THE INSIDE DOPE

THE INSIDE DOPE

Wall Street is the only place that tells you that a stock is the best thing since sliced bread in one breath, while simultaneously telling you that the stock is overvalued in another. To say Wall Street gives mixed signals is an understatement; in fact, they manufacture them as a way to cleverly fleece the retail investor out of their positions on a daily basis.

They are the masters of throwing false narrative rocks and hiding their hands like we don’t see their transactional intentions, fortified by that green eyed monster called greed. It is not uncommon for Wall Street to create false narratives and headwinds, but as a retail investor, what are you to believe? It seems like Wall Street is one big insider’s casino, where the house always wins and the average Joe is lucky to leave with the clothes on his back.

It’s a mockery; Sell-Side Analysts put hold ratings on stocks that go up and buy recommendations on stocks that go down, while snugly sitting in their Brooks Brothers suit, talking in acronyms as if they seek validation from talking over the head of the retail investor. It would be one thing if they got it right more often than wrong, but a win ratio of 30% suggests that they are using a dart board at best. 

There are two types of Wall Street analysts: Sell-Side Analysts and Buy-Side Analysts. The very definition of a sell-side analyst breeds contempt. A sell-side analyst typically works for an investment bank or brokerage firm. Their primary role is to provide research and analysis on stocks and other securities to assist the firm’s sales and trading teams.

They provide analysis on market trends, sector performance, and company fundamentals. They produce research reports, earnings forecasts, and investment ratings, i.e., buy, hold, and sell. One of their most essential functions is to generate commissions and investment banking fees, as well as promote the companies that are clients of their firms. Sell-side analysts are notoriously known for being overly optimistic and having conflicts of interests, especially when covering companies their firms are recommending inhouse. An interesting fact according to FactSet—sell-side analysts almost never put a sell recommendation on stocks they cover. The proof is in the pudding—out of thousands of recommendations on stocks in the S&P500, sell recommendations only account for 6%.

What does that tell you? 

It says that analysts are less likely to piss off companies that potentially become clients, which makes them subjective in their analysis rather than objective. This effectively renders the analyst report about as useful as toilet paper.

Now, if I had a gun to my head, my last 10k, and I had to choose, I would choose the buy-side analyst; they have a different type of self-interest. A buy-side analyst works for asset management firms, hedge funds, pension funds, or other investment firms. Their primary function is to make buy and sell decisions for the firm’s investment portfolio. Their research primarily centers around in-depth analysis, detailed financial modeling, and long term value and performance. And considering buy-side analysts reports are not public information and hedge funds charge a 2% management fee plus 20% of the profit, being right more times than wrong ties directly into compensation come bonus time.

HERE IS WHAT THEY THINK ABOUT YOU ……

There is an old saying in poker, if you can’t spot the donkey in the first couple of hands, you’re the donkey. Retail investors are raised like genetically modified chickens for slaughter, being fed misinformation and head fakes, as a standard diet by institutions.

Wall Street has put a battery in the back of each and every retail investor and sold them the “Get Rich Quick or Kill Your Money Trying” package aka, The Chase The Bag Syndrome, where they trade away money daily to a false perception of making profits and becoming a millionaire trader.

The institutional traders are both the bull and the bear that eats and the retail investors are the pigs that get slaughtered. It is widely known that 95% of retail traders lose money, mainly because they are playing a losing game. The cards are stacked heavily against the retail investor. Institutions have way too much power, dry powder, and inside information.

When I say inside information, I do not mean illegal. I mean access to firsthand information - something retail investors aren’t privy to; although, the retail investor accounts for 15% to 25% of the daily volume. They are misguided missiles on a search-and-destroy-their-money mission due to the lack of knowledge of how Wall Street’s playbook works.

The stock market trades approximately 300 billion or more in volume a day. Institutions control 60% to 70% of the daily volume, and within the institutional brackets sits the largest asset manager in the world, BlackRock, with $11.5 trillion in assets, controlling 10% of the daily volume.

Next up is the billionaire, Ken Griffin, Founder of Citadel, the hedge fund that engages in high frequency trading, and also provides liquidity through its market maker activities. They are also what is known as a quant firm, that engages in algorithmic trading, and control roughly 20% to 25% of the stock markets daily volume.

If you compare the retail investors 45 billion to 75 billion daily dollar volume to Citadel’s 60 billion to 75 billion dollar volume, although roughly equal, Citadel is what one would call, the smart money and retail investors are what I call liquidity pools.

Liquidity pools are where institutions set their traps based on an idea of where a retail trader may put its stop loss or limit orders.

For example, let’s say you are buying 100 shares of Tesla at $339, hypothetically, with a stop loss at support level of $308 a share. Institutional traders will go short, putting pressure on the stock, pushing it down to where they think your stop loss may be triggered.

Since every trader uses support, resistance, and trend lines to manage their risk, figuring out where their stop losses and limit orders are as an institution is a no brainer.

This is where institutional money steps in and knocks out your stop loss, hence profiting off of your loss while covering their shorts. Since the majority of retail traders play either the long side or the short side, this puts retail traders at a disadvantage to the big institutional capital that’s employing strategies, simultaneously on both sides of the market. Institutional traders are trading with sophisticated algorithms that process data in split seconds and trade at lightning speed, using artificial intelligence.

And it’s not just AI’s ability to process large data sets, social media trends, market sentiment and economic data in microseconds. They also have the hardware infrastructure and risk management incorporated into the artificial intelligence that allows them to initiate hedge strategies in the blink of an eye.

Now here is what they know about retail traders based on studies:

• Retail traders have a propensity to actively trade and they have poor stock selection.

• They sell their winners and keep their losers, which creates a bigger tax consequence, if they win.

• They are liquidity providers that suffer from “The Better Than Average Effect.” This is a cognitive bias where individuals tend to overestimate themselves thinking that they are better than they really are, even when imperial evidence proves them wrong. The Better Than Average Effect manifests itself in skillset, intelligence, and performance, which can be a losing strategy and financially devastating.
  
  Based on personal experience, I have found that the best way to beat the machine is to learn the fundamentals of a corporation, and buy companies based on their ability to generate free cash flow in certain pockets of the market that have durability and an expanding moat. This took decades to discover as well as the understanding that time in the market is more important than timing the market, as long term investing is undefeated.

A TARIFF HYPERINFLATION NIGHTMARE…

This week’s economic talk centered around tariffs as Citadel founder, Ken Griffin, speaks on the potential of crony capitalism; stating at first, American companies would enjoy a short-term benefit from the annihilation of their competition.

But this could lead to legions of special interest groups and lobbyists seeking higher and higher tariffs to keep competitors out to protect the companies they serve.

He also stated that this would make America as a whole, less competitive and less innovative, implying this could have an adverse effect on the consumer, as protectionist policies could make goods more expensive and raise prices on the already strapped consumer.

The idea is, if there is no competition, there is no threat of competitive pricing. And with no threat or reason to lower prices, this would make protected companies the only game in town, giving corporations no incentive to lower their pricing; therefore, leaving Americans in the jaws of corporate greed.

In theory, competition keeps everyone honest.

For example, in south Florida, the insurance market is an absolute mess due to the hurricanes, followed by high litigation, limited carriers, and limited coverage for homes with aging roofs. A great majority of the homes that receive coverage go through Citizens Property Insurance Corporation, which is the government’s coverage.

Citizens coverage is often the cheapest, but the coverage isn’t the best, and is temporary in some cases, as homes go through their depopulation program each year. During this process, a homeowner’s policy can be transferred from Citizens to another carrier if the outside carrier’s renewal premium comes within 20% of the premium Citizens will offer.

Private carriers are either way too expensive, leaving the state, or provide limited coverage, leaving Floridians to take whatever coverage they can find.

If tariffs have the same impact, this could spell trouble for countless Americans as there is a potential for hyperinflation down the line and a deep recession.

Here’s why. If Trump imposes his 10% to 20% tariffs on all imported goods, 60% on China, and 25% - 100% on Mexico, at least a dozen estimates indicate this can grossly harm the American economy. Tariffs will reduce trade and distort production leading to a lower standard of living and a major hit to GDP! (Gross Domestic Product)

If Trump’s tariffs create a trade war, when a person or business purchases foreign goods, retaliatory tariffs increase the price, forcing businesses and people to find domestic businesses, which then increases demand on supply. This in turn, gives the domestic business incentive to raise prices at the expense of  both the American consumer and businesses who are forced to consume domestically.

This causes inflation and to bring inflation under control, the Feds will have to increase interest rates to slow inflation down. This will increase the cost of capital and put the burden of higher interest rates, and the increased cost of goods on the backs of the consumer.

American companies will feel the crunch because of the high cost of capital and slowing growth, impacting both the top and bottom line. This may lead to layoffs, which in turn will have an adverse effect on businesses across all segments:

• Retail

• Durable Goods

• Industrial Sector

• Consumer Discretionary

• Consumer Cyclicals

• Supply Chain Distortions
  And Manufacturing (The Bullwhip Effect)
  
  Couple this with tax cuts that reduce government revenue, high unemployment, and retaliatory tariffs on foreign goods. This will not only increase the deficit and reduce business activity, but deal a death blow to what could be already embattled company margins as the consumers trade downs and economic activity grinds to a halt, i.e., a tariff hyperinflation nightmare.

EARNINGS REPORT CARD…NVDA A+++

The fate of the bull market rally rested firmly on the back of NVDAs, as the street was thrown off guard by what was considered to be a hit piece by the newsletter, The Information.

The newsletter made reference to old, circulated news about Blackwell servers overheating in their current state.

The report hit the street Sunday, November 17^th, taking the stock down Monday morning, as low as $137.15 a share before recovering and closing at $140.15.

Wall Street loves volatility and what better way to get it than to float a narrative on the streets' most closely watched company.

NVDA reported, what I believe, to be another record blow out quarter with $35.1 billion in revenue, beating not only the street's consensus estimates by $1.98 billion, but also beating their original guidance of $32.5 billion in revenue by $2.6 billion, crushing revenue expectations.

Earnings per share came in at 81 per diluted share on a non-GAAP basis, beating the street's 75 cents a share estimates.

NVDA guided to $37.5 billion above the analysts’ estimates of $37.09, according to LSEG data.

Data center revenues were up an impressive 112% year-over-year and 17% sequentially, but yet it seemed Analysts were looking at the glass half empty instead of half full, so allow me to drink the water so they have nothing to argue about.

First of all, this was a Nothing quarter in terms of Blackwell deliveries, so for NVDA to blow out the numbers was very impressive, and a testimony to demand for their current products and the H200.

Since Wall Street is very narrow minded, if you are looking through their narrow lens, you would see the street pouting at a potential deceleration in fourth quarter revenues at 69.5%; based on current guidance, this is due to the fiscal 2024 high comparable based on the revenue of $22.1 billion in the fiscal fourth quarter 2024.

However, if you just go back to their fiscal 2023 year, they plateaued at $26.974 billion in revenue. So instead of being inconsiderate of their growth trajectory, ask yourself, what will you pay for a company growing at better than 52% per annum (year) for possibly the next 5 years?

Based on 52 Wall Street Analysts on Yahoo Finance, the highest revenue estimate for full year fiscal 2026 is $269 billion, which suggests a 100% growth in revenue increase over the fiscal 2025 target of $133 billion.

At current state they are on pace to do $128 billion for the year, but if you listened to the conference call, Jensen made a very important statement. Jensen stated that demand greatly exceeds supply and that NVDA is on track to exceed their previous guidance of several billion dollars as visibility into supply continues to increase.

This to me, rings of possibly the biggest beat of the year, but yet analysts will say it’s overvalued in one breath and raise their guidance in another. They were so disappointed in NVDA that on November 21st, the day after earnings, NVDA received 20 price target increases from firms all across the street, with the highest coming from Rosenblatt Securities at 220 a share or the equivalent of a $5.4 trillion market cap.

NVDA currently boasts a forward PE of 22 times earnings based on the highest 2026 full year estimate of 6.11 a share, trading below the current S&P500 of 27 times earnings; although, they are trading at 52 times sales, which is extremely lofty.

The fact that it’s trading at 136.02 suggests with 20 price target increases, Wall Street believes that they should trade at a premium. After all, what do you pay for a company growing their revenue and free cash at such a rapid pace:

Fiscal 2024 $60 billion revenue
Fiscal 2025 estimated $128 billion revenue
Fiscal 2026 estimated $269 billion revenue

Free cash flow :

2024 : $27.02 billion up 609% over 2023 $3.808 billion a decline of 53%
2025: trailing twelve months (TTM) free cash flow is 56.4 billion and growing

Data center revenues were just $4.8 billion in the first quarter of 2024, and currently $30.8 billion in just 7 quarters (less than 2 years ago).

NVDA is trading at 26 times current year sales, suggesting that the growth may be already factored into the current stock valuation. This translates to Jensen having his work cut out for him if the company is to grow into its current valuation, but I am willing to bet on this CEO, and based on the street raising their targets, so are they.

Thank you for reading and again please like, comment and share with your tribe.

Kevin Davis Founder Investment Dojo and Author of The C.R.E.A.M. Report