Stock Squawk 🦜 - Preparing for 2022

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We’re just a month away from 2022. Now’s the time many people start rebalancing and trying to figure out how to align their portfolio’s for the new year.

There’s a lot of talk about how interest rate hikes will affect growth, and if I plan to change my investment style. So this is my attempt to answer these questions, and what I “currently” plan to do going into the new year.

I first want to re-cap where I’ve been on my investment journey. You can get the full picture by reading my first newsletter: “An Introduction”

I started out in February 2020 primarily focused on Index & ETF’s with a few large caps added to the mix. Over a few months after the March ‘20 crash, I rotated out of those index and ETF’s and into individual names to take advantage of the historic post-crash bull market.

Whether smart or lucky, that strategy paid off well. I assumed, and have stated before, that when I saw a shift in the market I would change my investment style to match…

In 2021, I failed to recognize the extreme valuation’s and looming correction we would get in February ‘21, and basically rode the market up… and back down. I recovered from the low’s of 2021, but have not seen the high’s of February '21 since.

With the benefit of hindsight, it’s easy to see the extreme valuations, and how obvious it was I should have trimmed/sold more near the top. As good as 2020 was, it also ingrained some very bad habits.

Through that experience I learned to trade options, first as a potential hedging strategy, then as a supplement to my long term investments. This added both tools to the toolbox, and also gave me an outlet for the “need to do something”, while leaving my long term investments intact to compound over time.

Until last weeks sell-off, I’d been able to tread water with an average year (roughly +10%) despite having huge drawdowns in many of my larger holdings; including $MGNI from the $60’s to under $20. After last week, I’ve dropped to a slightly negative return on the year.

Rotating back to index’s in February would have paid off much more in the short term, but I believe staying the course with my conviction holdings and learning a new skill (options) will benefit me more in the long run.

Now the million dollar question… What’s in store for 2022?

I think we’ve already seen some of it:

So what does it all mean for the market?

We’ve already seen multiple contraction in small/mid cap names, I think we see a similar contraction in larger cap names as well; either due to lower prices or higher revenue’s. We got a big taste of that last week.

Is inflation transitory? Some of it is, caused by lack of workforce participation and other supply chain issues. Some of it is here to stay, due to higher wages and fuel costs.

Tighter monetary policy? Whether you believe in the underlying companies or not, there is no doubt the run up in speculative assets has been due to the unprecedented liquidity in the market. All that “free” money has to go somewhere, along with growth stocks a lot of it flowed into crypto, NFT’s, and meme stocks. Less liquidity will likely see a correction in these type’s of assets.

Rate hikes are going to make the cost of capital more expensive, whether that’s funding a new business, buying a new home, or servicing existing debt. With home price’s at record highs, interest rate hikes could dampen home sales (although there might be a rush before the rate hikes).

Return to work has already started, there are many positions that won’t ever go back, but in general we should see more face to face interactions. How is that going to affect WFH stocks next year? But more importantly, what stocks will benefit?

Return to travel has picked up as well, but we are no where near peak travel. With each Covid variant we will continue to get volatility in the sector. Who’s going to benefit?

Despite the popular theme of ridding the world of fossil fuel, it’s not going anywhere, and demand will only pick up in 2022. Without fossil fuel you would be naked, hungry, and afraid. Work from the office, travel, and current administration policies will only increase demand and reduce supply in 2022.

I expect to see more pain in the short term, but believe patience will pay over the long haul.

I’m re-evaluating my positions to be very selective in holding companies who are not profitable. Especially small & mid Cap companies.

I’ll be looking to add to my growth companies as their multiples contract. Revenue growth and profitability will be rewarded… eventually.

I’m not going to overthink my “market disruptor” positions, and will accept they could remain beaten down for the majority of 2022. This includes companies such as $NNOX & $LMND.

I will try and catch the prevailing trends with my allocation for trading.

Some noteworthy trends I’ll be watching:

Travel: I have a position in $ABNB that I expect to do well, and I could see $MAR & $CCL catching bids in 2022 among others.

Advertising: As supply chain issues resolve, and travel opens up, I expect advertising to pick up with it. Even if the economy is suppressed in 2022 due to inflation & interest rates, if businesses have merchandise, they will be vying to sell it to you. $TTD, $MGNI, $ROKU, $ATY, $CTV, $ZMDTF, $EGLX, $PUBM, $APPS and many more should do well.

Fossil Fuels: I’ve already traded $OKE & $RRC this fall for natural gas & propane. I think refiners could get a boost in 2022. $XOM & $PSX are solid options to keep an eye on.

An interest rate increase may bring banks back into the spotlight. I’m leaning more towards staying with alternative investments in this area such as Fin Tech names $SQ, $SOFI, & $UPST for now, but banks should do well.

I’ll be staying away from housing and work from home names such as $ZM, $UPWK, $FVRR, $DOCU etc. for now. Although they may all be great long term investments, I could see some short term pain in 2022. I’ll also be cautious adding anything with a high sales multiple like $NET & $SNOW.

In short, I don’t expect to make any wholesale style changes like I did in 2020 unless something fundamentally changes in my life (I lose the time I have available now to dedicate to trading/investing).

The market is likely to do what is least expected. Everyone expected a Christmas rally, and then a pullback in early 2022. So naturally we got an early pullback instead of a rally. We are now hearing everyone scream the crash is here, and it’s going to get much worse. Maybe… or maybe we rally instead. No one really knows for sure.

Traders are sitting on the sidelines looking for market direction, young investors are dollar cost averaging into great companies, and many long term investors are just sitting tight knowing over time the market will recover.

I expect to see more red days ahead, but I know I’m not smart enough to time the market (especially with how it’s been acting in 2021). Maybe the downside of 2022 is getting priced in as we speak, and we will continue our bull run, or maybe we are in for another 35% correction (I’ve been through 2 in 18 months, and honestly getting close again). Either way, I’m investing in companies I believe in long term, and I’m going to do my best to continue holding them through the volatility until the thesis changes.

And the thesis will change on some of them. I’ll lose money on some and take profits on others. It’s the nature of the game.

If you can weather the volatility, I still believe growth is the best long term strategy, but there is something to be said for having those stable slow & steady growers in your portfolio as well. There may come a time where I decide to add more of them back into mine. For now, I’m going to ride this out like I have the other corrections, and continue to position myself for what I believe to be winners in 2022 and beyond.

Sh*t show about sums it up. 🤣

Today (Monday) I traded $AFRM for $TDOC; the decision had more to do with the opportunity for $TDOC than any bear sentiment for $AFRM. Otherwise I plan to ride through the volatility and continue to make small adjustments to preserve capital for better opportunities.

If time allows, I’m going to see if I can get something out on end of year tax harvesting next week.

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