11/29 Daily Market Note: Slowly Expanding my Coverage Universe into Mid-Caps & Small-Caps for our Community in 2024
11/29 Premium Strategy Note - Expanding our Value
Hey Folks -
I’ve got an exciting announcement for everyone here which will greatly add to our Community’s value proposition. I believe you’ll like what you read.
Up until this point, I have primarily discussed Large Cap stocks and that has had a good year so far in 2023. As markets have rallied this year, I believe much of the upside potential in my DCF models for a lot of companies in my coverage universe (primarily large cap) are fully valued, meaning any further upside from here is largely sentiment based (and not based on fundamentals).
2023 was a year where I introduced Options into our Community with much success as I introduced Selling Options (Selling Puts with high consistent win rates) and also HK-listed Stocks for diversification/alpha.
I know a lot of people follow me for my views on China/Hong Kong, and I’m proud to share that my retirement 401K account was primarily positioned in China this year. Even more proud to say that it advanced around 20-21%, mostly attributed to New Oriental and Pinduoduo, with Alibaba being a primary drag. My taxable account is doing a bit better at 24-25% for the year, and will be keeping net equity exposure low until 2024. Friends here may recall that I’ve listed EDU TCOM PDD as top China ideas in nearly every single email over the past 3 months. I’ve been adamant about those companies being in the best position to fight China’s deflationary environment. I hope this has helped you.
Given that Hang Seng is down 15-17% this year, being positive at all with China exposure is something I am sincerely grateful for. Hang Seng bear market has been unbelievably ferocious, and I will continue to do my best to provide guidance in that sector.
However, with the VIX now below 13 (for now), U.S. large caps being fully valued, and my top China ideas EDU PDD TCOM already nearly fully valued, I must now go deeper in searching for ideas in the investible universe.
This means that I will be adding more knowledge to our Community arsenal and I will be studying U.S. Mid-Caps and Small-Caps in the background and start introducing “Watch Ideas” on brand new companies when appropriate for our Members in 2024.
There are many companies that many investors don’t pay attention to but have fascinating business models.
And due to their market positioning where they are growing in a large Total Addressable Market (TAM), successful companies have the potential to see share price gains quickly outpace large cap stocks.
That said, mid-caps/small-caps are much more volatile than large caps and should be positioned with much smaller sizing to account for the bigger range in which they trade. Smaller/mid sized companies are “less efficient” in the marketplace and that means that it may take longer for institutions to recognize their value.
An example of a mid-cap stock is New Oriental. It took a while for the market to recognize its value, but when it did, off it goes.
Studying new business models requires me to spend quite a lot of time in the background researching their fundamental qualities, so much of my commentary/watch ideas on Mid-Caps/Small-Caps will begin in 2024. I expect Mid-Caps/Small-Caps to be at most 10-15% of my overall exposure/strategy given their volatility. If I see any compelling ideas within this space, I’ll introduce them as “watch ideas” for our members.
Just to give a quick sense, over intermediate-timeframes of 6 months, drawdowns in names within mid/small caps can range from 20-30%. I need to share that statistic upfront. But appreciation potential can be 30-50% (or more). Mathematically, this means risk/reward can be nearly 1:2 on intermediate-term timelines. This means being able to capture even a piece of the move can prove to be very well worth the fundamental research effort for growth oriented investors.
I look forward to bringing ideas from the Mid-Cap/Small-Cap universe to our members.
Over time, our Community will aim to continue providing actionable insights on companies that are already popular among retail investors with the large caps. And also discuss companies that many investors do not pay attention to given less frequent analyst coverage.
I look forward to adding more value for our members in finding alpha with this long-term initiative to expand my coverage universe. Thank you for your support.
-Larry
Forward-looking Conclusions of this note:
Macro: Much of the opportunity in the Magnificent 7 has passed. I will spending a lot of time expanding my coverage universe into 2024.
Stock-Specific: Stop-Loss to take profits were raised on Walmart yesterday as discussed. Today triggered closing the position for a profit. Long term view on the company is positive. It’s just a matter of do you want to book profits now or hold it.
Bonds: Bonds are a top 2024 idea for Wall Street according to the latest Fund Manager Survey.
China: Hang Seng is a source of funds to be sold to buy U.S. stocks at the moment.
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.