I'm still constructive on stocks with a 'no landing' scenario for the economy; Economic indicators remain strong; Activist short report on Stride

1) All of the big banks have reported solid-to-strong earnings in the past week, which reinforces what I've been saying all year...

In the debate over whether our economy is going to have a hard or soft landing, I'm not convinced it's going to "land" at all, as this recent Wall Street Journal article notes: Soft Landing or Hard? Bank Results Show Path to No Landing. Excerpt:

Rather than the economy slowing gradually or rapidly, it might actually be poised to keep growing as it is, at a moderate or better pace. Bank executives' recent comments have suggested that some of the recent indicators of slowing for consumers and businesses might be more echoes of the past than visions of the future...

Coming out of that difficult period, there was a "heavy rotation" into travel and entertainment spending, "as people did a lot of traveling and they booked cruises that they hadn't done before, and everyone was going out to dinner a lot, whatever," [JPMorgan Chief Financial Officer Jeremy] Barnum said. "That's now normalized."

Normally a reduction in this kind of spending might signal a rotation out of discretionary spending and into nondiscretionary items – the things you need every day, such as gasoline or groceries. That in turn is usually a sign that consumers are preparing for a worse economic environment.

But as the article continues, that's not what JPMorgan Chase (JPM) has seen in its consumer data – including no weakening in retail spending:

"So overall, we see the spending patterns as being sort of solid and consistent with the narrative that the consumer is on solid footing, and consistent with the strong labor market and the current central case of a kind of no-landing scenario economically," Barnum said.

This is the main reason why I've been constructive on stocks for the past few years – and remain so.

It has been a good call, as the S&P 500 Index has had 46 all-time closing highs this year (the most recent being earlier this week). And it has had its best year-to-date performance since 1997.

2) All of the major economic indicators are strong, as Creative Planning's Charlie Bilello highlighted in his latest Week in Charts blog post earlier this week. Below, I'll share some of the standout charts from his post...

First, the Federal Reserve Bank of Atlanta estimates third-quarter GDP growth will be a robust 3.2%:

Meanwhile, based on the consumer price index ("CPI"), inflation is way down from the 2022 peak:

Our economy has added jobs for 45 consecutive months, with the latest increase of 254,000 jobs in September nearly twice the consensus estimate:

The unemployment rate is at 4.1% – a historically low level:

Wage growth has outpaced inflation (meaning real wages have risen) for 17 consecutive months:

Lastly, the Fed has started to cut rates, and investors expect it will continue to do so all the way through next year:

All in all, this is a "Goldilocks" scenario, so don't let the ever-present naysayers scare you out of the market.

3) To wrap up today, here's another stock to add to the "avoid at all costs" list...

The stock of online charter school operator Stride (LRN) collapsed by 9.3% yesterday in the wake of a bearish report by an activist short seller who posts anonymously under the name Fuzzy Panda Research. Here's the summary:

Stride – The Last Covid Over Earner – Hiding That Est >25% of EBITDA Came from Covid Funds

• Covid Windfall is GONE! – Funds Expired Sept 2024 – EBITDA Cliff Coming
• Mgmt. Hid That Schools Received >$330mm in Revenue from Covid Funds
• Discovered That Fake "Ghost Students" Account for Large % of Enrollment
• Undisclosed Churn – Schools are Leaving

We are short Stride (formerly known as K12 Inc.). We believe Stride, a K-12 online education company, is the last Covid over-earning stock yet to fall. The stock is near its highs (+60% YoY) but investors are clueless about the looming Covid funding cliff...

Stride is currently trading at peak everything. Peak EBITDA, Peak Multiple, and near its Peak Stock Price. Investors don't know that on the other side of that peak lays a Covid Cliff!

Fuzzy Panda also released a five-minute video that summarizes the bear case.

I have a long history with this stock, going back 11 years, when I discovered the company was doing all sorts of bad things. That led me to short the stock in the hedge funds I was then managing and go public with my findings, which I presented in a 105-slide presentation at my Value Investing Congress conference on September 17, 2013 (you can see my whole presentation here).

I also published this article on Seeking Alpha: An Analysis Of K12 And Why It Is My Largest Short Position.

This slide summarized my short thesis at the time:

After the stock lost nearly three-quarters of its value over the next couple of years, I covered my short position and moved on – which was smart/lucky, as the stock is up 8 times since its early 2016 lows.

Based on what Fuzzy Panda has uncovered, it looks like the company still isn't doing right by students or taxpayers, and it could lose 25% of its profits in the near future.

But that doesn't mean to rush out and short the stock – as I've said more times than I can count, the vast majority of investors should avoid short selling. Instead, you're better off just staying away from Stride's stock entirely.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.