2024 Mid-Year Portfolio Review

The Hedge Vision portfolio has returned 26.61% YTD

The Hedge Vision portfolio returned 26.61% during the first half of 2024 compared to the S&P 500’s return of 15.94% and the Nasdaq 100’s return of 19.46%.

Returns Since Inception:

2020 starting from May: +54.80%

2021: +0.33%

2022: -48.99%

2023: +69.13%

2024 as of June: +26.61%

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Hedge Vision Portfolio as of June 30, 2024

Total Positions: 22 compared to 26 as of Dec. 31

Top 10 Positions Concentration: 78.4% compared to 73.8% as of Dec. 31

Cash: 12.0% compared to 6.8% as of Dec. 31

Watchlist: Lululemon (LULU) at $300 or below, Celsius (CELH) in the high $40s, any of my existing positions at the right price.

Here is my portfolio from June 30, 2023 for context:

The top contributors to my YTD returns were Nvidia (NVDA) with a gain of 156% and Crocs (CROX) and Crowdstrike (CRWD), each with a gain of 55%.

I’m closely watching my CRWD position, as its valuation and weight in my portfolio have both increased significantly since the beginning of the year. I don’t have current plans to sell any of my CROX, although I trimmed ~20% of my NVDA in June. My earliest buys of the company are up by over 1,000%.

With a market cap hovering near MSFT and AAPL, Nvidia’s upside from here seems limited.

Nvidia has superior growth compared to its Magnificent 7 peers. However, that growth won’t last forever. The semiconductor industry is cyclical, meaning that it goes through booms and busts. You can tell from Nvidia’s revenue CAGR:

In addition, the company’s sales growth is expected to fall to 32.87% by CY2025 and 16.08% by CY2026.

However, I also factor in that Nvidia is at the center of the AI craze, which means that its valuation has the possibility of surging higher than anyone can rationally expect, even more than it has already done. That’s why it’s still my fourth largest position. With mass media coverage and the fear of missing out from deep-pocketed institutional investors, I believe another 20% to 30% gain is possible. That would put Nvidia’s market cap at around $4 trillion.

Meanwhile, my cash position increased by 5.2% compared to Dec. 31 as a result of realizing profits on AMD and MDB, breaking even on CRM and ESTC, and getting stopped out on BIDU for a loss. As of June 30, I didn’t have any new positions compared to Jan. 1, although I increased my positions in MELI, ZS, and BABA.

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New July Purchase: Lululemon

I want to point out that I started a 0.5% position in LULU on July 2 at ~$300. Here's part 2 of a note I sent out to subscribers through Substack Chat on June 11:

Current price: $318.

Market Cap: $38.13 billion.

52-week low: $293.03

Summary: A DCA strategy at $300 or below seems justified as long as LULU is able to beat growth estimates going forward while increasing its margins and men’s clothing presence. A 20x forward PE gets us to $292 vs the current multiple at 21.7x. 19x gets us to $278.

Because of slowing growth, I wouldn’t invest more than 3% of my portfolio into LULU. I’ve heard from customers that Lulu clothing is very high quality, but the company has failed to innovate in recent years. Lulu’s revenue slowdown began in Q3 of 2021 and hasn’t showed any sign of reversing yet. 

This attitude marks a change to my tone yesterday but after digging deeper into the numbers, I feel more optimistic about LULU. Its valuation is lower than I expected after taking into account the recent earnings. 

In my Q1 portfolio review published in April, I wrote:

"The main question an investor should ask themselves before investing in Lululemon is if the company can become a household name in the likes of Nike while expanding its portfolio of products through a growing audience reach. Because that’s what the valuation absolutely commands. I wouldn’t use more than 2% of my portfolio to start a position in Lululemon based on this factor."

Back then, LULU was trading at a forward PE of 25x, which has come down to 21.7x today, the lowest since 2017 (Edit: The multiple is currently at 20.4x, the lowest since 2009). Lulu’s revenue, margins, and FCF were dramatically lower in 2017, while TTM revenue CAGR was 11.10% compared to 15.55% today.

Stagnant margins are a major concern for shareholders, although industry comparisons show that it’s certainly possible for Lulu to continue to push it higher. Lulu is likely already in the process of cutting costs, as it announced in April that it would close down a Washington distribution center, removing 128 jobs in the process. On the flip side, this could also be a sign of falling demand. 

With the 52-week low at $293, I believe that LULU has a fair shot at testing that level again given a fairly average earnings report and weak Q2 guidance when expectations for the company were much higher.

Lulu operate as a semi-luxurious athleisure company offering high-quality clothes and accessories. Lulu was an athleisure first-mover, although its management has recently fallen behind in keeping up with consumer demand and trends. That’s resulted in a 40% drop in LULU this year.

“When looking at women's, we did not maximize the business in the U.S., which was the result of several missed opportunities including a color palette and our core assortment, particularly in leggings that was too narrow.

Where we had color, guests responded well. We just needed more as they are looking for additional choices. And we are also out of stock in some of our smaller sizes.”

-CEO Calvin McDonald, Q1 2024 Earnings Call

These problems are all resolvable for a company that has managed to compete with the likes of Nike, rising contender Alo, and Target (All in Motion dupe brand) in an extremely competitive landscape.

That comes on top of a shareholder-friendly management team. During Q1, Lulu bought back $296.9 million of its shares and announced in its recent earnings that it had added another $1 billion to its repurchase program, which now stands at $1.7 billion.

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Wall Street Hikes 2024 S&P 500 Price Target by 7.9%

The S&P 500 closed at $5,460.48 on the last trading day of June, or 11.39% above $4,902, the 2024 consensus analyst estimate at the beginning of the year. The estimate has since been raised to $5,302.

In fact, J.P. Morgan announced on July 3 that 19-year veteran and outspoken bear Marko Kolanovic would step down as Chief Global Markets Strategist. That came just one week after he reiterated his price target of $4,200.

"Two years ago he advised clients to take an overweight position in US stocks during the deep market sell-off, before switching to recommending an underweight position in early 2023. The bank has stuck with that position ever since, despite the blue-chip index having surged more than 40 per cent since then.”

-Financial Times

On the same day, Piper Sandler’s Michael Kantrowitz, another notable bear, stated that the firm’s macro research team would no longer issue price targets due to the them being “a poor form of explaining stocks, which is what it was initially meant to represent.”

The large miss from the analysts further strengthens the notion that investors should buy high-performing companies at opportunistic valuations while cancelling out unnecessary noise. Do your own research, form your own thesis, and validate or null that thesis as time progresses.

On a contrarian note, it is a bit concerning that two prominent bears have waved the white flag.

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Outlook for 2024

At the beginning of the year, I had written that I wouldn’t be surprised to see a 10% correction sometime in 2024. This still hasn’t materialized, although the S&P 500 did drop 5.4% between March and April before quickly making up the losses.

While optimism remains elevated, volatility could be just around the corner with the 2024 Presidential Election quickly approaching. The first rate cut is expected to occur before that, with futures pricing in a 72.6% chance in September.

While rate cuts can stimulate the market, the downside is that recessions tend to occur around the first one. That’s because the first rate cut is a response to the economy slowing down.

The shaded areas represent recessions in the chart below:

Now, I’m not advocating for a bearish market-timing strategy, which is a mistake that loyal followers of the inverted yield curve have made. The current inversion, which began in July 2022, has been the longest on record without the occurrence of a recession.

Rather, it’s good to keep in mind that market downturns are quite common and that investors should welcome them. I’d love to have my cash balance at 0%, although there aren’t that many deals on the market at the moment.

Patience plays a significant role in recognizing when the market has discounted stocks too much, creating opportunities with generous future rewards.

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Hedge Vision - Institutional Insights

Please don’t hesitate to send me topic recommendations, suggestions, or general questions. You can contact me by email: HedgeVisions@gmail.com, or by X (formerly Twitter) messages: @HedgeVision