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Szn 3, Ep. 29: Causes for Optimism in 2022, with Ryan Worch

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Ryan Worch of Worch Capital rejoins the podcast to provide his outlook on stocks for 2022. Spoiler alert: He’s bullish. With certain qualifications. Worch mentions specific securities in the latter half of the episode.

Nothing here is intended as investment advice.

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Nathaniel E. Baker 0:03
Ryan Worch of Worch Capital. Thank you so much for rejoining the contrarian investor podcast. I had you on this show about a year ago. And your views then were quite prescient, you predicted a bull market for this year, I think you might have been a little bit more bullish on growth than actually turned out. But you did say that at the time, there’s a lot of fear and that you told us to basically ignore it. And indeed, that’s what’s happened the market is due for a another double digit growth year and double digit percentage gains on the s&p at least. And so of course, this begs the question how you view next year, and if you think this party will continue, and exactly where because we have some parts of the market that are kind of in correction territory already. And we just had the Fed today, and they came out with something that that was interpreted as kind of, I guess, dovish, even though they said they’re tapering, they’re accelerating the tapering of bond purchases. But anyway, enough about me. Let’s hear from you. What is your view for next year?

Ryan Worch 1:51
Well, once again, thanks for having me on. I always enjoy doing this. And it’s interesting, you know, looking back at our last discussion last year, around this time, and some of the comments that I made, and I think it’s going to be even more contrarian this year. Awesome. Because yes, I was bullish last year, because I still believe that we’re in a secular bull market. Now. I think the major question that I have, and probably most investors have is, is this more 1997 or 1999. And I think, a year later, being now, I think many more pundits believe this is 1999. We’re in a bubble, the bubble is about to burst, the Fed’s gonna go into an interest rate hiking mode, which could bring the end of this wonderful bull market that we’ve been in, since however you want to define it, whether it’s the bottom of 09 or 2013, where we took out prior highs. But with that being said, I think the idea that this bull market continues, I think is actually even much more contrarian than it was a year ago.

Nathaniel E. Baker 3:02
Yup.

Ryan Worch 3:02
A year ago, we were just freshly off of a bear market, obviously, the pandemic. And now we’ve we’ve had almost 20 months since then, of really up markets with very little correction. I guess what I got probably wrong last year was the massive rotation was out of growth and into more value centric sectors. And growth, quite frankly, is really underperformed since early February, or late February, early March of this year. Now, if you’re invested in just the general indices, you’re you’re sitting on double digit gains. They’re only a few percentage points off of new highs, especially after today. But if you look underneath the surface, there’s definitely been some real destruction in the speculative part of the markets. So I think what’s happening is there’s been a big deleveraging from investors alike, and And what’s happened is it’s hit the high beta specular parts of the market the hardest. So, if you want to look at the specs, the spec mean stocks, all of those have just crumbled down 30, 40, 50, 60, 70% from highs in some cases biotechs biotechs, in large are in a bear market outside of, you know, maybe Pfizer and Maderna. A lot of the biotechs which are again, more of the speculative part of the markets are in a bear market. If you want to look at growth, and you can’t look at the NASDAQ or the NASDAQ 100. Let’s look at something that’s a better proxy probably for high beta growth. Cathie Wood’s ARKK fund, fair market down I think 40% from highs, crypto crypto. I would only talk about crypto, but you have to look at that as part of the specular part of the market

Nathaniel E. Baker 5:04
Yup

Ryan Worch 5:04
That’s in a bear market. So underneath the surface, there is a lot of movement that you just don’t capture in the general indices. I think part of what I do as a as an investment process is we have to look at what is happening. Currently. Currently, you have certain sectors, especially the speculative part of the market that is has had some massive selling and deleveraging. And then we kind of go and look back in the past and look at prior precedents, what kind of markets do these does this look like? And then we kind of shape a thesis an idea for the future, and scenario analysis of what potentially could happen at the end of the day for for myself, and my research process, prices, the ultimate judge, ultimately, but we do play some scenario analysis of what could happen and maybe give some percentages of what we think may happen. Going forward, I continue to believe that the the general markets are in a secular bull market, it doesn’t mean we can’t correct and we probably are overdue for a bigger correction than 5%. And if you go back and look at we’ve had some indicators that have aligned with prior markets, two of them being 1997. And 2001. What is the big difference between those two markets? Well, 1997, we were in the midst of probably the strongest secular bull market ever. 2001 We were in one of the biggest bear markets ever the beginning of a secular bear market that started in the tech crash of 2000. So looking back, what do we think this market is more reminiscence than what what do you think it compares better to and we believe it’s more of a 97 type of environment rather than a 2001? bear market collapse?

Nathaniel E. Baker 6:54
Hmm. Interesting.

Ryan Worch 6:56
I do think that is contrarian because I think if you go on Twitter and you listen to the media, more people are calling for a bubble and a burst of this bubble, that people say, You know what, I think we’re in a secular bull market, and we’re just going to march higher.

Nathaniel E. Baker 7:15
I guess the question is about these speculative parts of the market. And the the meme stocks that Cathie Wood stocks, because if if you’re in the late stage of a bull market, usually, and I believe this is why you predicted last year that these would do well. And indeed they did for a little. But at that stage, that’s usually when these type of securities do best. Right. And so what do you think will happen with those? Do you think I mean, it’s Cathie Wood, is that done? Are are cryptos have they peaked? And are we going to hear about NF T’s again? God? I certainly hope not. But hopefully, they will be buying any constitutions or anything like that. But yeah, what do you what do you think?

Ryan Worch 8:01
Well, it’s a good point, because the market has become so very narrow. And I think money is hiding out in some, you know, safer havens. And it’s funny nowadays, we were talking about prior to this call that the safe havens now are Apple and Google and Microsoft and Facebook, which were your old traditional growth stocks. But nowadays, they’re more of, you know, whatever value or guard plays, but that’s where money certainly is hiding. And the leadership of this market is extremely narrow there, handful of mega cap names that are at new highs or close to new highs, Home Depot, Ford, I think, clearly, the spec of money has come out of those areas and gone into some safer place. Now, the question remains is, is the destruction in those spective plays a leading or lagging indicator? Right? That’s what I don’t know. If if it’s a lagging indicator, we believe that those areas that have been beat up, are going to have to finish their correction, but are going to be the areas that are going to bounce back the fastest. If it’s a leading indicator that all those other areas, they’re going to crack eventually. So right. If they crack the apples, and the Googles and the Home Depot’s of the world, the indices have to come down just because of the massive weight in general.

Nathaniel E. Baker 9:26
Yeah, how would you gauge how would you kind of place the odds now? Like, do you think we’re closer to it? Do you think which of these scenarios do you think is more likely to stage that we’re closer to the end of this or closer to the beginning of the I guess?

Ryan Worch 9:41
I think we we have time before the ultimate collapse comes and a study that I ran, which is kind of fascinating. 2021 is going to be the third year of a double digit return in the industry. So I wanted to look at that. And how many times have we had three straight years of double digit returns? And we’ve had four prior instances of that in the past? Before I read that study, I just would have thought that intuitively, the fourth year probably would have been down, right? Three strong years, double digit returns, you would think there’d be some level reversion to the mean. So went back and looked, those three years were 1942 to 44/49 to 51, 95 to 97, 2012, 2014. And now, the last three years would be the fifth instance. So what happened in the fourth year after those three returns, you’d be shocked to the average game was 17%. Only one down year? And that was actually the most recent one. 2015. And it was down by, you know, point seven 3%. Yeah, cool. Yeah. So that, again, that doesn’t mean we’re going to have it up here next year. But it says history. Strength begets strength. Yeah. And I also believe we’re remain in a secular bull market. And I think that we’ll continue on to next year. Obviously, the big wildcard is the Fed what they do with tapering, they’ve kind of today they they’ve shown their hands, telegraphed exactly what they’re gonna do. They’re talking about raising rates. But if really, you know, inflation was such a massive concern, your traditional inflation hedges have on all gone down last month, when they first started talking about expedite and tapering. You know, the 10 years gone down, gold has gone down, tips have gone down. So what is what what is the mark market been worried about over the last, you know, probably month, month and a half where we’ve had a little bit of this digestion? I think it’s probably just a normal, you know, correction, where we did get excessive to the upside in certain areas, for sure. And we still remain overvalued on every single metric out there. But that’s what happens at Walmart, you stay overbought for a lot longer than people can ever expect. And I think that’s going to continue to play out.

Nathaniel E. Baker 12:15
How many of these fourth years that you looked at? Were coincided with fed tightening? I know 2015 did. In 1999. There was one hike, which seems crazy. In retrospect, I just looked that up a couple days. But I think it was in the first quarter Greenspan hike. And that was it. That was the only time he did until like mid 2000. But did you have any information?

Ryan Worch 12:37
I don’t know on the the 40s in the 50s, right in the 90s 2015. You’re correct. But there’s also a study, I don’t have the exact numbers off top my head, I have to go rerun it. But the general market actually acts fine. After the first and second rate hike, right, so it’s usually not until after that, that the market reacts. So let’s say they do hike three times next year. Depending on the timing of those hikes, you may not get weakness into the back half of next year. Which again, would line up with some other, you know, data about, you know, time between bear markets and whatnot. I just think so many people are bearish. And they’re bearish for valuations and raid highkey, whatever, you can make an excuse in the world that you want. I just take the time, the opposite view that I truly believe we still remain in this technological revolution. There is innovation and entrepreneurship happening every single day. These these growth stocks are going to continue to grow, they’re going to be teeny more important. And yes, we’re going to have bear markets within a secular bull. I just don’t think we’re going to have one. Now. I don’t think it started. I think this is probably just a normal correction within maybe it’s a little bit more dramatic than your five to 10% Maybe it’s 12 15% I mean, they average intraday drawdown in the s&p is 14%. So that should be expected anyways. But it feels like every wiggle in the market, the frantic come out, and people just are calling for the top and and the bubbles gonna burst. I just think the trend is your friend that trend remains up over the long term. Until that changes, I continue to ride it.

Nathaniel E. Baker 14:39
Hmm, interesting. Okay. Another thing that we’ve seen here and this is a question about these growth stocks, and also the pandemic, some of the pandemic favorites, which have done very poorly as well here in the last month. And I’m wondering here, if we go back to you mentioned technological revolution. If we go back to the early 2000s. Remember that a lot of the advancement While a lot of the companies were maybe a little bit ahead of their time, but some of this stuff got co opted by, by bigger companies. And I just think of a company like TelaDoc, which is Kathy Woodstock. Also. And this is something that they basically, I don’t know that well, but from when they’re standing like it’s basically zoom. And that, wouldn’t that be something that could potentially just be replicated by zoom? Like, it seems like a lot of these names that we think of as being innovative, maybe aren’t quite as innovative as we thought, and they just happen to be in the right place at the right time, or is that unfair?

Ryan Worch 15:36
Well, it’s, it’s a little unfair, because if you don’t know much about the technology company, because it’s hard to make it fair enough. You know, I read a fantastic article last week, and I forget who it was from, but the main theme was a disruptors get disrupted. Right. Right. Um, so while there’s always innovation, I think innovation is happening to such a faster clip now that it’s getting disrupted even faster. You know, again, who was the biggest market caps in 99 2000, AOL, Cisco, Microsoft, I mean, AOL, Yahoo. I mean, these these companies are, are dinosaurs compared to what they used to be. So I think it’s a little bit unfair for to just single out TelaDoc. Yeah, I don’t know. But you’re you’re right, in that sense that these stocks have been absolutely hammered. I mean, you could look at the three pie poster child’s for stay at home, or were TelaDoc, zoom and peloton, right? All three are just absolutely killed. Does it mean that their innovation is over? No, it probably just means that they got so far ahead of their, their their growth, from a valuation standpoint that, you know, the rubber bands just went too far and was bound to snap. I think that’s what happened. Yeah, who ultimately becomes out the winner of this? I don’t know. And I hate, you know, making predictions, because really, ultimately, nobody knows. Yeah. And that’s not the business that I’m in. Yeah, I, you know, I prefer to look at trends, you know, and, and data and make a educated decision rather than predicting which technology is going to win the future.

Nathaniel E. Baker 17:19
Yeah, fair enough. And it’s often not even always the best technology, if you look at the Betamax versus VHS right being a classic example. All right, I want to come back and ask you about how your portfolio is positioned, maybe get some favorite names out of you, with the understanding that it is, of course, not investment advice. But I want to take a first a quick break and give our sponsors a chance to make themselves heard. And then we’ll come back, if you are a premium subscriber, do not touch the dial, you will not get the break. And we’ll be right back. Welcome back. Everybody here with Ryan works of worth which capital? Ryan? So yeah, this all kind of begs the question, like I said, of how you are positioning your portfolio. And to the extent that you can talk about it, obviously, that a lot of this stuff is fluid, I imagine you will be trading in and out of some positions of Iran, but maybe big picture, some of your favorite sectors and potentially even stocks.

Ryan Worch 18:13
Sure, um, first, just before, you know, anything I talked about is obviously not taken as investment advice. And I may or may not own some of the stocks that I discussed. But, you know, with that said, even though, you know, I’m, I’m bullish in the long term, you’re 100%, right. It’s dynamic, you know, as as a trader and more of an active investor. My opinions change dynamically with the market, as new data evolves, we, we make decisions and we adjust on the fly. So, right now, actually, I have a decent amount of cash just because we’ve had some rumblings, the market that I specialize in, or my portfolio is made up of, pretty much your high beta growth momentum type of names. That has been a very unfavorable position to be in in the past probably month, as those prices were going against me, we were we were either hedged or we were, our stop losses were were being hit. And we were getting kicked out of some positions. But there are some, some legacy positions that I still hold that I think continue to look, look and act well. That kind of formed the nucleus of, of our portfolio, and one of them being I think, Nvidia, I think semies in general, have been extremely strong. You know, during this whole, you know, four week meltdown in in growth semies have actually held up fairly well, from a relative strength standpoint. So, you know, I think Nvidia still remains one of the dominant tech companies in in the markets from just a growth standpoint, all the areas that they’re in Are the massive innovation that’s gonna happen prior the next decade, I think they’re at the forefront of all of it. Tesla, another one’s very similar. It’s held up relatively well starting to crack a little bit. Something that we are watching, you know, closely. And again, I think Tesla probably got a little too stretched to the upside and it’s just correcting some of those excesses right now, but I don’t think anything from the from the fundamental story has changed at all. In fact, I think it’s probably even gotten better. Know, especially with the infrastructure bill and and the money that’s being sloshed around and Washington going making a concerted effort to go into electric vehicles and whatnot. I think it’s a real tailwind for Tesla, and I think it just remains the dominant de facto probably growth leader in the market. You could we could talk all day long about valuation, it’s been probably overvalued for five years, and it’s done nothing but really go up and compound at a tremendous clip. Something probably newer, that may be off the radar screens of a lot is a stock like Roblox hmm. And what’s funny about Roblox, the way I got interested in is I have four kids. And I noticed that they were playing this game on their, their phones and iPads constantly, I finally asked, What are you playing? And it was Roblox, and this by about a year ago. That’s what first got me interested in. And then when it came public, I did a little, you know, little bit of research on it. And I think, again, you hear about the metaverse and the future that everyone’s gonna be, you know, Facebook is clearly put that front and center and put it in front of people’s minds that this is the future. I think Roblox is going to be a big player in that theme. Whether or not it plays out again, I don’t know. But I think that’s going to be one of the major players in that that Metaverse team, and I think, is going to be a massive growth area in the technology world. So those are probably three, three stocks that I that I do own. And I think I’ll continue to own as long as they continue to hold up and act well. from a fundamental standpoint, I don’t I don’t think a whole lot has changed, Roblox did have some numbers today, and there was a little digestion and some selling. But other than that, you know, I’m, I’m playing this market, I’m waiting, what I do is we call it you know, waiting for the pitch. So, right now, I don’t have that yet. So that’s why I have a decent amount of cash, I’m just kind of waiting for that time or that, you know, fastball comes down the middle of play, and I could hit a park. Until then I’m probably going to play a little bit of small ball and be a little bit more nimble, maybe smaller position sizing and take less risk. But I still believe we remain in a fairly favorable bull market. And I think if and when growth does bottom, there are going to be some opportunities in that space.

Nathaniel E. Baker 23:16
Interesting. I’m curious, did you think may be coming into today that if the Fed did announce something along accelerating tapering, that it could lead to a sell off? And that could be an entry point?

Ryan Worch 23:28
Yes, I listen, quite frankly, the best thing that could that could happen for me is that the market actually does correct, you know, full blown correction at 20 25%. Because that will get rid of all the excesses across the whole spectrum. Right now. They haven’t cracked everything. So some areas are, you know, again, we’re within a percent or two of new highs in the indices. So you can’t even say we’re really going through a correction. Because bear markets, reset everything and create bigger opportunities. And, you know, but trying to time it or predict when that happened is almost impossible. But you should look at those as opportunities, especially if you believe that we remain in a secular bull, which I think we are. A lot of people are talking about, you know, this this next bubble burst could lead to a secular bear. I don’t know I don’t think that’s correct. I think the average run of a secular bull we still have plenty, plenty more years left. But who knows, again, that’s why I am a more of an active shorter term trader rather than a long term holder because you always have to adjust to to the unknowns and certainly last year’s pandemic, absolutely play into that if Yeah, you had to be a little bit nimble to sidestep that, you know, massive destruction and really just a month, huh, what happens? I mean, it happened In the the rate tantrum in the fourth quarter of 18, where we had, in essence a bear market in six weeks. Yeah. So it does happen. So I’m on high alert, obviously for that. And if price goes against me, I’ll probably get out and, you know, save my capital and chips for another day. And that’s what I do I try to avoid the really big down moves while trying to participate on the upside.

Nathaniel E. Baker 25:27
Fair enough. Do you have any thoughts on inflation? And do you feel that that’s now the Fed kind of has a handle on it or not? And and if not, how would you be looking to protect your portfolio from it?

Ryan Worch 25:39
What I find interesting is that we talked about earlier, your traditional inflation hedges are signaling the opposite. When when Powell came out, I think it was November 20. I don’t have the exact date when he first started talking about getting word of getting rid of the word transitory and tapering faster and expediting it. What’s happened since then gold has gone down, the 10 year has gone down, tips have gone down, these are all areas that should rally in an inflationary environment. Now, could the 10 year weakness be, you know, maybe forecasting a slowdown in growth? Possibly? That I don’t know. But it’s something that I absolutely watch from a, from a price perspective and a trend perspective. You know, they’re giving some conflicting signals for sure. And I think I think that’s part of why the general market has been so choppy, or kind of in a tantrum in itself in the in the last month, because there are some conflicting signals on your line.

Nathaniel E. Baker 26:50
Yeah, yeah. But they’re always conflicting signals. I think it’s very rare that we get a clear green signal green light. And then when we do there’s always reasons to doubt it. So or at best case scenario, you have no money to put to work?

Ryan Worch 27:05
Well, it’s the classic, you know, climb the wall of worry, right. There’s always something to be fearful about, at any given time. You know, quite frankly, you know, you should be most bullish at the bottom of most fearful at the top, and most people are the exact opposite. Oh, yeah. human psychology and it really never changes. So, you know, a, a good healthy correction should be viewed as a positive because it will give some bigger opportunities going forward. And I think everyone should, you know, be ready and willing to try to time it impossible. Yeah. But but being prepared for it in advance. Is what you should be doing?

Nathaniel E. Baker 27:51
Yeah. Yeah, of course, then if everybody is that means they aren’t putting cash to work, bidding the market higher and then you probably won’t get any rally. So it’s all Yeah.

Ryan Worch 28:00
What makes it it’s what it what’s its what makes the market right,

Nathaniel E. Baker 28:04
Indeed, indeed. Yeah. All right. Ryan Worch. Thank you so much for joining me contrarian investor podcast again, today. Thank you all for listening. And I look forward to speaking to you again next time.

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