Quick housekeeping note. I have moved the newsletter from Substack to beehiiv for a number of reasons. Ultimately, it will allow me to create the best long-term experience for you and your fellow investors who read the newsletter. I’ll share more details later.

As I learn the platform, you might see some minor formatting errors, but this is the right decision long term.

For paying subscribers, nothing changes. Stripe is the payment processor I used on Substack, and it will be the same on beehiiv.

Market Outlook

The portfolio is currently up 35% YTD and 16% since inception on February 15, 2022, using money-weighted return, which considers all cash flow in and out of the portfolio (M1 Finance uses money-weighted return).

I was heavily invested in tech/SaaS at the beginning of the year, but as long-term readers know, I begin transitioning out of some of my favorite SaaS stocks like NET, DDOG, and SNOW because I thought they had become too overvalued given the environment we are in.

I think the S&P 500 and Nasdaq 100 are overvalued. I shared my thoughts in detail last week when I bought SQQQ, a 3x inverse QQQ ETF. It’s designed to move 3x the opposite direction of QQQ but is only designed to be held for short periods. So I closed the position on Friday last week for a nice gain.

Please read up on the SQQQ before messing with it because there are a lot of associated risks. Last week, I outlined my thoughts and thesis for buying the SQQQ in this post.

The S&P500 is down roughly 13% from where it traded on December 31st, 2021, which makes it seem like we’re due for a major rally.

But the narrative changes if we look at the P/E multiple instead of just the price. At the end of 2021, the S&P 500 had a blended P/E of 24. It is now trading at a blended P/E of 18.73.

The chart below shows the S&P 500 current price, represented by the black line trading under the blue line, which shows its average P/E since 2001 of 19.66.

So the S&P 500 is cheap right?

I don’t think so. If we take out the years following the .com crash when the S&P 500 P/E was artificially high due to EPS falling from $7.92 in 2006 to $4.33 in 2008, and then take out the post-COVID craziness when the P/E shot up to 24 then the average P/E from 2010 - 2019 is 18.26.

So what that means is that the S&P 500 is currently trading above it’s average P/E from 2010 - 2019. That was a very low-interest rate period where earnings grew 11% per year.

We are now in a higher interest rate period with earnings expected to grow 7% per year over the next 3 years. There is also a chance these growth expectations come down, which would put more pressure on the indexes.

I just can’t justify where the Nasdaq 100 or S&P 500 are trading right now.

Walmart and Home Depot just reported earnings and gave underwhelming guidance. Walmart just gave FY 2024 EPS guidance of $5.90 to $6.05 vs expectations of $6.51. Home Depot just gave FY 2023 EPS guidance of a mid-single-digit decline.

I think there’s more light guidance to come.

Putting My Money Where My Mouth Is (Portfolio Changes)

Here’s what I’ll be doing this morning.

#1 Buying SQQQ

This is a hedge against a tech/broader market sell-off. My current target is roughly 15% of the portfolio in SQQQ. That leaves me with 85% of the portfolio to invest. Since SQQQ moves 3 times as much as the QQQ, I’ll be essentially 45% “hedged” and 85% invested, meaning I’m roughly 40% long.

Because SQQQ is a short-term vehicle, the longest I’ll hold this position is until Friday. Or, if I see a 10% - 20% gain this week, I’ll close the position and have $25,000 in cash to invest at lower prices.

This isn’t a perfect hedge by any means, but I’m limited by the options I have in M1 Finance.

If you agree that the market seems overvalued but don’t want to hedge using SQQQ, you could raise some cash, shift from “expensive stocks” to more stable dividend payers, or do nothing.

Data shows that doing nothing is usually the best option.

#2 Reducing exposure to tech stocks and buying dividend payers

I’m selling PDD, BABA, and MELI to reduce risk and raise capital to buy dividend payers VZ, MDT, and FNF.

Simply put, I think investors will flock to stable dividend payers as rates stabilize, and I think these three companies offer a great mix of dividend yield, dividend growth, and stability.

Here’s a screenshot from Alpha Spread showing their intrinsic value and Wall Street analyst price targets on them.

And finally, here are some screenshots from one of my favorite services for dividend investors, Simply Safe Dividend.

First, this is how my portfolio will be invested (not counting the $22,000 SQQQ position). I’ll own 7 dividend payers: AAP, BAM, BN, FNF, MDT, TSM, VZ and 3 non-dividend payers: GOOGL, META, RKLB.

Here’s a nice summary of the portfolio. I’ll have roughly $141,000 invested in these companies producing annual dividend income of $2,874 with a 2.04% portfolio dividend yield and 10.8% dividend growth per year over the last 5 years.

Not bad, considering over $50,000 is invested in non-dividend payers.

This gets me so pumped about investing in dividend payers and dividend growers. Here’s an income forecast using the 10% dividend growth, dividend reinvestment, and annual contributions of $36,000 (yes, that’s aspirational).

By 2043, this portfolio would be producing $92,500 in dividend income. That doesn’t take into consideration the fact that META and GOOGL could be paying a growing dividend by then (kind of like AAPL did).

It’s important to emphasize that the income forecast above is a forecast. Things will change, and we can’t just blindly own stocks. We have to monitor our portfolios over time.

Summary

This email is way too long, but I wanted to spend some time outlining my current outlook and how I’m adjusting my portfolio after an insane run to start the year.

I’m not completely shorting the market, I simply believe the market is 10% - 20% overvalued and I think I’m better off owning dividend payers and undervalued stocks than some of the high-flying SaaS/Tech companies.

If companies like SNOW, NET, and DDOG trade down to fwd P/S ratios of 10 - 12, I’ll strongly consider buying them. But they are at 16, 16, and 12, with growth decelerating significantly. I think I’m better off waiting a bit.