by Louis Navellier

April 30, 2024

In any election year, change is on the horizon, but in this uncertain world, the one thing that remains certain is that companies and their underlying earnings will determine the fate of individual stocks.

U.S. companies that have been overly dependent on China – like Apple and Tesla – are now suffering from the deflationary forces and overproduction that have enveloped the Chinese economy. In fact, Tesla has had to cut the price of its vehicles again worldwide – by another $2,000 last week. As a result of this deflation that will hinder Apple’s and Tesla’s earnings, institutional money is on the move, seeking safer havens, where sales, earnings and future guidance are more predictable. That is why many of our growth stocks have emerged as new market leaders and are benefiting from new institutional buying pressure.

The rising cost of electricity is a big new challenge. The electric bill for my Nevada home is soaring as my local utility strives to implement more green energy. At my Florida home, my utility bill has not risen excessively, since Florida has been making a much slower green transition, so voters around the country are increasingly being influenced by more than just food and gasoline prices, but their electricity bills as well. As a result, I suspect that economic factors will largely influence the upcoming Presidential election.

The AI race continues to sort winners from losers. In addition to chip winners (Nvidia) and faster data centers (Super Micro Computer), the next big opportunity will be boosting electricity and internet speeds that cloud computing demands. Typically, the cloud migrates to where electricity is cheaper, like nuclear, hydroelectric and coal. Natural gas peak-power plants are also important, since they turn on an off during peak demand, like when it gets hot, and air conditioning demand rises. The next great investment opportunity is now in companies that are expanding the electrical grid (like Eaton, Emcor and Quanta Services) or benefiting from the growth in cloud computing (CrowdStrike, Fortinet and Nutanix).

The hope of AI is that it will cause productivity to soar, fueling a rise in prosperity, but that means the initial downside of AI is that thousands of technology workers have been laid off. Nonetheless, change is coming, and AI is leading the way. Looking even farther out, the U.S. is in better shape than other nations, since our population is growing, and we largely assimilate new immigrants well. In addition to the U.S., only Brazil and India have growing populations. The rest of the world is shrinking, which is one reason why deflation is spreading (or at least inflation is running cooler). The U.S. is fortunate to be energy and food independent and to have 50 states that naturally compete with each other, so overall, the U.S. will remain the AI leader due to its better demographics and natural competition between our states.

As deflation in China destroys the once-profitable businesses of Apple and Tesla there, institutional money is moving to companies that can beat analyst estimates. One notable example of money on the move is the exodus of money from ARK ETFs that do not own Nvidia and have been buying more Tesla shares. The Wall Street Journal reported that ARK ETFs had net outflows of $2.2 billion this year. The ARK ETF assets peaked at $59 billion in early 2021, but assets now stand at $11.1 billion, a drop of 81%. This illustrates the fact that you must own the right technology stocks, like Nvidia and Super Micro Computer – otherwise investors will abandon your fund. The largest holding of the flagship ARK Innovation ETF (ARKK) is Tesla (at 9.6%), plus some other tech laggards, according to Morningstar.

In reporting earnings last Tuesday, Tesla told investors what they wanted to hear – after missing analysts’ consensus estimates. Specifically, Tesla said that it would be accelerating its commitment to less expensive electric vehicles (EVs), but still, Tesla’s operating margins plunged to 5.5% in the first quarter.

Typically, the cheaper the vehicle, the lower its operating margins. However, to better compete with BYD in China, Europe and the emerging markets, like India, Tesla needs a smaller EV designed for cities. This will be a big challenge for Tesla, which may require a new manufacturing process to make low-cost EVs.

The other big-tech earnings announcement came on Wednesday, when Meta Platforms announced better-than-expected first quarter revenue and earnings. However, for the second quarter, Meta Platforms forecasted revenues in a range of $36.5 to $39 billion, not far from the analysts’ consensus estimate of $38.25 billion, but Meta Platforms said that it expects capital expenditures “will continue to increase next year, as we invest aggressively to support our ambitious AI research and product development efforts.”

Translated into bottom line outlook, the costs of setting up AI are temporally hindering Meta Platforms’ outlook. To me, this means Meta’s guidance was great news for our Nvidia and Super Micro Computer. As I have repeatedly said, investing in AI hardware via NVDA & SMCI, I believe, is the best way to profit from the AI boom, since the AI software results for AI users (like META) have not yet materialized.

One caution is that AI is now straining utility power grids as the demand for faster AI cloud computing soars. This is also great for Super Micro Computer, and for companies that boost electricity infrastructure.

Last week, I cautioned you that the recent profit taking in Super Micro Computer and Nvidia was unfounded, since these are our strongest stocks in terms of comparable sales and earnings, and our patience was rewarded as both recovered strongly last week: SMCI rose approximately 20% and Nvidia 15% last week.

Stay Invested in Energy, Due to Wars, Seasonal Trends and a Strong Dollar

The European Central Bank (ECB) and the Bank of England have telegraphed that they may cut their key interest rates in June. Since the Fed has postponed its key interest rate cuts until July or later, the U.S. dollar has gotten even stronger, on the anticipation that high U.S. interest rates will persist longer.

In addition to slower GDP growth, the Commerce Department announced that durable goods orders rose 2.6% in March, due largely to commercial aircraft and defense orders, but excluding commercial aircraft and defense orders, core capital goods orders rose 0.2%, indicative of slower economic growth in 2024.

The recent inflation gains remain primarily focused on high shelter costs (defined as owners’ equivalent rent) as well as higher gas prices at the pump. On the other hand, wholesale goods prices have fallen in five of the past six months, due to the deflation we are importing from China. A strong U.S. dollar will limit inflation’s future gains for import prices, so if the Fed’s Personal Consumption Expenditure (PCE) index can cool off in the upcoming months, key interest rate cuts are expected to be forthcoming. The Fed typically cuts key interest rates before Presidential elections, and this year is expected to be no different.

With rising energy costs, it is imperative that we hold our energy stocks, since any escalation in the wars in the Middle East or Ukraine could send crude oil prices soaring. Also, these conflicts are also weighing on the voter’s minds, as organized protests envelop many major colleges. (Unfortunately, my daughter is studying at Columbia, so she must now attend all her classes online due to the Pro-Palestinian protests).

Bloomberg reported on Saturday that Ukraine struck a Russia’s Slavyansk refinery with 10 drones after Ukraine on Friday night was attacked by a heavy missile barrage at gas infrastructure targets. This is the fifth Ukrainian attack on Russian refineries and their energy infrastructure. After the third attack, the Biden Administration once again asked Ukraine to stop attacking refineries, since the cost of diesel and refined products were rising. Interestingly, now that Ukraine was approved for new aid by Congress after a long wait, perhaps Ukraine will temporally ignore the Biden Administration, until it needs more money.

Our energy stocks have been exhibiting relative strength due to the chaos in the Middle East as well as the fighting between Ukraine and Russia, and warmer weather. One final caution: The key to reducing risk is to mix technology stocks with energy stocks, since when one sector “zigs” the other sector tends to “zag.”

Navellier & Associates owns Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), Apple Computer (AAPL), EMCOR Group, Inc. (EME), Quanta Services, Inc. (PWR), CrowdStrike Holdings (CRWD), Nutanix, Inc. Class A  (NTNX), Eaton Corp. Plc (ETN), Fortinet, Inc. (FTNT), and a few accounts own Meta Platforms (META), and Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), Apple Computer (AAPL), EMCOR Group, Inc. (EME), Quanta Services, Inc. (PWR), CrowdStrike Holdings (CRWD), and Nutanix, Inc. Class A  (NTNX), via a Navellier managed account, and Nvidia Corp (NVDA), and Apple Computer (AAPL), in a personal account. He does not own Tesla (TSLA), Eaton Corp. Plc (ETN), Fortinet, Inc. (FTNT), or Meta Platforms, (META), personally.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Louis Navellier

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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