Trade Alert: Cleaning Out A Few Names Here On The Other Side Of The Bubble

The Bubble-Blowing Bull Market got crazy in 2020 and in February 2021, it got so crazy that I did “The Great Reset“. Resets never stop in the market though and I want to look back in order to look forward so let’s start with something I wrote for my hedge fund partners recently:

‘One of the reasons I was so alarmed about the sectors we tend to invest in was that for the last two years heading into last February, it hadn’t mattered which stock you picked if you picked the right sector, because they all went up a bunch. Electric Vehicle stocks were a great example. I’d made Tesla our largest position back in 2019 before the markets had recognized that Tesla’s cheaper cars, the Model 3 and Model Y, were by far the best cars you could buy for the money and that Tesla would be able to produce millions of them and the stock went up 20x in the next two years. But so did most any other EV stock, from the worst names like Lordstown Motors and Workhorse also went up 10-20x.

Fast-forward to today, and Tesla is still up almost 20x what we originally bought it for while Lordstown and Workhorse are back to where they were and are down — I’m serious — 95% from where they were back in February.

Most retail investors never got back near those February highs, and even major technology ETFs like ARKK finished last year down 25% or more (retail investors and ARKK are down another 25% or more already in the first three weeks of this year). Meanwhile, the broader indices, full of megacap stocks, hung tough throughout the year and ended near their all-time highs. I’m terribly disappointed that I didn’t match the performance of the major indices but seeing the carnage amongst my hedge fund and technology-investing competitors out there is a reflection of how well we did end up playing defense in a stealthily harsh market. I also know that we tend to make our biggest gains in years when the broader indices don’t go straight up.

The bifurcation between small cap speculative stocks and the major indices reminds me of the one of the great novel openings.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” ― Charles Dickens, A Tale of Two Cities

In the 3rd quarter update, I’d written: “I continue to selectively bet against some of the smaller cap names that I think look either fraudulent or very fragile. And that includes a relatively large number of small bets against almost a dozen space-related companies, both recent space SPACs and old school space stocks that I think are far from actually being part of The Space Revolution.” Those hedges certainly have helped us defend our gains even as so many of our competitors unprofitably stuck with offense.

In the 3rd quarter update, I’d also mentioned that: “The good news is that means valuations in some of the speculative names that have come down 70%-90% from their recent highs are starting to look attractive. I’m actively sorting through the rubble and am looking for unique business models in: The Artificial Intelligence Revolution, The Virtual Reality Revolution and, as usual, especially The Space Revolution.” Soon after I wrote that, stocks rallied hard again and by mid-November, I was back in major defense mode. As the new year has started with a mini-crash in the stock markets, I have started to build a basket of beaten down small cap stocks. Some great companies are getting completely crushed in the downswing and I’m excited about the opportunities that are finally starting to show up with great technology roadmap companies trading at increasingly reasonable valuations. Some big fortunes are going to be made by picking the right names while they’re crushed here.’

Cody back in real-time for Trading With Cody now…

The fact is that I was right that valuations were bubbled up and blowing off in what turned out to be a very ugly top. And, frankly, I’ve struggled to find any stock for the last year that I’ve pounded the table about, say, like I did when I was so wildly bullish on all of our stocks back at the bottom of the Covid Crash in 2020 or like I was all over Tesla back in 2019 or Nvdia in 2016 or Facebook back in 2012 or bitcoin back in 2013 or Google back in 2004 or Apple back in 2003.  but I remember the times that I’ve found stocks for great companies that I just couldn’t believe were trading at the levels they were trading at. And the performance of the recent picks underscore why that point is important.

After I’d gotten us out of a few stocks and preached raising cash and being defensive overall, I’ve picked a few names during this momentum stock crash that have done terrible. I’m sick to my stomach every time I think of Redwire or Skillz for example. I know subscribers had been wishing all year that I was giving out more stock picks than I did, but in retrospect I should have been even more disciplined about buying any new names as I was never thrilled about any of the valuations of the names we did buy.

So what about now? Well, the valuations of many stocks are finally starting to look reasonable, if not thrilling yet. And I wonder if we’ll get to point in this sell-off when some great stocks will finally start to look thrillingly, no-brainer-like cheap. I keep expecting that we’ll see these markets grind slowly lower for months at a time but it’s been wildly volatile and even a bit crash-ish for even the broader markets so far in 2022. It’d make sense that we will see the thrillingly great valuations before this Other-Side-Of-The-Bubble market bottoms out and it’d make sense that we won’t see the “thrillingly” great buys overnight, but that it will take some time to grind out all the excesses and silliness and fraud that was The End Of The 13-Year-Long Bubble Blowing Bull Market. I shouldn’t completely write off the possibility that the markets and many momentum stocks could suddenly one day ramp right back to their all-time highs, although I do think that is the most unlikely scenario when the markets’ tail is wagging the economy’s dog as I explained last week.

I went through the entire portfolio and spent much of the weekend running each of the positions through my WiNR Ratio and WilPOWR Rating algorithmic systems that I created back in 2018. Before doing so, I went through all my old analysis of individual stocks that I had run through my algorithmic systems over the last three years to confirm that these systems have been working even in this crazy bubbled/crashed/bubbled/crashing stock market years. To do so, I sorted all the prior analysis in order of highest performing stocks through the worst performing stocks. There are several hundred stocks I’ve analyzed in the system over the last three years and I am happy to see that there is proof of the system’s validity. That is, the top 25% best performing stocks had an average WiNR/WilPOWR Rating of 24.3. The next 25% tranches, in order, came in the following averages respectively: 18.7, 17.6, 12.3.

The single highest rated stock I ever ran through the system was TSLA back in November 2018 when the stock was $45 and it came in at 79.1 rating and sure enough, TSLA, now up well over 2000% since then, is also the single best performing stock that I’ve ever run through the system.

Here are the current WiNR/WilPOWR Ratings for each of our stocks in order from highest-rated to lowest:

The upshot? I’m going to remove some of the lower rated positions in the portfolio to allow my brain to reset its emotions. Mea culpa on the names that are down since we bought them. It’s hard to do sell some of these names as U know that at least one or two of these names will probably work out as big winners from these current levels. But I need to manage the overall portfolio with discipline and balance and here are the hard choices I’m making this week.

I’m selling:

Tencent TCEHY

CGC

CDXS (I am keeping a few call options in this name that I own in the hedge fund).

In the hedge fund I’m also selling (I’m not selling these assets in my personal account as I’ve owned them for many years and literally bought most of them at or near their all-time lows):

AAPL

TWTR

SNAP

Bitcoin

Ethereum

It’s been an absolutely wildly volatile year so far and I’m, like you, amazed at some of the intraday volatility that we’ve seen over and over this year. I will be nibbling on some of the highest rated names if and when the markets tank again. Be careful out there and be disciplined, but don’t be scared.