🗞️ Tesla Runs Out of Power

WHILE YOU POUR THE JOE… ☕️ 
Send Us a Screenshot

Shares of Tesla (NASDAQ: TSLA) are down by 8.4% on the day… Yikes 😐️ .

But the selloff continued down another percentage point or two, as the stock hit $238 a share in the after-hours. While some may be weeping over their losses, if you’ve been following us for long enough, you should actually be celebrating with us 🎉.

Last week, we sent an issue showing you all the research and breakdown dissecting our bearish view on Tesla stock and why the top was imminent.

To save time, just click here and read over that release for yourself. By the way, we’re still holding our shorts for $230 and even $212, depending on how the print looks throughout the week.

So, to make us feel good about the work we do, send us a screenshot of the gains 🤳you have in this position (that’s if you decided to take it yourself) to [email protected]. If not, no worries; there are plenty more trades where that came from.

But our list of winners doesn’t stop there. Remember our post showing our bullish view on Potlatch (NASDAQ: PCH)? Well, that stock is up by over 5% in a single day 🔥, so we feel good about that as well.

Speaking of winning picks, let’s get on with today’s email 📧…

STRATEGIZE LIKE A PRO
Welcome to InvestiBrew’s Morning Meeting

Artificial intelligence trading models are here to stay, so trading intraday is a futile endeavor. If that’s you, do yourself a favor and stop hurting yourself.

Humans cannot compete with machines that can compute algorithmic math programs and execute up to 10,000 transactions a second. In contrast, we can only do one if we’re not hungover.

So, when we are looking for our next trade, we take on a 1-3 month time horizon to ensure we are outside the timeframe of the machines on the other side of the market.

To do this, you must employ a top-down search overlayed with a bottom-up approach. Here’s an example landing us on a short position bias for Entegris (NASDAQ: ENTG).

Where’s GDP Going?

That’s the first question we need to answer, since the stock market is determined by GDP, or at least the perception of where it will go next.

For the past 2 years, GDP has been contracting on absolute terms. Nominally, GDP has grown between 1.3% and 2.6%, but real terms are computed by subtracting inflation from these growth rates.

Keeping it real, GDP has actually contracted as inflation has been over the growth rate for two years. So, naturally, our bias is short the market on top of other drivers that we’ll reserve for our private group members; you know who you are.

Which Sectors?

Anyway, now we need to figure out which sectors and industries are starting to go down or are likely to start coming down so that we can align our views with the macro trend in GDP.

To do this, we should break down the latest PMI indexes for ISM manufacturing and services since they crudely tell you which industries are flexing or losing steam.

** By the way, if you want access to this model to keep up with the economy yourself, just email us at [email protected] with the subject “I’m ready for my model.”

The quarterly trend showed us that the computer electronics and electrical equipment industries have shown a topping pattern, which could also explain the following chart on Nvidia (NASDAQ: NVDA):

It’s down nearly 6% 📉, and other stocks will eventually follow suit. Do we know this for sure? Not really, but the evidence starting from the PMI is encouraging enough. Plus, there’s this from the services PMI:

The information industry also shows signs of a top or at least a slowdown. So, without touching the toxic waste made of Nvidia stock, we dug into other areas of the electronics manufacturing industry.

Here’s what we found:

There’s the comps spread for the electronics manufacturing industry. Notice that there is a positive outlier in Ultra Clean (NASDAQ: UCTT), and a negative outlier in Entegris stock.

You can find the outliers by following a list of drivers and compare them to the rest of the industry average so you can spot the outliers:

• Forward P/E ratios (PE2 column), where Entegris is higher, but not justified.

• Not justified because the earnings per share (EPS) growth for the next year (EG2 column) is only 29.2%, well below the industry average of 35%.

While not a perfect example of a short, we do think that this stock is too expensive 💵, on a forward P/E basis, compared to the next 12 months of expected earnings growth.

Because valuation multiples are driven by financial growth, there aren’t that many reasons to justify the current valuations on Entegris stock.

Digging Deeper

Looking into the company’s recent financial results, you can see a slowdown on the top-line revenue, up to 16% contractions 📉from the prior year.

But that’s not all.

Notice that the outstanding number of shares increased over the year, by roughly 2 thousand, diluting your ownership as an investor.

Now why would the company need to issue more shares if the net income went from a net loss of $88.2 million to a profit of $45.3 million this quarter?

** Quick tip: To save you time from learning accounting principles, just keep in mind that net income can be easily manipulated, while cash flow cannot. So don’t always make decisions off of net income alone.

Cash flow from operations was lower for the quarter, so net income should have also been lower. Yet, it wasn’t.

So, we suspect that because the industry is currently experiencing a slowdown and Entegris’ financials are showing signs of contraction, this could make for a good short prospect.

Taking the quotes from the services PMI respondent section, we noticed that the industry's overall feeling isn't optimistic. So, on a qualitative basis, our short thesis is also justified ✅.

Now, Onto the Charts

Entegris’ 4H chart looks like this, and the gray areas we drew represent excesses, defined as areas that don’t see a lot of volume.

As you can see from the recent price action, these excesses act as a vacuum, where the stock price either pivots quickly or just breaks through to the next level.

But that’s not enough to put on a trade.

Zooming into the market profile, the print shows that Entegris stock only sees volume on down days.

On 07/10, an up day, there was no volume, which meant the stock's perceived value was lower and not higher.

On 07/11, a down day, a lot of volume took place below the opening price, reiterating that the market has a short bias on this stock 📉.

Some other factors helping us out:

• Eversource Wealth Advisors, Entegris’ largest shareholder, sold out of their entire position in June 2024.

• The stock’s dividend yield is only 0.28%, way under its previous 1.5% yield. Just like the % return on a house vs rent, this means the stock price is too high compared to its historical levels relative to the dividend payout.

STOCK OF THE WEEK(END)
A la Mode (Again)

Remember our Wednesday issue, in which we pitched the potential upside currently being held in shares of Skechers (NYSE: SKX)?

That idea was based on the fact that most of the company’s revenues and expansion efforts were in European and Asian markets 🌏️, not North American ones.

Why? Well, CPI data (inflation) is finally slowing down, which means that there is less consumption, and as you now know from above, the United States GDP is actually contracting in real terms.

So, to support our European and Asian friends, we looked for other consumer discretionary stocks highly exposed to those markets.

Ermenegildo Zegna (NYSE: ZGN)

Yep, the luxury European brand, where a shirt might cost you the average monthly rent in the US and a pair of pants an entire down payment for a new car.

Money is drying up for consumers in the US, but that doesn’t mean overseas consumers must also suffer.

This table shows how Zegna is leading the board on an EPS growth basis (EG2 column), excluding Foot Locker, which is another entirely different concept.

More than that, the stock is trading at a forward P/E (PE2 column) of 17.6x, a premium of 35.3% 💎over the industry’s average 13.0x valuation multiple.

Typically, stocks will trade at premium valuations for good reason, so we got crackin’ and found this:

Note that, despite America having the greatest revenue growth, since you know the richer 1% of the country doesn’t feel a recession, it was China and EMEA that carried the bulk of the volume.

Following along, we know that a stronger Euro will encourage consumers to buy more discretionary items in that region, so that’s good news for the company’s largest market.

On the other hand, if you read our latest issue covering the Chinese market, you know that China will be awakening any day now and bringing a massive wave of consumer activity.

Here’s what Wall Street had to say about our thesis:

• Goldman Sachs boosted Zegna stock’s price target from $17 a share up to $18.7 a share, or 65.4% upside 🔥.

• Short interest fell by 7.3% in the past month, a sign of profit taking by short sellers after the stock traded down to only 68% of its 52-week high.

• Quadrature Capital initiated a $1.5 million position 💰️in the stock in May 2024.

NOW GO AND MAKE IT HAPPEN
Understanding the Fed

I bought this book 📖when I was getting started in real trading research; I was about 17.

By the time I finished it, I was roughly 40% done with most of what I needed to know about reading an economy; the rest was a piece of cake, save for the quants.

I hope this helps you as well, on top of the valuable degrees you’ve all earned (or are about to; most of our audience is still in college).

To your success,

G. 🥃