Best in Show

There's always a bull market somewhere, but not everywhere... The strongest bull market right now... The AI boom keeps going... A closer look at Nvidia's valuation... Fed speeches and jobs data are on tap...

'There's always a bull market somewhere'...

Longtime CNBC host Jim Cramer has said a lot of wild things during his decades on television. It's what he's paid to do, after all, and he's relatively entertaining.

Some calls have even been right, like compliments about our friend Marc Chaikin, founder of Chaikin Analytics. Cramer once said, "I learned a long time ago not to be on the other side of a Chaikin trade." Agreed.

Of course, Cramer has shared so many opinions on his Mad Money show and elsewhere that enough of them have also turned out wrong. Here's one from January, when Cramer urged his followers on X (formerly Twitter) to sell bitcoin...

The price of bitcoin, the world's most popular cryptocurrency, is up almost 70% since Cramer's call on January 25. If you were interested in short-term trading, it was a great buying opportunity... and it might end up being one over the long term, too.

At Stansberry Research, we always take the opinions of mainstream financial media analysts and commentators with a grain of salt... or even use them as contrarian indicators. We also warn of relying too much on a single, one-off opinion you might hear.

However, Cramer has one famous saying that I (Corey McLaughlin) do put some trust in...

There's always a bull market somewhere...

I believe this to be true.

If you do the work, like our team does, you can find it. Even in a bear market, you can bet some asset is going up in value.

For example, in 2022, when "everything was down," the relative value of the U.S. dollar compared with other major world currencies was up. That was reflective of rising U.S. interest rates, dictated by the Federal Reserve to cool inflation, which dropped the value of everything else denominated in dollars.

There are a few notable bull markets today...

The broader market is bullish, with the benchmark S&P 500 Index making new all-time highs and up roughly 44% from a low in mid-October 2022.

We're watching specific sectors, too, like biotech stocks, take off as more and more investors expect lower interest rates later this year (and activity in the more speculative and capital-intensive biotech business to pick up accordingly).

But, ironically for Cramer, the strongest of any bull market is happening in cryptocurrencies right now...

As I write today, bitcoin is trading around $67,000, less than 5% shy of a new all-time high and up 200% from a year ago.

We wrote about this last week, when we shared Crypto Capital editor Eric Wade's analysis of the bullish catalysts for the space. He first shared these ideas in early January – a few weeks before Cramer's take.

For starters, the U.S. Securities and Exchange Commission recently greenlit about a dozen bitcoin exchange-traded funds. But Eric says that's not the only catalyst that could push bitcoin and crypto prices higher. Eric has been telling his subscribers about two other major tailwinds.

And last month, Stephen Wooldridge II, an analyst on Eric's team, wrote about the bullish catalysts Ethereum, the second-largest crypto, has going for it. Ethereum has soared to more than $3,500 and is up more than 120% from a year ago. But Eric and Stephen think there's more upside potential ahead in the sector.

Crypto Capital subscribers and Stansberry Alliance members can find Eric's latest take in his weekly video published on Friday.

Here's a sneak peek: Eric said that whether bitcoin continues rising and hits $70,000 or falls to $50,000 this week, neither outcome "invalidates" the current crypto bull run. Eric also offered tips and strategies for managing emotions and gains as prices soar to new heights. You can find his weekly update video right here.

The bull market in artificial intelligence ('AI') has also been undeniable...

You could argue even bubbly.

We don't doubt that some of AI's potential already "priced in" to stocks over the past year won't be realized, but there will also be winners in the space. Some are already popular names... but others might not even exist or be publicly traded companies yet.

As DailyWealth Trader editor Chris Igou wrote in the free DailyWealth newsletter today, the biggest names in tech have gone "all in" on AI over the past year or so and have signaled more focus (and spending) to come. As Chris wrote...

In January, Meta Platforms (META) CEO Mark Zuckerberg said he plans to build out a huge AI infrastructure by the end of 2024, running on a massive supply of AI chips.

Zuckerberg expects the project to include the equivalent of 600,000 Nvidia (NVDA) AI graphics processing units ("GPUs"). At roughly $25,000 to $30,000 per GPU, that's somewhere between a $15 billion and $18 billion investment.

Microsoft (MSFT) is going after the AI chip market as well... And the same is true of Amazon (AMZN) and Google's parent company Alphabet (GOOGL).

The new goal is to create AI models that can handle all kinds of generative tasks. And ChatGPT helped accelerate this shift in AI. The generative AI industry was worth $6 billion in 2023. According to market research company Omdia, it could hit $59 billion by 2028.

This new era of AI fueled the stock market boom we saw last year, and Chris says it's far from over...

Much of this AI spending is going toward building new data centers housing GPUs. That kind of AI-specific spending was around $90 billion last year. It's estimated that could grow to $800 billion by 2027.

That will lead to some incredible winners in the stock market. Companies that supply chips, build the data centers, or just generally use the new infrastructure to create new businesses all stand to benefit.

Chipmaker Nvidia (NVDA) has been the headliner in this sector... and there has been considerable discussion about whether the company's valuation is justified. After a 78% rise in its share price over the past six months, its trailing-12-month price-to-earnings (P/E) ratio is around 70, reminding market vets of the dot-com bubble era...

And two weeks ago, Nvidia's latest quarterly earnings report sent shares rising 16% in 24 hours. (We covered the after-hours earnings report right here.) The stock price has moved even higher since then to a new all-time high around $850 per share.

A closer look at Nvidia...

Our colleague Mike Barrett, who has recommended shares of Nvidia in his Select Value Opportunities advisory, took a deeper look at the company in his February 28 issue.

He's a whiz at digging into the true value of companies – large, medium, and small. Beyond the headline numbers of around $22 billion of revenue in Nvidia's fiscal fourth quarter, Mike looked into the fuel for Nvidia's growth to explore the valuation of the AI juggernaut...

For the 12 months ending on January 28, 2024, Nvidia generated a staggering $27 billion in free cash flow ("FCF") – 7 times the FCF it produced the previous year ($3.8 billion). This enabled the company to pay $395 million in dividends, reduce debt by $1.25 billion, repurchase $9.5 billion worth of shares, and still boost its cash balance by $12.7 billion.

One crucial attribute makes this outperformance possible... Nvidia's extraordinarily high gross margin. Think of it as the mark-up Nvidia earns over its cost of goods sold.

Gross margin impacts all other measures of profitability... As it trends higher, so does a company's operating margins and FCF margins. To illustrate this point, check out the dramatic improvement in Nvidia's margins over the past year...

Nvidia earns extremely high price mark-ups (gross margins) for two main reasons. First, its artificial-intelligence ("AI") chips are in very high demand. And second, Nvidia commands at least 80% of that market share.

As Mike explained, Nvidia's main competitor Advanced Micro Devices' (AMD) trailing-12-months gross margin was nearly 50% lower for the fiscal year (37.9%). Mike continued...

Nvidia maintains high gross margins by introducing new products that improve upon older versions. This also helps the company stay ahead of the competition.

During [its] fourth-quarter conference call, Chief Financial Officer Colette Kress stated that Nvidia's next-generation AI chip, the H200, has nearly double the memory capacity of its H100 chip.

This is a key reason Kress projected that Nvidia's gross margin would rise further, from last year's 72.7% to "the mid-70s percent range"...

Wall Street analysts are estimating a 75% gross margin for Nvidia's next fiscal year, which ends in January. According to Mike, "That sounds about right." He expects the company's margins to continue increasing and fuel more growth.

So, to answer the question on many folks' minds today, Mike remains bullish on Nvidia. That's why he increased the buy-up-to price and stop loss on Nvidia in the Select Value Opportunities model portfolio.

Alliance members can find Mike's full analysis on Nvidia, and his other recommendations, in Select Value Opportunities here.

Nvidia shares also have an overall Stansberry Score of 86 and an "A" in capital efficiency, ranking 20th in that category out of more than 5,000 graded stocks. So Nvidia is doing well, unlike the bad dot-com bubble stocks that turned out to be duds.

Now, to be clear, I'm not recommending shares here. That's not what we do in the Digest. That's what our analysts and editors do in their trading services and advisories, complete with trading instructions and risk-reward propositions.

I will say, though, that bitcoin and cryptos and Nvidia and AI are "best in show" right now. But be wary of getting too greedy. There are still risks for the broader market.

And tomorrow, we'll be taking a look at a "worst in show" area of the market – where you want to be careful with your money – and why the weakness could be a signal for more trouble to come in one of America's most important asset classes.

What to watch the rest of this week...

There are some potential narrative-shifting and market-moving macroeconomic events on tap this week...

Around half a dozen Federal Reserve members are making speeches this week. Plus, Fed Chair Jerome Powell will sit before Congress for a regular round of two-day testimony on Wednesday and Thursday. Headlines are sure to be made... followed by pontification.

It's also another big week for jobs-market watchers. On Friday, Uncle Sam publishes its latest "nonfarm payrolls" report, with an unemployment rate for February. Wednesday brings other employment data report from payroll company ADP and a look at job openings.

New 52-week highs (as of 3/1/24): Applied Materials (AMAT), Advanced Micro Devices (AMD), Amazon (AMZN), A.O. Smith (AOS), ASML (ASML), Atkore (ATKR), Broadcom (AVGO), American Express (AXP), AutoZone (AZO), Builders FirstSource (BLDR), Ciena (CIEN), Costco Wholesale (COST), Pacer U.S. Cash Cows 100 Fund (COWZ), Copart (CPRT), Salesforce (CRM), Commvault Systems (CVLT), Dell Technologies (DELL), Dimensional International Small Cap Value Fund (DISV), Enterprise Products Partners (EPD), Diamondback Energy (FANG), Comfort Systems USA (FIX), Franklin FTSE Japan Fund (FLJP), SPDR Gold Shares (GLD), W.W. Grainger (GWW), Home Depot (HD), ICON (ICLR), IQVIA (IQV), Iron Mountain (IRM), Intuitive Surgical (ISRG), Liberty Energy (LBRT), Lennar (LEN), Eli Lilly (LLY), VanEck Morningstar Wide Moat Fund (MOAT), Motorola Solutions (MSI), Micron Technology (MU), Neuberger Berman Next Generation Connectivity Fund (NBXG), NVR (NVR), Parker-Hannifin (PH), PulteGroup (PHM), Sprott Physical Gold Trust (PHYS), ProShares Ultra QQQ (QLD), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), VanEck Semiconductor Fund (SMH), Spotify Technology (SPOT), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Cambria Shareholder Yield Fund (SYLD), Trane Technologies (TT), ProShares Ultra Semiconductors (USD), Viper Energy (VNOM), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, feedback on Dan Ferris' latest Friday essay and thoughts about an essay of ours published over the weekend in the DailyWealth newsletter, which talked about McDonald's hamburgers (and referred to them as sandwiches)... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"After reading Dan Ferris' very informative message about Berkshire Hathaway, I am reminded of something I learned while I was a toolroom apprentice many years ago from a very old timer. 'When in doubt, make it stout, out of things you know about'!! Thank you!" – Subscriber J.R.

"In addition to your well-explained remarks on Apple's car business I always thought that mixing a high gross margin, high free cash flowing, capital-light business (iPhones, iPads, iMacs and the Apple Store) with a low gross margin, low cash flowing, capital intensive business (car manufacturing) was a bad mix that would hurt shareholders...

"It makes no sense to want a small piece of a low-margin but high-revenue business. Not if you want to maintain a P/E of around 28 compared to the auto industry's P/E of 6 to 11 (excluding Tesla's ridiculous P/E of 47).

"Honestly, this should be a fireable offense. Apple could only afford that mistake because it's such a rich business. (I worked for a public company that acquired another company in a related market for $115M, spending all its available cash, and then wrote down that acquisition by $100M less than a year later. No one was fired.)

"Absurd." – Subscriber Mark P.

"I'm always amazed at how anyone can call a HAMBURGER a SANDWICH. It's nothing like calling a SPADE a SPADE." – Subscriber Eric C.

Corey McLaughlin comment: This reminds me of a viral online debate a few years ago... Is a hot dog a sandwich? (I will hold my opinion for now.)

All the best,

Corey McLaughlin
Baltimore, Maryland
March 4, 2024