Category: Opinion

Market Volatility and the Rise of Small-Cap Value Stocks

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Russell 2000 is down 2.8% for the day but remains up 9.55% year-to-date, while the NASDAQ-100 is down 4.3% for the day and 10% for the year.
– The Volatility Index (VIX) is at elevated levels, signaling increased investor uncertainty.
– While growth stocks face sell-offs, value stocks have shown relative resilience

The current market environment is one defined by stark contrasts. On one hand, major indices are faltering, led by a steep sell-off in technology stocks. The NASDAQ-100, once the pillar of market growth, is now in free fall, weighed down by declining FAANG stocks. Investors who previously viewed these stocks as untouchable are now reassessing their portfolios amid shifting economic conditions and concerns over stretched valuations.

At the same time, small-cap value stocks—often overlooked in favor of high-flying growth names—are quietly proving their resilience. While the iShares Morningstar Small-Cap Value ETF (ISCV) is down 3.7% year-to-date, this decline is minor compared to the broader indices. Historically, small-cap value stocks have shown their ability to outperform in recovery phases following market downturns, and many investors are beginning to recognize their potential.

What’s Driving the Shift Toward Value?

For years, growth stocks dominated, fueled by ultra-low interest rates and a market environment that rewarded future earnings potential over present fundamentals. That equation is shifting. With inflation concerns persisting and central banks maintaining a cautious approach to monetary policy, investors are prioritizing stability, profitability, and tangible value over speculative bets.

Warren Buffett’s move to trim his exposure to large-cap tech stocks speaks volumes about the changing investment landscape. Buffett, long known for his disciplined approach to investing, has historically favored companies with strong balance sheets, consistent earnings, and reasonable valuations. The fact that he is reducing positions in FAANG stocks suggests that even legendary investors see potential trouble ahead for high-growth names.

The Case for Small-Cap Value Stocks

Why should investors pay attention to small-cap value stocks right now? One key reason is valuation. While growth stocks have commanded high price-to-earnings (P/E) multiples, small-cap value stocks remain attractively priced, often trading at a discount relative to their historical averages. Additionally, many of these companies are less dependent on global economic conditions and trade policies, making them more insulated from external shocks.

Another factor is performance in post-recession recoveries. Historically, small-cap stocks tend to outperform large-cap stocks after periods of economic turmoil. When investor sentiment shifts and risk appetite returns, small-cap value stocks often experience significant upside, benefiting from their relatively lower valuations and higher growth potential.

Conclusion

The current market turbulence is forcing investors to rethink their strategies. While growth stocks, particularly in the tech sector, face continued headwinds, small-cap value stocks offer a compelling alternative for those seeking stability and potential upside. History suggests that in times of market uncertainty, companies with strong fundamentals and reasonable valuations often emerge as winners. While risks remain, the shift toward value is already underway—and small caps may be poised to shine in the months ahead.

Falling Treasury Yields, Inverted Yield Curves, and Market Weakness: Is a Recession Coming?

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The 10-year yield is falling, signaling potential economic concerns.
– Value stocks are holding up, but major indices are down, with only the Dow managing gains.
– The inverted yield curve historically precedes recessions, though recent history has offered mixed signals.
– While small caps have been under pressure, they could present attractive investment opportunities.

As treasury yields decline and the stock market falters, investors are left wondering: Is the U.S. heading into a recession? The market rally that defined much of last year has faded as interest rate cuts have come to a halt, leading to renewed concerns about economic contraction. Historically, the bond market has been a reliable predictor of recessions, and with the longest lasting inverted yield curve ending in late August 2024, suggests that investors should take notice.

The Yield Curve’s Recession Warning

One of the most closely watched economic indicators is the yield curve—the relationship between short-term and long-term interest rates on U.S. government bonds. Typically, longer-term bonds carry higher yields than short-term ones. However, when the yield curve inverts, meaning short-term bonds yield more than long-term ones, it has historically signaled an impending recession.

The record for the longest inverted yield curve was broken in August 2024 with 793 days. The previous record stood at 624 days set in 1979. This is significant because, throughout history, an inverted yield curve has been a highly accurate predictor of recessions. In nearly every case, when the yield curve inverts, a recession follows within 12-18 months. The exception was four years ago when the yield curve inverted three times, yet no recession materialized. The key question now is whether this time will follow historical norms or diverge as it did in the recent past.

Stock Market Implications

The stock market is showing signs of strain. While value stocks are holding up relatively well, major indices have struggled. The S&P 500 and Nasdaq have been in the red, with only the Dow managing to stay in positive territory. This weakness across equities suggests investors are reassessing risk and economic growth prospects.

A falling 10-year yield often signals that investors are seeking safety in government bonds, rather than taking on risk in equities. This shift in sentiment could reflect a broader concern about future economic growth and corporate earnings.

Why Small Caps Could Be a Smart Play

Small-cap stocks, often seen as more economically sensitive, have been particularly vulnerable in the current environment. Unlike large-cap stocks, which can better weather economic downturns due to stronger balance sheets and diversified revenue streams, small-cap companies tend to struggle when borrowing costs are high and consumer demand weakens. However, this very weakness can present opportunity.

Historically, small-cap stocks have tended to perform well coming out of economic slowdowns or recessions. When the Federal Reserve eventually pivots toward cutting interest rates again, small caps could benefit significantly from lower borrowing costs and increased economic activity. Additionally, small-cap stocks tend to be more attractively valued in uncertain times, making them a potential area of opportunity for investors willing to take a longer-term perspective.

Consumer Debt and Economic Strain

Another factor adding to recession fears is the state of U.S. consumer debt. Credit card balances have reached record highs, and with interest rates at their highest levels in decades, the burden on consumers is intensifying. High consumer debt combined with rising delinquencies could lead to reduced consumer spending, which is a major driver of the U.S. economy.

Are We Headed for a Recession?

While no indicator can predict the future with absolute certainty, the current economic signals are concerning. The longest inverted yield curve in the rearview mirror, declining treasury yields, stock market weakness, and record-high consumer debt all point to potential economic troubles ahead. If history is any guide, the U.S. could be facing a slowdown or even a recession in the coming months. However, for investors, this may also present opportunities—particularly in areas like small-cap stocks, which historically rebound strongly as economic conditions improve.

Investors should remain cautious but also look for potential value plays in the small-cap space, as these stocks may offer upside once the market begins to stabilize. As always, diversification and a long-term approach remain key to navigating uncertain times.

The Power of Patient Investing: Small Caps, Big Returns

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Patient small cap investors view market downturns as chances to acquire quality businesses at discounted prices.
– Thorough analysis of small cap companies can uncover exceptional businesses with strong fundamentals before they attract mainstream attention.
– The greatest advantage in small cap investing comes from maintaining conviction during periods of underperformance that drive away less patient investors.

In a market often dominated by mega-cap tech stocks and headline-grabbing trends, small cap investing remains a powerful avenue for those willing to embrace patience as their primary strategy. While these smaller companies may lack the immediate name recognition of their larger counterparts, they offer distinct advantages to investors who can weather short-term volatility in pursuit of long-term gains.

The Virtue of Patience in Small Cap Investing

The true edge in small cap investing isn’t found in rapid trading or timing market swings—it’s discovered through patient capital deployment and a steadfast focus on fundamentals. Small cap stocks, typically defined as companies with market capitalizations between $300 million and $2 billion, often experience greater price volatility than large caps. This volatility, rather than representing inherent risk, actually creates opportunities for patient investors.

When market sentiment shifts and institutional investors flee to perceived safety, small caps frequently bear the brunt of the selling pressure. This creates temporary dislocations between price and value that patient investors can explore. While others panic during downturns, disciplined small cap investors recognize these moments as rare opportunities to acquire ownership in quality businesses at discounted prices.

Filtering the Noise to Find Value

Today’s financial ecosystem bombards investors with constant commentary, predictions, and “expert” opinions. Patient small cap investors develop the crucial skill of filtering this noise to identify genuine value. They understand that short-term price movements often reflect temporary factors rather than fundamental business changes.

The ability to separate market noise from meaningful information allows these investors to maintain conviction in their small cap holdings through inevitable periods of underperformance. They recognize that small companies need time to execute their business plans, expand their market presence, and ultimately deliver value to shareholders.

The Power of Thorough Equity Research

In the small cap universe, thorough equity research becomes an invaluable competitive advantage. While large caps are constantly scrutinized by hundreds of analysts, dedicated research into smaller companies can uncover hidden gems before they appear on the institutional radar. Patient investors who commit to comprehensive due diligence often identify promising businesses with robust fundamentals that remain undervalued.

This research advantage becomes especially powerful when investors develop expertise in specific sectors or industries. By understanding the competitive landscape, technological trends, and regulatory environments that shape small cap businesses, patient investors can accurately assess both risks and growth catalysts that casual market participants might miss. This deep research foundation also provides the conviction necessary to hold positions through inevitable market fluctuations.

Embracing the Long View

The most successful small cap investors share a common trait: they evaluate investments through a multi-year lens rather than quarterly results. They understand that compound growth in small businesses can eventually translate into extraordinary investment returns. A company growing earnings at 15-20% annually will double its profits approximately every four years—a powerful driver of long-term stock performance that patient investors can capture.

The Psychological Challenge

Perhaps the greatest challenge in small cap investing isn’t analytical but psychological. It requires the fortitude to remain invested when markets turn negative, when positions move against you, and when the temptation to chase better-performing assets becomes strongest. Patient investors understand that their edge comes precisely from accepting short-term discomfort that others refuse to endure.

For those willing to cultivate patience, small cap investing continues to offer one of the most compelling risk-reward propositions in public markets. By focusing on long-term business value rather than short-term price fluctuations, investors can position themselves to achieve returns that make the occasional storms worth weathering.

Could These 5 Micro-Cap Sectors Be the Next Big Thing?

Posted on by slightbourne@noblecapitalmarkets.com

In the ever-evolving world of investing, savvy investors are constantly on the hunt for opportunities that offer the potential for outsized returns. While large-cap companies often dominate the spotlight, it’s the micro-cap universe that harbors some of the most exciting and undiscovered investment prospects. With market capitalizations typically ranging from $50 million to $300 million, these pint-sized powerhouses can pack a punch for those willing to navigate their inherent risks and volatility. In this article, we’ll explore the top micro-cap sectors that astute investors should have on their radar.

Technology
The technology sector has long been a breeding ground for micro-cap innovation, and the rise of artificial intelligence (AI) has added another compelling opportunity. From software-as-a-service (SaaS) companies revolutionizing business processes to cybersecurity firms safeguarding our digital lives, micro-caps in this space are at the forefront of disruption. As businesses embrace AI capabilities, micro-cap tech companies developing cutting-edge AI solutions could experience exponential growth, making them attractive targets for investors seeking outsized returns.

Healthcare and Biotech
The healthcare and biotech sectors are teeming with micro-cap companies pursuing groundbreaking treatments and medical devices. While the risks are undoubtedly high, with many drug candidates failing to reach commercialization, the potential rewards for successful micro-cap biotech firms can be staggering. From gene therapies to novel diagnostic tools, these micro-caps could revolutionize patient care and generate substantial returns for early investors.

Natural Resources
As the global demand for natural resources continues to surge, micro-cap companies in the mining, oil and gas, and agriculture sectors could present lucrative opportunities. Micro-cap mining firms with promising mineral deposits or innovative extraction technologies may capture significant value as commodity prices fluctuate. Similarly, micro-cap oil and gas companies leveraging cutting-edge drilling or fracking techniques could capitalize on energy market dynamics.

Manufacturing and Industrials
The manufacturing and industrials sectors are ripe with micro-cap companies offering innovative solutions to enhance productivity, automate processes, and streamline operations. From advanced robotics and automation technologies to cutting-edge materials and components, these micro-caps could experience significant growth as manufacturers seek to gain a competitive edge.

Consumer and Retail: Riding the Wave of Disruption
The consumer and retail sectors are breeding grounds for micro-cap disruptors challenging established brands and business models. From emerging consumer brands tapping into niche markets to e-commerce and subscription-based retailers reshaping the shopping experience, these micro-caps have the potential to capture significant market share and generate substantial returns.

Navigating the micro-cap universe requires a keen eye for potential, a appetite for risk, and unwavering patience. However, for investors willing to put in the effort and embrace a long-term mindset, the rewards can be substantial. By maintaining a diversified portfolio across these promising micro-cap sectors, conducting thorough due diligence, and staying attuned to emerging trends and catalysts, savvy investors can unearth hidden gems before they capture the spotlight. While the journey may be full of twists and turns, the ability to identify and capitalize on the next big thing can separate the micro-cap maestros from the masses. Embrace the thrill of the hunt, and let your passion for discovering untapped potential be your guide through the exciting realm of micro-cap investing.

New Highs Across Markets Signal Bull Run For Investors

Posted on by slightbourne@noblecapitalmarkets.com

The stock market is heating up and signaling the return of the bulls, as evidenced by fresh all-time highs in the S&P 500 and a rally across risk assets like Bitcoin and gold. Fueled by booming innovation in artificial intelligence, speculative capital is flowing back into equities in a big way. For investors, it may be time to go hunting for the next big investments.

The S&P 500 broke out to new records this week, finally surpassing the previous highs set back in January 2022 before last year’s punishing bear market. The large-cap index closed at 5233 on Thursday, up over 28% year-to-date. This demonstrates that the decade-plus bull run that began after the 2008 financial crisis may have refreshed legs under it.

The strength comes as AI mania has gripped Wall Street and Main Street. The smash success of OpenAI’s ChatGPT triggered a cascade of investors plowing capital into AI startups and tech giants racing to deploy advanced language models and machine learning systems. Cathie Wood’s Ark Invest funds, which load up on disruptive innovation plays, have surged over 30% in 2023.

Even the traditionally cautious money managers are piling in. Just this week, e-commerce juggernaut Amazon announced a staggering $4 billion investment into AI research firm Anthropic. It shows the FANG giants remain at the vanguard of cutting-edge tech adoption and are more than willing to spend big to stay ahead of the curve.

The AI buzz has spurred a speculative frenzy not seen since the meme stock and SPAC manias of 2021. The heavy inflows, plus robust economic data, have pushed U.S. stock indexes to their most overbought levels since the rally out of the pandemic lows. Technical indicators suggest more volatility and pullbacks could be in store, but the trend remains firmly bullish for now.

The buying spree has spilled over into other risk assets like cryptocurrencies and gold. Bitcoin soared above $70,000 recently to its highest levels ever. The original crypto has rallied over 70% in 2023 as institutions warm back up to the space and the AI buzz rekindles visions of decentralized Web3 applications and business models.

Not to be outdone, gold has surpassed $2,200 per ounce and is trading at levels far greater than what was seen in 2020 during the pandemic turmoil. Bullion is benefiting from growing concerns over persistent inflation and fears the Federal Reserve could push the economy into recession as it keeps raising interest rates aggressively. The yellow metal is increasingly seen as a haven in times of economic and banking system stress.

Combined, the advancing prices and frothy trading action point to the return of the animal spirits last seen at the height of the Robinhood/Reddit meme stock craze from two years ago. Caution is certainly warranted, as downside risk remains with growing chances of an economic hard landing from the Fed’s inflation fight.

But the market often climbs a wall of worry, and the blowout action indicates speculators are back in full force. For investors able to navigate the volatility, this may be an ideal time to put capital to work and research the next big opportunities to ride the bull’s coattails.

As ARK’s Cathie Wood stated, “Given the breakthroughs in AI broadly, we believe we are living in the most profound period of commercial invention ever.” Profound invention tends to create extreme investment returns for those with the foresight to invest early in transformative technologies.

For investors searching for the potential 100-baggers of tomorrow across sectors like AI, quantum computing, biotech, fintech, and cybersecurity, buying dips and dollar-cost averaging into high-conviction positions could pay massive dividends down the road. The market mania may only be just beginning.

What Investors Can Learn From the Super Bowl

Posted on by slightbourne@noblecapitalmarkets.com

This Sunday, over 100 million viewers will tune in to the Super Bowl, the biggest single sporting event of the year. The Super Bowl is about more than just football – it’s a cultural phenomenon that offers some interesting parallels to the world of investing. Here are a few key lessons investors can take away from the gridiron action.

Do Your Research

Top NFL teams like the Chiefs and 49ers do endless hours of film study, analyzing their opponents’ strengths and weaknesses. Similarly, successful investors research companies thoroughly before buying shares. They dig into financial statements, study industry trends and competitive dynamics, and evaluate leadership. Just as teams dissect game tape, investors need to do their homework before putting money on the line.

Stick to Your Game Plan

NFL teams map out detailed game plans listing the plays and strategies they will employ against a given opponent. But when things go awry during a game, emotions can take over and teams may abandon their plan. Investors face the same challenge. When market volatility spikes, it’s easy to panic and stray from your investment strategy. But patience and trusting your game plan, like asset allocation and time horizons, tends to pay off in the long run.

Remember Past Performance Doesn’t Guarantee Future Success

The 49ers and Chiefs have been among the hottest teams this season. But past performance doesn’t guarantee victory in the Super Bowl. Likewise, investors should be wary of stocks that have recently soared. Valuations may already price in expected growth. And markets humbles previous high flyers all the time. Picking stocks based on long-term fundamentals rather than short-term momentum is the better bet.

Expect the Unexpected

From major injuries to fluke plays, the Super Bowl often hinges on unpredictable events. Investing also involves constant surprises that can disrupt even the most ironclad strategies. Political turmoil, natural disasters, new technologies – the market is always full of unknown unknowns. Having flexibility to adapt to unforeseen events helps minimize damage and take advantage of mispriced assets when volatility strikes.

Patience Is a Virtue

Building a championship roster takes years. Teams must strategically draft prospects, develop their skills, and assemble complementary pieces patiently over time. Becoming a successful investor also requires long-term commitment. There are few get-rich quick schemes that work. Compounding modest gains over decades through steady contributions is the surest path to building wealth. Keep your eyes on the long-term prize.

Minimize Costs and Taxes

NFL teams structure contracts and manage salary caps astutely to get the most bang for their buck. As an investor, costs and taxes also directly impact your net returns. Minimizing investment fees, trading commissions, and avoiding short-term capital gains taxes helps grow your portfolio. Every basis point counts.

Diversify Your Holdings

Smart NFL general managers build depth at every position. If injuries arise, the next player up can step in seamlessly. Similarly, investors should diversify across asset classes, sectors, geographies, and risk levels. If certain segments of the market decline, gains in other areas can offset the losses. Spreading your investments helps smooth out volatility.

Stay Disciplined and Stick to Your Strategy

The bright lights of the Super Bowl can cause teams to get away from their identity. The same thing happens to investors during periods of market turmoil. It’s crucial to stay disciplined, avoid emotional decisions, and stick to your long-term strategy even as others lose their nerve. Composure under pressure leads to victory.

Just as fans love dissecting every nuance of the big game, studying the market from all angles is key for investment success. Enjoy the Super Bowl, but also reflect on the winning lessons it provides for building wealth. Your portfolio will thank you.

NobleCon19 Economic Perspectives – 2024: Boom or Bust?

Posted on by slightbourne@noblecapitalmarkets.com


The Economic Perspectives Panel’s discussions at the recent NobleCon19 emerging growth conference not only provided valuable insights into various sectors and the broader economic landscape but also served as a comprehensive analysis that captivated the audience’s attention. The panel, featuring a diverse range of experts from industry leaders to economists, offered nuanced perspectives on the challenges that have characterized markets since 2021 and identified potential opportunities, notably emphasizing the potential for undervalued small-cap investments.

The conference kicked off with an Economic Outlook Panel, expertly moderated by Michael Williams, a seasoned News Anchor at WPTV/NBC in West Palm Beach. Williams adeptly steered the discussions through key topics, leveraging the wealth of knowledge from panelists such as Lisa Knutson, COO of E.W. Scripps; Cary Marshall, CFO of Alliance Resource Partners; Jose Torres, Senior Economist at Interactive Brokers; Shanoop Kothari, Co-CEO of LuxUrban Hotels; and Dan Thelen, Managing Director of Small/Mid Caps at Ancora.

A prevailing sentiment among the panelists was the intriguing possibility of 2024 mirroring the economic resurgence experienced in 1990, a year that followed a challenging period. Notably, the consensus was that small-cap investments tend to outperform larger companies during economic recoveries due to their inherent agility and greater potential for growth. The panel expressed cautious optimism, suggesting that the Russell 2000 index might pleasantly surprise investors in the upcoming year.

The discussion also spotlighted sectors of particular interest, with media and advertising taking center stage. The anticipation of heavy political ad spending, estimated at an impressive $10-12 billion leading up to the 2024 election, captured the attention of the panel. Additionally, the oil and gas markets were under scrutiny, with a notable supply response identified as a contributing factor in curbing recent inflation concerns. Projections indicated a forecasted addition of 2.2 million extra barrels per day in the US in 2023, with prices already having experienced a 17% drop from their earlier peak in the year.

Delving into broader economic discussions, the panel highlighted the resilience observed in 2023 to date, supported by a robust labor market and excess pandemic savings fueling consumption. However, the panel cautioned against undue optimism, pointing to expectations of a potential slowdown in 2024, particularly as the Federal Reserve eases interest rates and government spending recedes. The acceptance of a 3-3.5% baseline inflation in the long term was posited as a necessary acknowledgment, notwithstanding the official 2% target.

While acknowledging potential risks in the commercial real estate sector, the panel expressed confidence that forward-thinking companies were actively engaged in cost-cutting measures and prudent inventory management. The overarching expectation was that stock returns would follow a trajectory reminiscent of the positive trends witnessed in 1990, thereby making small-cap investments an attractive prospect for investors keen on capitalizing on emerging opportunities.

Addressing the transformative impact of artificial intelligence (AI) on various facets of business and society, the panel collectively agreed that AI is not just a passing trend but a transformative force that is here to stay. Cary Marshall went as far as declaring, “AI is the electrification of this country.” While recognizing the potential for AI to reduce labor costs, the panelists cautioned that widespread adoption might take longer than initially anticipated. Jose Torres added a nuanced perspective, suggesting that AI could lead to shorter workdays but expressed concerns about the potential erosion of interpersonal skills critical for persuasion and influence.

In conclusion, the panel emphasized the indispensable need for mental toughness, emotion management, and discipline in navigating the inevitable cycles of the markets. Despite the multifaceted challenges, the prevailing sentiment was one of guarded optimism for the road ahead. As markets continue to evolve and present new dynamics, these key takeaways from the Economic Perspectives Panel offer invaluable insights for investors seeking to navigate the intricate landscape of emerging growth and economic recovery, providing a robust foundation for strategic decision-making in the ever-changing financial environment.

What is Equity Research? Tips for Making Informed Investment Decisions

Posted on by slightbourne@noblecapitalmarkets.com

No matter if you are just starting your investing journey or a seasoned professional, making a sound investment decision is always complex. However, one crucial aspect that can separate successful investors from the rest is equity research.

But, what exactly is equity research, and why is it so vital in the world of investing?

Today, we are going to dive deep into this topic to help you understand how equity research can be leveraged to make more informed investment decisions. By shedding light on this intricate process and providing valuable insights from free equity research reports, you can arm yourself with actionable tips and tools to become a smarter investor.

Understanding Equity Research

Equity research is the detailed analysis and evaluation of companies and their equity securities like common and preferred stocks. The core goal is to develop an informed, unbiased opinion on the financial valuation and future prospects of a public company along with its shares. Equity researchers, often referred to as equity analysts, conduct rigorous financial modeling, ratio analysis and due diligence research to provide actionable investment recommendations and targets.

These comprehensive equity research reports become invaluable resources that help all classes of investors make prudent decisions on which stocks to buy, hold or sell. The reports provide a holistic perspective of a company’s financial health, operations, industry dynamics, and management team. By reviewing equity research reports, investors can better assess the inherent risks and growth opportunities of a potential investment.

For example, research reports incorporate detailed financial projections, valuation models, and investment theses that indicate whether a stock may be undervalued or overpriced. Having access to high-quality equity research from Wall Street analysts can provide individual investors with a distinct edge when selecting stocks to build their portfolios.

What are the different types of equities?

Common Stock – This represents ownership in a company. Common stockholders typically get voting rights and a claim on dividends and corporate earnings after other stakeholders are paid.

Preferred Stock – This represents partial ownership in a company. Preferred shareholders have priority over common stockholders when it comes to claims on assets and earnings. They typically receive regular dividend payments before common shareholders. However, preferred stock usually does not come with voting rights.

Blue Chip Stocks – These are stocks of large, reputable companies with a long history of sound financials and steady dividends. Blue chip stocks are generally considered lower risk. Examples include companies like Johnson & Johnson, Procter & Gamble, and Coca-Cola.

Growth Stocks – These are stocks of companies expected to grow at an above-average rate compared to the broader market. Typical growth stocks trade at higher valuations and reinvest profits into expansion rather than pay dividends. Examples include tech companies like Alphabet, Facebook, and Netflix.

Income Stocks – These stocks regularly pay out higher than average dividends to shareholders. They are ideal for investors seeking regular income. Traditional income stocks include utilities, real estate stocks, and consumer staples companies.

Penny Stocks – These are inexpensive stocks that trade for under $5 per share. Penny stocks are generally more volatile and risky since they belong to smaller companies.

Now you may be wondering, who actually conducts all this intensive equity research that gets distilled into reports? Equity research is primarily conducted by financial analysts employed by investment banks, wealth management firms, hedge funds, pension funds, and other institutional investors. These analysts possess deep financial acumen and industry expertise that allows them to build complex financial models and derive reliable stock valuations for public companies.

Top firms like Goldman Sachs, Morgan Stanley and Noble Capital Markets have entire teams of equity analysts covering different sectors, industries, and regions. The lead analyst generally focuses on and specializes in a specific industry they have experience in. For instance, some analysts may focus on just healthcare stocks or technology companies. These specialists leverage their knowledge to provide invaluable insights and analysis.

Why is Equity Research Essential?

Now that we’ve covered the basics of what equity research encompasses, let’s discuss why it is such an indispensable tool for investors:

Identifying Promising Investment Opportunities 

One of the biggest benefits of equity research is it can uncover promising investment opportunities that may be flying under the radar. The due diligence conducted by analysts digs much deeper into a company’s fundamentals to determine if its stock is potentially undervalued relative to its growth prospects. This allows analysts to identify stocks poised for upside that the broader market may be mispricing.

Assessing Downside Risks

While finding hidden gems is great, equity research also evaluates potential downside risks and red flags that may not be apparent to an average investor. This cautionary perspective helps mitigate losses from investments that seem enticing but have underlying issues.

Making Informed Investment Decisions 

Equity research provides a holistic 360-degree perspective of a company that individual investors typically lack. Investors can leverage these comprehensive insights to prudently decide where to deploy their capital and build conviction around investment choices.

Gaining Expert Industry Knowledge

Seasoned equity analysts also provide key insights into industry trends, competitive dynamics, economic cycles and sector outlooks that most retail investors do not possess. Their expertise helps investors make bets in promising high-growth industries primed for secular tailwinds.

Considering these myriad benefits, equity research can aid all types of investors ranging from novice individuals to large institutions. Even professional fund managers at marquee hedge funds and investment banks routinely utilize equity research to inform multi-million dollar investment decisions. Leveraging expert third-party research analysis levels the playing field.

The Equity Research Process

Now that we’ve covered why equity research is so invaluable, let’s explore how analysts actually conduct this complex and meticulous process:

Step 1 – Data Gathering & Financial Analysis

The first step of equity research involves gathering all available data and information on the target company. Analysts will thoroughly study annual reports, SEC filings, earnings calls, conference presentations, industry publications, news articles, economic data, and management commentary to ensure nothing is overlooked.

Next, they dive into analyzing the company’s financial statements and operating metrics using various techniques:

– Building detailed financial models based on historical financials

– Projecting future income statements, balance sheets, and cash flows

– Calculating financial ratios like P/E, EV/EBITDA, PEG, current and quick ratios

– Benchmarking metrics and multiples against peers through comparable company analysis

This rigorous financial analysis focuses on developing an objective understanding of the company’s financial health and performance.

Step 2 – Industry and Competitive Analysis 

Analysts will also conduct in-depth research on the company’s industry, end-markets, competitive landscape and business model. This includes identifying market size, growth trends, industry drivers, pricing dynamics, competitive threats, opportunities, and regulatory issues.

They’ll assess the company’s positioning and advantages versus rivals. The goal is to develop specialized industry expertise and perspective.

Step 3 – Technical Analysis

Equity researchers will analyze the stock’s price patterns, trends, volatility, trading volume and momentum indicators over time to identify optimal entry and exit points. This technical analysis complements the fundamental financial analysis.

Step 4 – Valuation Analysis

Armed with the financial data and industry insights, analysts derive price targets and fair valuation ranges for the stock. Common valuation methodologies include:

– Discounted cash flow (DCF) analysis

– Applying P/E multiples based on industry averages

– Leveraging valuation multiples from past M&A transactions

Each methodology makes certain assumptions that are tested through sensitivity analysis. The end valuations consider both quantitative data and qualitative assessments.

Step 5 – Final Recommendation

Finally, the analyst sums up their buy/sell recommendation and 12-month price target in an equity research report. This final call is based on the upside potential versus downside risks assessed through their rigorous analysis. Top analysts revisit and update their models regularly as new data becomes available.

Tools and Resources for Equity Research

For those looking to leverage equity research, many free resources are available:

Access Free Equity Research Reports

Channelchek is a resource that provide clients with free equity research reports on companies and stocks they cover. New  and seasoned investors should take full advantage of these free resources.  When reviewing equity research, look for reports that exhibit quality and objectivity. Some hallmarks to seek out: impartial analysis not motivated by investment banking relationships, the right balance of quantitative and qualitative insights, data/assumptions from credible sources, and serious financial modeling.

Additonally, resources like Capital IQ allow you to practice modeling, while reading analyst reports from top firms can provide templates to learn from. Investor education sites like Investopedia also have introductory content to develop core competencies.

Register with an account with Channelchek today to get free access to our Equity Research Reports.

Equity research is the fuel that powers informed investing. By properly leveraging analyst insights, both novice and seasoned investors alike can make smarter stock picking decisions. As you embark on your investing journey, be sure to educate yourself on the equity research process and analysis techniques. With quality research in hand, you can invest with conviction and confidence. Check out our free equity research reports to accelerate your investing education today!

Small Cap, Big Potential: Capitalizing on The Widening Valuation Gap

Posted on by slightbourne@noblecapitalmarkets.com

As we progress through earnings season, a concerning trend is becoming more apparent – the widening valuation gap between small and large cap companies. Across sectors like biotech, construction, media and more, large cap stocks are trading at significantly higher valuation multiples compared to their small and mid cap peers. For long-term investors, this divergence could signal an opportunity to start positioning in overlooked parts of the market.

Valuation refers to the process of determining the current worth of an asset or company. The most common valuation metric used by investors is the price-to-earnings (P/E) ratio. This compares a company’s current stock price to its earnings per share, giving a sense of how much investors are willing to pay for each dollar of earnings.

Typically, investors are willing to pay higher multiples for larger companies perceived as higher quality investments. However, the gap in P/E ratios between large caps and small caps has expanded dramatically over the past year. The sizable disparity between the two classes is the largest it has been in over 20 years.  

For example, Pfizer trades around 13x forward earnings expectations. But the average forward P/E for biotech stocks with market caps under $500 million is only 5x. This means investors are valuing each dollar of Pfizer’s earnings twice as highly as the average small cap biotech peer. 

We see similar trends in other sectors. In construction & engineering, Jacobs Engineering trades at 25x forward earnings versus under 10x for small cap marine construction firms like Orion Group Holdings and Great Lakes Dredge & Dock. Media giants like Disney (14x) and Fox Corp (11x) also command far higher valuations than small cap peers like Direct Digital Media (DRCT), Entravision (EVC), or Townsquare Media (TSQ). 

What explains this growing divergence in how the market is pricing future earnings potential?

For one, large cap companies often have broader business diversification that allows them to navigate volatile economic conditions. Pfizer’s COVID vaccine gave revenues a shot in the arm during the pandemic. Meanwhile, smaller biotechs with narrower clinical pipelines carry more binary risk around drug development outcomes.

Bigger balance sheets also provide an advantage. Large caps can leverage financial strength to pursue acquisitions, ramp up buybacks and maintain dividends during downturns. With higher cash reserves and access to capital, they are better equipped to weather tightening financial conditions.

Many large caps also benefit from durable competitive advantages like strong branding, pricing power, high barriers to entry and economies of scale. This allows them to consistently deliver high returns on invested capital and cash flows sought by investors.

Smaller companies tend to deliver more volatile financial results. They lack established competitive positions and have less excess cash. Weaker balance sheets increase vulnerability to supply chain disruptions, rising input costs and tight financing conditions.

While these factors help explain higher valuations for large caps, the magnitude of the gap suggests investors may be overlooking the long-term potential of small and micro cap stocks.

Though more volatile, smaller companies offer greater growth potential. They can deliver exponential returns if new innovations gain traction or they carve out niche industry positions. With valuations already compressed, their risk/reward profiles appear skewed to the upside.

Noble Capital Markets’ Director of Research, Michael Kupinski states in his Q3 2023 Media Sector Review, “We believe that there is higher risk in the small cap stocks, especially given that some companies may not be cash flow positive, have capital needs, or have limited share float.  But investors seem to have thrown the baby out with the bathwater. While those small cap stocks are on the more speculative end of the scale, many small cap stocks are growing revenues and cash flow, have capable balance sheets, and/or are cash flow positive.  For attractive emerging growth companies, the trading activity will resolve itself over time.  Some market strategists suggest that small cap stocks trade at the most undervalued in the market, as much as a 30% to 40% discount to fair value.” 

Astute investors know that future unicorns often hide among today’s small and micro caps. Many current large cap leaders like Apple, Amazon and Tesla began as small companies trading at single digit earnings multiples. Yet these stocks generated huge returns for early investors.

Just because a company is small does not necessarily mean it is distressed. Many smaller firms boast solid fundamentals and growth drivers that are simply not apparent to short-term traders. Their lower valuations present a compelling entry point for long-term investors.

While large caps will remain a core portfolio holding for many, today’s environment presents a unique opportunity. The extreme valuation divergence has created asymmetric upside potential in overlooked small cap names. As legendary investor Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.”

Digging Deeper into Valuation Metrics

When assessing valuation gaps between small and large caps, it helps to look beyond simple price-to-earnings ratios. Other useful metrics can provide additional context on relative value.

For example, the price-to-sales (P/S) ratio compares a company’s market capitalization to total revenue. High growth companies with minimal earnings often trade at elevated P/S multiples. However, small caps today trade at an average P/S ratio of just 0.7x versus 2.3x for large caps. Again, a sizable gap that favors small companies.

Enterprise value to EBITDA (EV/EBITDA) is another meaningful valuation yardstick. By incorporating debt levels and focusing on cash profits, EV/EBITDA provides a more holistic view of a company’s valuation. Currently, small caps trade at an average forward EV/EBITDA of 6x – roughly half that of large cap peers.

Across an array of valuation metrics, small and mid caps trade at substantial discounts relative to large caps. This suggests underlying fundamentals and growth prospects may not be fully reflected in their beaten-down share prices.

Small Cap Opportunities Across Industries

While small caps appear broadly undervalued, some industries stand out as particularly compelling hunting grounds.

For example, junior mining stocks have been ravaged during the recent crypto/tech selloff. But with inflation soaring and geopolitical tensions rising, demand for precious metals should strengthen. Many miners are generating robust cash flows at today’s elevated commodity prices. Yet their shares trade at deep discounts to book value.

Biotech is another area laden with small cap opportunities. Developing novel drugs carries substantial risk, so setbacks in clinical trials can decimate share prices. However, the sector remains ripe for M&A. Larger pharmas need to replenish pipelines, providing takeout potential. Investors can balance risks via diversification across promising development stage companies.

Oil and gas producers offer further value among small energy firms. Strong demand and restricted supply has sent oil prices surging. Many smaller E&Ps focused on prolific shale basins sport attractive cash flows and reserves value. Yet their shares lag larger counterparts, despite superior growth outlooks.

The bottom line is that while risks are higher with small caps, their depressed valuations provide a margin of safety. Reward far exceeds risk for selective investors focused on fundamentals.

Mitigating Volatility

Small caps carry well-known risks, including elevated volatility. Information flow and analyst coverage is more sparse for smaller companies. Major drawdowns can rattle investor nerves and sink long-term performance if not adequately prepared for. Resources like Channelchek is a great tool to help provide data to investors in the small cap space. 

Based on your age, time horizon, and risk tolerance, here are some tips to mitigate volatility while still capturing small cap upside:

  • Maintain reasonable portfolio allocation – small and microcaps should represent a smaller portion of your equity holdings
  • Diversify across sectors, industries and market caps to smooth volatility
  • Maintain a long-term mindset – don’t panic sell on temporary declines

With prudent risk controls, small caps can boost portfolio returns while diversifying away from large cap shares. Their more attractive valuations provide a compelling opportunity during these volatile times.

“In the equity markets history tends to repeat itself. At some point the smart money will start allocating more portfolio weight into these undervalued equities, which will narrow this historic valuation gap, offering potential for above average returns for small and microcaps,” said Nico Pronk, CEO of Noble Capital Markets.

Trick or Treat: Is Recent Uptick in Small Cap Biotech M&A Activity the Catalyst for an Industry Turnaround?  

Posted on by slightbourne@noblecapitalmarkets.com

With the recent rise in mergers and acquisitions in the biotech sector, some analysts believe that now is an opportune time for investors to start positioning themselves in small and microcap biotech stocks. Though these smaller companies have been out of favor with investors in the post-pandemic environment, the current conditions suggest their fortunes may soon change.

The biotech sector saw a surge of interest during the pandemic, as companies raced to develop vaccines, treatments and diagnostics for COVID-19. Many smaller biotechs saw their values skyrocket on the hope that they would come up with a breakthrough. However, once the initial rush of COVID-related products came to market, investors began rotating out of pandemic darlings and into recovery plays. This led to a dramatic decline in the valuations of micro and small cap biotechs.

Despite this negative sentiment, mergers and acquisitions in biotech have been increasing over the past year. Pharma giants have been scooping up smaller firms to replenish their drug pipelines. While the big deals have gotten all the headlines, analysts say more deal-making is starting to occur further down the market cap scale. This suggests that the fundamentals of select smaller biotechs remain strong, though valuations do not yet reflect it.

Take Eledon Pharmaceuticals (ELDN) for example. This clinical stage biotech has a market cap of only $35 million, which is about half its cash on their 6/30/23 balance sheet . Though its lead drug candidate is in Phase 2 trials for several indications, the company’s stock price has languished. However, with ample cash to support ongoing trials and an approved IND for another preclinical asset, Eledon seems significantly undervalued based on peers.

In fact, many small biotechs appear mispriced today based on the potential of their underlying technology and pipelines. These companies are developing innovative new platforms and drug candidates across therapeutic areas like oncology, rare diseases, neurology, and ophthalmology. While risks are high during the R&D process, achieving clinical milestones and a path to successful commercialization could drive exponential growth.

Consider the market opportunity for breakthrough platforms like CRISPR gene editing or cell therapy. Many smaller firms are advancing novel applications of these cutting-edge technologies. If proven successful in clinical studies, even niche indications could generate billions in peak annual sales.

Additionally, smaller firms tend to be more targeted in their R&D approach. Rather than spreading efforts across numerous indications, microcaps often concentrate on 1-2 assets with large treatment populations. This focused strategy allows them to achieve key milestones more economically. Partnerships with larger biopharma companies can also help offset expenses in later stage development.

The current biotech environment shares some similarities with pandemic euphoria. Today’s misery and fear echoes the extreme euphoria felt by investors three years ago. Just as sentiment eventually turned negative on pandemic darlings, the same could occur for today’s recovery favorites. Already, tech giants like Meta, Nvidia and Tesla have fallen substantially from their highs, suggesting a potential peak.

While rotating out of pandemic favorites made sense as reopening plays gained momentum, the economic backdrop is cloudier now. High inflation, rising rates, geopolitical tensions and recession fears have driven significant equity declines and increased market volatility this year. This has led some investors to question whether stocks still offer favorable risk-reward profiles.

With bonds and equity markets declining in tandem, some investors have turned to cash equivalents like money market funds. While these instruments can provide principal protection, their yields could still lag inflation, given its uncertain outlook. Accounting for taxes owed on interest earned further reduces the chances of a real return. Therefore, holding too much cash during periods of high inflation could erode purchasing power over time.

Rather than accept guaranteed, but potential negative real returns in cash, investors may want to revisit beaten-down assets with asymmetric upside, like small cap biotech stocks. Some of these companies offer innovative technologies that could drive explosive growth if their development and commercialization efforts prove successful, and investor sentiment in this sector turns around.

To identify promising opportunities in the space, investors need to educate themselves on individual companies, study various ideas and leverage resources like Channelchek. While risks for small biotech stocks are always high, those able to discern winners from losers can potentially generate substantial outsized gains.

After years of hype around pandemic favorites, optimism needs to be rekindled for forgotten pockets of the market like micro and small cap biotech stocks. For investors with the appropriate time horizon and risk tolerance, now could be the ideal time to start building positions. If M&A activity continues apace, it likely will not be long before positive fundamentals translate into rising valuations.

Hurricane Damage at the Individual Stock and Industry Level

Posted on by phoffman@channelchek.com
Image Credit: Darryl Kenyon (Flickr)

Avoiding a Hurricane May Mean Adjusting Your Portfolio

Like most people that live in Florida, I usually first learn of approaching hurricanes from concerned family members up North. My reaction is probably different than others. My first thoughts on rare news events is to ask myself, “is this bullish or bearish?” When it comes to hurricanes, there is an answer – like most events that impact stocks, the answer is, “it depends.” Getting out of the way of a hurricane could also mean a slight adjustment to holdings.

I will mention that the toll on life and property of natural disasters, or any travesty, is not lost on me. But as investors, we must control the risks that we can and look for the rainbow in situations we have no control over.

Economic Damage

Dubravko Lakos-Bujas, JP Morgan’s head of U.S. equity and quantitative strategy, shared insights on the economic impact of hurricanes a couple of years before hurricane Ian struck Naples Florida. But the value of the information has not changed. “Major U.S. hurricane landfalls have had less significant impact on aggregate market performance (~2% decline) given the subsequent pick-up in disaster-induced public and private spending,” Mr. Lakos-Bujas said. “The most significant impact on equity performance is seen at the stock and sub-industry level.”

Money May Grow on Trees

Does your portfolio contain Orange Growers? Gulf Coast REITS? Companies that operate in the affected area of the storm see a loss in production as they close up and, at the same time, a jump in costs as they make repairs. These stocks are most likely to underperform. For those companies in the repair business, for example, lumber and roofing supplies, they could generate business whether a storm actually makes landfall or not. The rebuilding effort will cost insurance companies with a concentration of insured properties in the path of a storm.

Lakos-Bujas warned, “The underperformance should be concentrated in insurance (i.e. property loss coverage), and companies with Hotels, Restaurants, Leisure, & Airlines (i.e. based on occupancy/traffic, rising commodity costs), Telecom and Cable (i.e. capital expenditure tied to repair and potentially lower revenue per unit), and Industrials (i.e. rising input costs, disruption in production and transportation) depending on geographic footprint.”

Solutions tend to gravitate toward problems, even if those problems include damage and destruction. This is a good thing, it is capitalism working in a way that helps others. This help is profitable and could make some sectors outperformers. “The largest outperformers include industries tied to replacing and/or repairing existing capital stock (i.e. Energy Equipment & Services, Communication Equipment, Autos), transportation and logistics (i.e. Distribution, Air Freight, Trading Companies), and construction (Basic Materials and Engineering),” Lakos-Bujas’ said.

The analysis of the JP Morgan equity strategist is based on a study of 31 hurricanes between 1965 and 2014, which had a combined cost of $520 billion. Two o the large storms, Irma and Harvey, represent a high percentage of the total cost.

“Based on current unofficial damage estimates for hurricanes Harvey and Irma, losses this year are expected to exceed 50% of combined costs over the last 50 years,” he said. “These outsized losses could currently drive more pronounced moves at the stock and sub-industry levels than historically.”

So, a person may live across the country or around the globe from the storm and still feel an impact. For historical context, the S&P 500 (^GSPC) has seen an average decline of 2% in the week following a hurricane’s passing.

Rebuilding Benefits Stockholdings Differently

Much of the backstop in the economy and the markets is based on the idea that rebuilding after a storm is stimulative. Households and businesses suddenly jam work that needed to be done into a short time span and spend much more on what could’ve been routine maintenance. Economists say that the near-term impact on GDP is a net positive once the hurricanes pass. A lasting positive impact occurs if a natural disaster brings about rebuilding that improves on the existing structures or facilities instead of just restoring them to their previous state.”

One caveat is that labor markets have been tight. Most other years, roofers and builders flocked to the highest bidders and the flow of money helped speed the rebuilding process. If there are currently not sufficient human resources, this will push costs up more than they otherwise would have. Unfortunately, there continue to be reports of labor shortages in many industries, including construction. Fox Business News reported on August 28, 2023, “America’s shortage of skilled workers is impacting the ability of businesses in the construction and manufacturing industries to staff their businesses and complete jobs on time.” This situation could certainly slow any needed rebuild.

As wildfires in Hawaii have shown us, funds for rebuilding efforts are further complicated by politics. Three of the Floridian candidates for president, including the governor, are from a party that is not in power

Take Away

Opportunity comes in all forms. This includes opportunity to avoid a dip in some of your holdings, and an opportunity to capitalize on increased company profits this includes disasters of all types. Weather events can impact stock performance of individual companies and industry subsets. At roughly a negative 2% average, the overall market could impact investors over the following 30 days at a rate that feels like normal monthly swings.

As a positive thought, after the storm clears, come join Channelchek, Noble Capital Markets and an expected 150 public companies companies all converging on South Florida in early December for NobleCon19, the investment conference where you’ll discover actionable investment ideas inspired directly from company management. Learn more here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wtwco.com/en-us/insights/2023/08/how-is-labor-shortage-impacting-the-construction-industry

https://www.foxbusiness.com/economy/americas-skilled-worker-shortage-impacting-construction-manufacturing-industries

https://finance.yahoo.com/news/hurricane-irma-mean-stocks-105038376.html

The Three Causes Crushing Crypto

Posted on by phoffman@channelchek.com

Bitcoin’s Throttleback Thursday Explained

Bitcoin and Ethereum had a bad day. After gaining a lot of upward momentum from late June after Blackrock, Fidelity, and Invesco filed to create bitcoin-related exchange traded funds (ETFs), the volatile assets have shown cryptocurrency investors that the bumpy ride is not yet over. What’s causing it this time? Fortunately, it is not fraud or wrongdoing creating the turbulence. Instead, three factors external to the business of trading, mining, or exchanging digital assets are at work.

 Background

On Thursday, August 17, and accelerating on August 18, the largest cryptocurrencies dropped precipitously. Bitcoin even broke down and fell below the psychologically important $26,000 US dollar price level before bouncing. While some are pointing to CME options expiration on the third Friday of each month, most are pointing to a Wall Street Journal article, and blaming Elon Musk, as the reason the asset class was nudged off a small cliff. There are other less highlighted, but important, catalysts that added to the flash-crash; these, along with the WSJ story, will be explained below.

Smells like Musk

What could SpaceX, the company owned and run by Elon Musk, possibly have to do with a crypto selloff? On Thursday, the crypto market had a downward spike around 5 PM ET. It was just after the Wall Street Journal revealed a change in the accounting valuation of SpaceX’s crypto assets. Reportedly, SpaceX marked down the value of its bitcoin assets by a substantial $373 million over the past two years. Additionally, the company has executed on crypto asset divestitures as well. When the reduction took place is uncertain, but cryptocurrency holdings have been reduced both in terms of the amount of coins and the value each coin is held for on the books.

Elon Musk’s reputation is that of a forward thinker, and one that embraces, if not leads, technology. He has significant influence over cryptocurrency valuations, often instigating pronounced market fluctuations brought about by Musk’s influential posts on his social media company, X. The reduction coincides with a similar crypto reduction on the books of publicly held, Musk-led, Tesla (TSLA). The electric car manufacturer had previously disclosed in its annual earnings report that it had liquidated 75% of its bitcoin reserves.

While it should not be surprising that two companies stepped away from speculation on something unrelated to their business or lowered support for the still young blockchain technology, it gave a reason for a reaction to this and other festering dynamics.

Wary of Gary

The Chairman of the Securities and Exchange Commission (SEC), Gary Gensler, is viewed as a “Whack-a Mole” to crypto stakeholders that prefer more autonomy than regulation. Every time the SEC gets knocked down as a potential regulator, it resurfaces, and crypto businesses have to deal with the agency again.  

Last month, Judge Analisa Torres made a pivotal decision in a case involving payment company Ripple Labs and the Commission. Her verdict declared that a substantial portion of sales of the token XRP did not fall under the category of securities transactions. The SEC claimed it was a security. This judgement was hailed as a triumph for the crypto sector and catalyzed an impressive 20% uptick in the exchange Coinbase’s stock in a single day.

On the same Thursday as the WSJ article, the SEC showed its face again with a strong response to the earlier ruling. Judge Torres allowed the SEC’s request for an “interlocutory” appeal on her ruling. This process will involve the SEC presenting its motion, followed by Ripple’s counterarguments. This is slated to continue until mid-September. Afterward, the Judge will determine whether the agency can effectively challenge her token classification ruling in an appellate court.

The still young asset class, its exchange methods, valuation, and usage techniques, once they are more clearly defined, will serve to add stability and reduce risk and shocks in crypto and the surrounding businesses. The longer the legal system and regulatory entities take, including Congress, the longer it will take for cryptocurrencies to find the more settled mainstream place in the markets they desire.

Rate Spate

The eighteen-month-long spate of rate hikes in the U.S. and across the globe is providing an alternative investment choice instead of what are viewed as riskier assets. Coincidentally, again on Thursday, August 17, the ten-year US Treasury Note hit a yield higher than the markets have experienced in 12 years. At 4.31%, investors can lock in a known annual return for ten years that exceeds the current and projected inflation rate.

Take Away

The volatility in the crypto asset class has been dramatic – not for the weak-stomached investor. On the same day in August, three unrelated events together helped cause the asset class to spike down. These include an article in a top business news publication indicating that one of the world’s most recognized cryptocurrency advocates has reduced bitcoin’s exposure to his companies. The SEC being granted a rematch in a landmark case that it had recently lost, where the earlier outcome gave no provision for the SEC to treat cryptocurrencies like a security. And rounding out the triad of events on crypto’s throttleback Thursday, yields are up across the curve to levels not seen in a dozen years. Investor’s seeking a place to reduce risk can now provide themselves with interest payments in excess of inflation.

But despite the ups and downs, bitcoin is up 56.7% year-to-date, 11.1% over the past 12 months, 110.5% over three years, 300% over five years, and astronomical amounts over longer periods. Related companies like bitcoin miners, crypto exchanges, and blockchain companies have also experienced growth similar to that found in few other industries over the past decade.   

Paul Hoffman

Managing Editor, Channelchek

Sources

https://finance.yahoo.com/video/bitcoin-sinks-below-28k-crypto-202201698.html

https://www.barrons.com/articles/sec-crypto-regulation-ripple-coinbase-d8143058?mod=hp_DAY_5

https://www.forbes.com/sites/siladityaray/2023/08/18/bitcoin-drops-to-lowest-level-since-june-amid-wider-crypto-sell-off/?sh=28df65ce55ff

https://app.koyfin.com/share/1d479a881a

The Other BlackRock, Citadel, Bitcoin Story

Unhyped Information to Improve Investment Success

The Ripple XRP Case Creates Many Questions

Why the Fitch Downgrade is Better for Investors

Posted on by phoffman@channelchek.com

With a Longer Time Horizon, The US Credit Downgrade Helps the Market

Providing third-party research and analysis that then ranks an entity’s debt or equity outlook, including companies and sovereign nations, requires extremely high integrity. The mostly negative news headlines responding to the Fitch Ratings downgrade of the United States Long-Term issuance to AA+ from AAA is an indication of how much pressure analysts must be under to avoid issuing a downgrade. This is true whether the rating impacts the entire free world, or the stakeholders and their families of a small public company through company-sponsored research.

Most high-caliber analysts have built a model that gives them little room for pressure from the outside, either from the ranked entity, the investors, or even the financial media. It is undoubtedly easier to do nothing and cross your fingers as an analyst, but that doesn’t actually serve anyone well, including investors or the entity.

Background

In late May, while investors and other market watchers were trying to determine on which day in June the US Treasury would run out of money, Fitch, a securities rating service, placed a ratings watch on US debt which they had held at triple-A, the highest rating, indicating the lowest default risk for the issuer.

On July 31, the US Treasury unveiled an overview of its third-quarter debt issuance needs. At $1.007 trillion, it would be the largest third quarter on record. I have experience as an issuer ranked by Fitch and Moody’s while CIO of two funds that held a rating in order to meet specific investor guidelines.  Rating agencies are the first to be made aware of any changes being considered. So I suspect that Fitch, Moody’s, and S&P analysts were all aware of the details of what the Treasury planned and projected going forward. Moody’s downgraded the US back in 2011 from its lowest default risk rating. Its treatment back then was also not one of appreciation from the markets, investors, or the issuer.

This clip from the movie The Big Short attempts to show the movie-goer all the relevant pressures an analyst may be under, and why integrity is critical.

Thoughts on Ratings Move

Cathie Wood had a conversation on (Twitter) Spaces this morning with Pension & Investments’ Jennifer Ablan in an exclusive mid-year interview. Ms. Ablan asked Ms. Wood’s thoughts on the US downgrade. The Ark Invest founder didn’t hesitate to say that there is “a side that is happy to see it.” She went on to explain that it helps those managing the organization, in this case Washington, to do a better job. She explained that it  says, “legislature, let’s get your act together.” Wood, added “government spending is taxation.”

While Cathie Wood was discussing the most powerful nation in the world, the same concept should be applied to a company she holds, or you own that experiences a downgrade. It serves to help management discover weak areas they could pay more attention to and gives the investor the understanding and confidence that a third party is looking on and even consulting with management before they make any moves that may alter the rating.

Michael Kupinski, the Director of Research at Noble Capital Markets, is a veteran analyst that has undoubtedly had to ignore pressure from the outside and follow models he’s created to the path they help provide. Mr. Kupinski says, “Ratings and earnings revisions are a function of the dynamics of new, and, likely extreme, inputs on the investing continuum.” He then explained how all could benefit,  “Such revisions then present management a roadmap for the new baseline in expectations or for a course correction. As such, ratings provide a valuable currency to determine investment merits, set investment expectations, and for investors to determine risk,” said Michael Kupinski.

Take Away

Don’t shoot the messenger – instead, thank them.

A negative change in ratings, whether it be on debt issuance, equity issuance, or frankly ones own credit rating could serve to preserve something before it goes further down a bad path, and can be used as a guide to adjust and do better. While there was a lot of criticism for Fitch placing the USA on credit watch for a downgrade back in May, if they had not issued a downgrade as US Treasury issuance climbed even higher, it would cause investors to think that no one is paying attention. The outcome of not having another trusted set of eyes, on any security issuance, is weaker pricing.

Paul Hoffman

Managing Editor, Channelchek

Meet the top management and hear the compelling stories of less talked about opportunities, while mingling with analysts and knowledgeable investors at this year’s NobleCon19

Sources

Fitch US Downgrade Press Release

Cathie Wood Jennifer Ablan

Michael Kupinski