Author: Noah Kiedrowski

Opportunities Abound - Building Out A Portfolio

Posted on by Noah Kiedrowski

The economy is going through a pivotal moment as the Federal Reserve withdrawals stimulus as economic tailwinds may be in jeopardy. The culmination of inflation, supply chain constraints, pandemic backdrop, rising rates, and easy money policies coming to an end has led to some individual stocks losing 30%-80% of their value in a matter of weeks. All the major indices have sold off in a meaningful way and are now in correction territory. Initially, there was a massive sea change in the market out of technology, specifically high beta/richly valued stocks and into value. As a result, the Nasdaq dropped over 15%, Russell 2000 dropped over 20%, S&P 500 dropped over 10%, and the Dow Jones dipped down over 8%.

With many high-quality companies selling at deep discounts, this correction offers an opportunity to build out a portfolio and engage in dollar-cost averaging. It's difficult, if not at all impossible, to time the market and buy at the exact bottom. However, one can initiate a position and add to the position as the stock becomes cheaper when and if the market-wide sell-off deepens. Any portfolio strategy should include a cash portion, and it's times like these where the cash portion should be deployed and put to work.

Earnings Disasters And Indiscriminate Selling

Disappointing earnings have been a linchpin for individual stocks to lose swaths of value while sending entire sectors into a downward spiral. The financials suffered massive selling pressure after JP Morgan (JPM) and Goldman Sachs (GS) reported earnings. Netflix (NFLX) saw its stock tank over 25% after reporting earnings, and this reverberated through the streaming space to sink Disney (DIS) too. Continue reading "Opportunities Abound - Building Out A Portfolio" →

Extreme Volatility: Options-Based Portfolio Approach

Posted on by Noah Kiedrowski

Cash is a critical component to any portfolio strategy to reduce volatility, seize opportunities, lower cost basis of a long position and avoid full exposure to the equity markets. Controlling portfolio volatility is essential as the broader markets continue to undergo a sea change from high beta/richly valued technology stocks and into value names. The past four-month stretch from September 2021 - January 2022 serves as a prime example of extreme market volatility. The markets pushed to new all-time highs early in September 2021, then suffered a significant selloff in the same month where the Dow Jones was down as much as 6%. October 2021 saw a bounce back into positive territory with new all-time highs set. Then the November/December 2021 stretch saw a sharp dichotomy between the tech-heavy Nasdaq and the Dow Jones, with these indices experiencing relentless selling and heavy buying, respectively.

Amid the bifurcated market, entire sectors have been decimated, and some companies have lost swaths of market capitalizations. Even many well-established, profitable large-cap companies have seen their market capitalizations reduced in a meaningful way. Entire sectors of the market have been wiped out, specifically the fintech space and some pure stay-at-home plays. Given the market backdrop, the cash portion of the portfolio can come in handy to seize unique opportunities to bolster a portfolio. In addition to cash, a conservative options strategy can offer additional mitigation against these pockets of extreme volatility.

A Holistic Approach

Proper portfolio construction and optimal risk management is essential when engaging in options trading to drive portfolio results (Figure 1). Managing a long-term successful options-based portfolio requires a risk tolerance balance between cash, long equity, and options. Ideally, an options-based portfolio should be broken out into the below structure (This is an example breakdown, and percentages can be modified): Continue reading "Extreme Volatility: Options-Based Portfolio Approach" →

Apparently, Valuations Do Matter

Posted on by Noah Kiedrowski

2021 ended with a bang, with the S&P posting a 27% gain on the year. This appreciation occurred with the markets were facing a trifecta of rising interest rates, an unknown coronavirus variant backdrop, and the Federal Reserve tapering. The major indices reached unprecedented territory breaking through all-time high after all-time in what seemed like a daily occurrence throughout the year until the back third of the year rolled around. The September correction was a harbinger that valuations do matter, albeit October saw a huge reversal to the upside. Then came the November/December bifurcation in the markets, along with extreme bouts of volatility. Despite the back third of the year, the S&P 500 posted a 27% gain, placing the index in rarified air across many valuation metrics.

As interest rates, fed taper, and the pandemic gripped the markets, a sea change occurred. This sea change started to take hold back in November and December of 2021 while really accelerating in the first week of January 2022. As a result, technology names experienced heavy selling, specifically in stocks with high beta and/or rich valuations. This massive rotation came out of technology companies that are unprofitable with proof of concepts and into value-oriented companies that are well-capitalized, profitable, and pay dividends. As 2022 continues onward, this theme will lead the charge in the markets until the uncertainty surrounding the pandemic and the interest rate environment is settled out. Continue reading "Apparently, Valuations Do Matter" →

Block and PayPal - Ostensibly Bottomed

Posted on by Noah Kiedrowski

Before the massive market rotation and tech-heavy selling, specifically in high beta and richly valued stocks, fintech had been in a multi-year secular growth trend. Recently, high-quality names in the space such as Block (SQ), formally Square, and PayPal (PYPL) have seen their stocks nearly cut in half. Block has come down from $298 to $138 or a 54% drop, while PayPal has come down from $310 to $179 or a 42% drop. All the rage has been about the buy-now and pay-later platforms as a disruptor to the entire payments space. However, Block came through with a $29 billion, all-stock deal to buy Afterpay, a major buy-now, and pay-later platform. Block's acquisition highlights consumers circumventing traditional credit, especially younger buyers, for installment loans. PayPal also offers their version of buy-now and pay-later offering, which showed fantastic growth over the holiday season and a surge of 400% on Black Friday alone.

Both Block and PayPal are firmly in the buy-now and pay-later space while also enabling businesses at the point of sale, analytics, peer-to-peer payments via Venmo (PayPal) and Cash App (Block), small business lending, cryptocurrency transactions, and support traditional credit card integrations into their platforms. Block and PayPal offer end-to-end financial solutions for businesses and consumers while powering the next generation of financial technology. These financial technology companies are creating additional revenue verticals while addressing unmet needs in the financial services space. Both Block and PayPal may offer long-term growth at very reduced valuations due to the tech-heavy selling, when factoring in their end markets are current growth rates. Continue reading "Block and PayPal - Ostensibly Bottomed" →

2022 Financials Outlook

Posted on by Noah Kiedrowski

2021 Tailwinds

The big banks have benefited from a confluence of a rising interest rate environment, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests. Earnings season kicks off in January for all the major financials. The most recent earnings reports from the core financials such as Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) all reported very strong quarters with stock prices breaking out to all-time highs prior to the Q4 overall market turbulence. The biggest banks, by assets, posted profit and revenue that beat expectations. These results came on the heels of booming Wall Street deals and the release of funds previously earmarked for pandemic-related defaults. The big bank cohort is in a sweet spot of a post-pandemic consumer, with rising rates and balance sheets to support expanded share buybacks and dividend increases. These stocks are inexpensive and stand to capitalize on all these tailwinds heading into 2022.

Resilient Consumer

The pandemic has been going on for two-plus years, and the big banks have navigated the coronavirus volatility over this stretch. Throughout the rolling pandemic, the consumer has been resilient, and the potential worst-case financial downsides did not materialize (i.e., massive loan defaults). In addition, the consumer has been strong in retail, housing, autos and the overall holiday spending was robust.

Bank of America CEO Brian Moynihan stated that whether it was a return to loan growth, credit-card signups, or economic indicators like unemployment levels, the company was back in expansion mode. "The pre-pandemic, organic growth machine has kicked back in," "You see that this quarter, and it's evident across all our lines of business." Loan balances at BAC increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans, the company said. Continue reading "2022 Financials Outlook" →