VICI - Shooting The Warning Shot

2023-07-20 09:00:00 ET

Summary

• The S&P 500 has seen a significant increase of 18.7%, nearing new all-time highs.
• Despite this, the S&P 500's performance is largely due to the success of the highest weighted and most valuable companies, not the index as a whole.
• Analysts are more bullish than ever raising price targets to absurd levels, but I am cautious following the herd.
• I share my own strategy, recent investments and market outlook.

The stock market is driven by a lot of things, but two stand out the most, emotionally driven and fundamentally driven. Understanding, the difference is of utmost importance to investors, and it differentiates someone from being a speculator or an investor.

The S&P 500 ( SPY ) is up an incredible 18.7% and is closing in on a new all-time high. Not many expected this kind of a momentum shift at the end of 2022. However, the S&P 500 didn't do so great, only the highest weighted and the few most valuable companies in the world have pulled the index higher.

The so called "Magnificent 7" are the highest weighted companies in the S&P 500 and have a total weighting of more than 28%. This number has grown lately as the "Magnificent 7" have a year-to-date performance of:

• Apple ( AAPL ) - 55%
• Microsoft ( MSFT ) - 47.49%
• Amazon ( AMZN ) - 57.54%
• Nvidia ( NVDA ) - 227%
• Tesla ( TSLA ) - 170%
• Alphabet ( GOOG ) ( GOOGL ) - 37%
• Meta ( META ) - 151%

All of them have outperformed the index massively and have therefore guided the S&P 500 higher. Yet, the question remains if the move upward was emotionally driven or fundamentally driven.

Analysts are sure we are in a new revolution and are raising price targets well above current prices of stocks. I could expand the list even more, but I think this is sufficient. So far, what I have learned in the few years of my investment career, is that when everyone is raising price targets and jumping on the few excellent stocks, that I can better avoid them and we are nearing peak exuberance. On the other hand, when analysts are downgrading a stock by the masses, I might have to take a closer look at the stock. One example of this has been my call on Meta when it was trading at $110 a share. Of course, it is no perfect science, but definitely a great way of avoiding the herd, and finding value.

Multiples have increased immensely year-to-date and have reached a point where the lowest price-to-earnings ratio of the "Magnificent 7" is 27. Since risk is determined by the price investors pay, it important to know that the "Magnificent 7" has become more risky. Investors are now predicting a lot of growth in the following years for all the businesses mentioned and as result pricing them for perfect. I agree that most of them will see accelerated growth, due to AI products and efficiencies. Still, it is hard to see a margin of safety considering the "possible" growth ahead. I prefer to invest in a business, where I get growth for free and create value for myself as a shareholder. I would consider the extended rally emotionally driven by speculators instead of investors. Benjamin Graham would say:

When stocks grow faster than companies, investors always end up sorry.

Accordingly, I have been making changes to my own portfolio. One of them includes a 50% trim of my " Top Pick for 2023 ", which has been running rampant with a 46% gain. I see further progress for MGM Resorts (MGM) in the following quarters in the China part of the business, but I also expect the Las Vegas boom slowly coming to an end of growth. All combined, I decided to take some profit.

Besides, I have also exited my recent investment into Blackstone ( BX ) for a 27% profit. I do want to mention that I pay very low capital gain tax in Belgium of only 0.35% when I sell a stock, this short term value trade might be more difficult to pull off for others. Lastly, I trimmed my allocation in Kulicke and Soffa industries ( KLIC ) by 50% after it did an incredible run without any fundamental improvement.

Of course, I am not going to sit just on cash and reinvested a part of my profits into REITs. Real estate is one of the sectors hit the most by the increase in interest rates and opened some value income opportunities. VICI Properties (VICI) is by far my favorite REIT, but held up strong and was not interesting enough to add much for me. I did buy a lot of Alexandria Real Estate Equities ( ARE ) and started a position in W. P. Carey ( WPC ).

Finally, most recently, I bought two solar module makers , Canadian Solar ( CSIQ ) and JinkoSolar ( JKS ). I anticipate a margin expansion, due to extremely low prices of polysilicon to make ingots, wafers and solar modules.

Takeaway

In the market as it is now, I find it hard to find good deals with low risk and good/high returns. The sustainability of the rally is questionable and I think holding a position of cash could not hurt. Taking advantage of value and taking profits when there is no more value, while keeping in mind the risk and reward balance, is the investing strategy I prefer. Rebalancing your portfolio might be considerate. You would not be alone, the NASDAQ 100 is rebalancing, due to an overly top heavy fund.

With this article, I shoot a warning shot. Maybe I miss the bigger picture, but only the future can tell me that.

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