleashing “Operation Choke Point 2.0,” as Chris calls it. Only this time, a litany of federal agencies is taking aim at… crypto.
According to pundit Nic Carter, he sees “a well-coordinated effort to marginalize the industry and cut off its connectivity to the banking system… all designed to stifle the crypto space and starve it of banking access.”
“This effort includes the Federal Reserve, Fed regional banks, the FDIC, the OCC, the DOJ other bank regulators and the White House
“Everything we need to know right now,” says Chris, “is in the Biden administration’s ‘Roadmap to Mitigate Cryptocurrencies’ Risks,’ published on Jan. 27.
“The policy statement says they don’t intend to ban banks from serving crypto clients,” Chris says, “but they’re discouraging them from transacting directly with crypto or maintaining exposure themselves for depositors.
“That’s not great news,” he says. “But it’s a lot better than many crypto pundits are making it sound. To be clear, we don’t actually think the U.S. is looking to kill crypto. There are plenty of reasons for governments to embrace crypto.
“Just as with AI, despite both technologies posing an existential threat to the current status quo,” Chris says, “disintermediation and automation are the defining trends of the digital age.”
And while there are “many paths to victory,” he adds, “crypto is here to stay.”
“Dave, love your work,” a reader writes. “Fifteen times adjusted inflation on Super Bowl commercials? Bet they are reaching 25x more people.”
Another reader chimes in on yesterday’s episode: “Geez, thanks Dave for reminding me of Super Bowl XLIX — the Patriots-Seahawks matchup in 2015 — that ranks No. 9 on the list with a 47.5 rating.
“This game gave Malcolm Butler name recognition, and as Richard Sherman had a tirade early this year: ‘RUN THE [DAMN] BALL!’
“I would still like to assume that was aimed at coach Pete Carroll, LOL! Thanks for that awful reminder for us ‘Twelves.’ Ouch!
“Still love The 5!”
And our final contributor today quips: “Interesting thoughts about load-shedding… Should we be calling them ‘green-outs’ instead of ‘brownouts’?”
As we’ve said from time to time here at The 5, don’t give ’em any ideas… Happy Valentine’s Day (if you’re into that sort of thing), and take care!
Best regards,
Emily Clancy
The 5 Min. Forecast
