MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014. At MAXIN ADVISORS, we manage FULLY TRANSPARENTLY and publish the transactions on a DAILY basis and the details of the portfolio on a WEEKLY basis.
Taking Profits on our Long Positions
The past few days have seen a lot of volatility, not only in the markets themselves but ion the narrative of the FED and the sentiment of the market as well. Our core roadmap was for equities to make a bottom in March for a last Hurrah into April, wit a target on the SP500 of 4200/4300 before starting the second leg of the secular bear market into the summer / fall of 2023.
As a result, we had reduced some of our short exposure and went long a number of individual stocks on their own merit to trade this unplug of the market.
With the sharp reversal in the SP500 caused by the hawkish testimony of the Fed Chair, the technical setup has become far more complex and the initial thrust upward has been stopped in its tracks, leaving US equities on very thin ice with a crucial support at 3950. Today’s flattish session was not encouraging as the upward momentum has been clearly broken in the US while European equities are clearly topping out and rolling over after their phenomenal rise since October 2022 and January 2023.
US equities are now in a very tight complex structure of overlapping trends that could resolve themselves brutally in the short term, either by breaking down below the uptrend in place since October 2022, marking the final end of the Q4 bear market rally, or breaking out above the 4070 top of the week, to test the next levels at 4200 and 4300.
The current environment is highly treacherous, and unfortunately, there is not much in terms of catalyst to propel equities higher at the moment.
Inflation is high, and investors have now accepted the fact that it would be far more resilient than they wildly assumed at the beginning of the year.
Interest rates are high with 3months yields above 5 % and bound to go higher, whether at 0.25 or 0.50 % clips, the end result is the same and equity valuations cannot withstand high interest rates without damage. Liquidity is withdrawing extremely fast and it takes time for its reduction to impact equity markets.
Equity markets are more disconnected from bonds than ever. Bond markets are pointing to a sharp recession ahead, equity markets do not believe in it just yet. At 100 basis points the inversions of the yield curve tells the story of a sharp economic downdraft ahead, the only debate being whether that recession will unfold in 6 Months down the road or only in 2025 depending on the models being used. But as the following graph demonstrates, the coming recession is a certainty, not a possibility. Economic history also conforms that no inflationary surge can be tamed without a significant economic contraction first.
The leading economic indicators are also posting to a sharp deceleration ahead …
… while sharply higher mortgage rates are taking a severe toll on real estate markets and the construction sector.
And there again, there has never been a downdraft in real estate without a subsequent recession..
Finally, profit margins are collapsing, another advanced indicator of a looming recession.
All this to say that the environment is one where all the data points to a very difficult time ahead, characterised by the combination of high inflation, high interest rates, economic contraction and corporate earnings declines, the worst possible combination of factors for equities.
And equities are levitating at the most extreme levels of overvaluation ever reached…
So, although we can be tempted to trade the upside and we can not exclude the possibility that our expected ultimate attempt towards 4’200 could happen, the more we go, the less we feel that trading this last leg up Is worth it, and that the risks are way too high.
Granted, the US CPI next week could reveal less inflation, but regardless of the number, the FED and the ECB have no choice but to continue taking rates higher and withdrawing liquify further. In the best case scenario, we are talking a 6 % advance from here with major technical resistances to break, and a turning point that we see no later than the beginning of April 2023, so barely 3 to 4 weeks ahead.
European equities are actually in an even worse setup. Oblivious to the much sharper economic deceleration in retail sales and much higher inflationary pressures fuelled by widespread wage increase demands, their spectacular rally since January is sputtering and they are clearly rolling over just under a major resistance level that will be extremely hard to break.
It is only a matter of time before European equity markets break down sharply, and that could come with a nasty surprise at the time of the European Central Bank March meeting next week.
The point we are making is that we are back to a stage of immense disconnect between the bullish psychology of equity markets and the reality of the underlying fundamentals, similar to the one we had at the end of 2021, save for the fact that interest rates and inflation are way higher.
Even more worrying in the disconnect between bonds one equities, and history tells us that it is always bond investors that are right in the medium term.
We are at this dangerous stage where investors are getting used to inflation, have not yet factored in the impact of higher rates on valuations and are totally oblivious to the high probability of a recession ahead.
Not a good time to remain invested in equities in a long-only portfolio and the unfolding of our last “Hurrah”, if it happens, should be taken as an opportunity to offload stocks.
As a result, we have started taking profits on our long positions initiated in the past few days and weeks.
New Asset Allocation
Why We Are Shorting NVIDIA
NVIDIA’s stock is up more than 70% year-to-date, and 110 % since the October 2022 bottom less than 6 months ago.Most of the latest rise came from comments of its management about the growth prospects of AI at a time of Q4 results that were satisfactory but no much more than that.
As is always the case in speculative environments driven by retail investors, new investment fevers develop and the latest one is surrounding the artificial intelligence industry, particularly ChatGPT and the like. The release of Chat GPT made everyone and their neighbour believe that search engines could do their work for them, write their memos, business plan, contracts and certainly coding, opening a whole new era of technological advances.
But AI has been around for years and corporations like Google have poured billions of Dollars into the technologies, making significant advances but still far away from tangible and monetizable results.
Moreover, their investments in servers, storage and calculation power has already been made to a great extent to power their search engines, databases and user interfaces.
There is no doubt that Nvidia is well positioned to benefit from this secular shift in computing industry and the company has a strong history of delivering top-line growth together with high margins as it focuses on designing chips rather than producing them themselves.
But we have reached levels where objective valuation analysis suggests the stock is extremely overvalued, and as always at market tops, one company embodies the whole spectrum of speculative FOMO. NVIDIA is certainly the iconic stocks of the recent up phase..
Headquartered in Santa Clara, California, NVIDIA was incorporated in April 1993. It specializes in designing and manufacturing advanced graphics processing units (GPUs), which are used in a variety of industries, including gaming, artificial intelligence, data centres, and the automotive industry.
The company’s business is divided in two segments: Compute & Networking and Graphics.
The Company’s fiscal year runs from February 1 of one year to January 31 of the following year.
In FY2023, which ended on January 29, 2023, Compute & Networking segment was leading company’s sales with revenue representing 56% of the total amount.
In the past 10 years Nvidia has delivered strong financial results, with revenue and profit growth amongst the best in the industry. Stellar results enabled the company’s market cap to outpace its peers in the semiconductor industry.
Over the past 10 years, NVIDIA’s top line growth was 20.6% CAGR with gross margins in the 55-65% range.
Operating profits and free cash flow grew even faster with CAGR of 27.4% and 24.9%, respectively.
Many investors explain Nvidia stock rise by the stellar pace of top line growth and the company’s high profitability. But, and objective peer comparison reveals that Nvidia’s margins are not by far higher than other semiconductor companies. Even more, across some profitability metrics, NVDA is by far not best-in-class.
On February 22, 2023, the company announced it’s 4Q and full FY2023 results.
Nvidia slightly topped consensus estimates both in terms of quarterly revenue and EPS.
Far form revealing spectacular growth rates, the last Quarterly revenue was $6.05 billion or 21% lower than the same quarter of the previous year, and up only 2% sequentially when compared to the preceding quarter. Not really news that would justify a 70 % increase in the share price.
Moreover, the Year on Year decrease in quarterly revenue mainly came from a 46% drop in gaming with other revenue streams offsetting each other almost evenly. with gaining representing almost 50 % of its revenues the previous year, the sharp decline in sales for the leader of the industry depicts a truly damaging trend for the industry. A part of the decline came from the need by console manufacturing companies to clear their large inventories in the face of reduced consumption and high inflation.
Professional visualisation also demonstrated a sharp drop with the same problem as Gaming which related to inventory correction.
When looking at Full year revenue was $27 billion, which was flat from the prior FY with margins and EPS shrinking. There again, these results do not tie up with a stock rising 72 % in the matter of a few weeks.
For the first quarter of FY 2024, NVIDIA’s management expects revenue at approximately $6.5 billion, which is higher sequentially but almost 22% lower than the company reported for Q1 FY 2023 and gross margin is expected to shrink about 150 basis points.
When looking at its balance sheet, the following points are salient.
The company has 12 Billion in debt of which 9.70 Billion in long term debt.
Consensus estimates forecast that the company will hit a $100 billion in annual sales by FY2033, demonstrating consecutive topline double digit percentage growth, except for FY2029.
EPS is expected to follow this pace by increasing almost fivefold compared to FY2023.
Our bear Case is, as always, based on unsustainable valuations
Since the beginning of current year, Nvidia stock had a massive rally of over 70% which by far outpaced other semiconductor companies’ shares.
Nvidia’s valuation multiples were already high in the last 10 years with P/E ratio averaging at 45.02 for the period. The Current P/E multiple [GAAP TTM] is at 137.30, which is THREE TIMES higher than the 10 year average.
The company has delivered stellar growth in the last decade with very wide margins; therefore it is not surprising that Nvidia’s valuation multiples were already much higher than sector median.
But the current level, at three times the past ten years average when sales and profits are declining are a leap off faith that is extremely difficult to justify.
With a book value of USD 8.9 per share and a stock price levitating at 240, NVIDIA trades on 27 x book value and lots 20x sales, ratios it has never reached in the past.
Seeking Alpha’s valuation rating system gives NVIDIA the worst possible mark : F
All its valuation multiples are now way higher than its own 5 year averages, and this in a macro-econooc environment that does not promises fabulous growth ahead.
In addition, when making comparisons with NVIDIA’s last 5 or 10 years valuation metrics, one should keep in mind that these were achieved in an environment of ZERO Interest rates.
Witt rates now hovering at 5 %, both the macro prospects for NVIDIA’s business and the valuation of its own future earnings and cash flows are considerably different. Rather than paying the company three times more than its past 10 year average, investors should probably pay it at least 30 % less.
A discounted cash flow simulation to understand what the company’s future cash flow is worth its current market valuation, using a rate at 14.25% gives a fair market cap of $403 billion, or 60 % of the current USD 600 Bln. market cap.
Whichever way one looks at it, and despite still using extremely optimistic revenues and profits expectations way into the future, NVIDIA is today one of te most expensive and overvalued stock in the US investable universe.
In 2019, not that long ago, NVIDIA was trading between USD 30 and USD 50, against 240 today.
In 2019, NVIDIA generated sales of USD 11.7 Bln and Net profits of USD 3.7 Bln, against 27 Bln and 6 billion respectively in 2023. The ship decline in profitability between 2022 and 2023 at almost constant revenue levels reveals the sharp deterioration of its margins in a highly competitive industry now that the chip shortages due to COVID disruptions have now faded away.
NVIDIA has now retraced 50 % of the first leg of its secular bear market after the 2020 / 2021 bubble years that saw its share price surge from USD 50 to USD 332.
The second leg of its secular bear market will start soon, and that will take its stock price back down towards USD 50 to USD 60 in the coming two years.
Investors and analysts pinning their hopes on the development of AI may be underestimating the cyclicality of all the other businesses of NVIDIA, and look back to history to see how dangerous the semiconductor industry can be.
Great Companies are Great Companies and they will thrive and survive…
But bubble valuations coming from infatuation and FOMO never last…
The combination of the two provides fantastic short opportunities.
DISCLAIMER Maxin Advisors FZ-LLC or www.maxinadvisors.com, is not a registered investment advisor, nor a capital management firm or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Maxin Advisors FZ-LLC operates as a private advisory and research company where we provide consulting services to pension funds, investments funds and family offices. MAXIN ADVISORS FZ-LLC is one of the General Partners of MAXIN GLOBAL FUND - USD,a Luxembourg Incorporated Hedge Fund. Our analyses and conclusions are ours and they only clarify and highlight the investment rationale behind our own investment decisions. The analysts and employees or affiliates of Company may - and usually do - hold positions in the stocks or industries discussed here. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. You understand and acknowledge that there is a very high degree of risk involved in trading securities.  It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns. The indicators, strategies, columns, articles and all other features of Company’s products are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company’s website are for educational purposes only. Such examples are not solicitations of any order to buy or sell securities, commodities, investment products or engage into any kind of trading activities. Accordingly, you should not rely solely on the Information provided in making any investment decision. Rather, you should use the Information provided only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. By navigating on our website or remaining on our subscription lists, you accept our terms and conditions and discharge us irrevocably from all responsibility.
DISCLAIMER Maxin Advisors FZ-LLC or www.maxinadvisors.com, is not a registered investment advisor, nor a capital management firm or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Maxin Advisors FZ-LLC operates as a private advisory and research company where we provide consulting services to pension funds, investments funds and family offices. MAXIN ADVISORS FZ-LLC is one of the General Partners of MAXIN GLOBAL FUND - USD,a Luxembourg Incorporated Hedge Fund. Our analyses and conclusions are ours and they only clarify and highlight the investment rationale behind our own investment decisions. The analysts and employees or affiliates of Company may - and usually do - hold positions in the stocks or industries discussed here. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. You understand and acknowledge that there is a very high degree of risk involved in trading securities.  It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns. The indicators, strategies, columns, articles and all other features of Company’s products are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company’s website are for educational purposes only. Such examples are not solicitations of any order to buy or sell securities, commodities, investment products or engage into any kind of trading activities. Accordingly, you should not rely solely on the Information provided in making any investment decision. Rather, you should use the Information provided only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. By navigating on our website or remaining on our subscription lists, you accept our terms and conditions and discharge us irrevocably from all responsibility.
