| Dear Louis, Today, we’re going to be selling four positions. I’m recommending we close out our entire position in Equinix (EQIX) and Palo Alto Networks (PANW), as well as the remaining 50% position of NVIDIA (NVDA). And we’re also going to close our position in Snap (SNAP) at a loss today. At current prices, we’ll record gains of 80%, 113%, and 397%, as well as a loss of 73%. It’s worth noting that these returns are based on our model portfolio, which is just that—a model. I know individual returns will be different for each subscriber. So long as we followed the recommended buy-up-to price, we should all be recording a gain on our first three companies. Even if we weren’t able to capture the full returns from our first three closed positions, I still recommend we sell today. As we’ve talked about previously, our gameplan for the rest of the year is to pare back the portfolio. With the volatility and uncertainty in the market, we are going to sell positions into any strength we see in the market. And the market has had a great run this past month. Since bottoming on June 16, the Nasdaq 100 has risen 11.4%. This gives us an opportunity to sell some of our holdings. Despite this recent strength, the market outlook is still murky. We are seeing the highest levels of inflation in 40 years. Just last month, the Consumer Price Index (CPI) hit 9.1%. This has caused the Federal Reserve to become more hawkish and talk of interest rate hikes. As regular readers know, I think the Fed should reverse course and cut interest rates. We’re already seeing prices of rent, gasoline, and copper (a leading economic indicator) decline in July. But we’ve seen Fed policy be reactionary, favoring past data instead of looking forward. And that’s causing what I believe to be irrational rate hikes and balance sheet reductions. And if the Fed thwarts economic growth, we will see valuations head lower. That’s why we’re closing out the three winners today. They are still trading at premium valuations. Even after the market pullback, these stocks still have historically high valuations. That puts them at more risk in the event of a broad market pullback. To be clear, all these companies are executing their business plan perfectly. But we need to adapt to the market we’re in. We are selling because of emerging economic headwinds. These companies will be at the top of our list to reinvest in when this economic storm passes. And as for Snap (SNAP)… The stock’s performance has been disappointing. The company reported earnings last week and the market sent SNAP plummeting. There’s no way around it. This one hurts. So it’s worth taking a step back to see where things went wrong. We established a position in Snap in April of this year. At the time, Snap had been hitting its stride by monetizing its user base. Revenues for the company had soared 10X between 2016 and 2021. And there was every indication that Snap’s growth would continue. In addition to its legacy social media business, Snap had exposure to two bleeding edge technology trends: augmented reality (AR) and brain-computer-interfaces (BCI). Snap had been a leader in AR technology for years with its popular “filters.” And Snap had been methodically acquiring companies to cement control of its AR hardware stack. One of those acquisitions was a BCI company called NextMind. The technology from NextMind will eventually allow us to control our devices with our minds. And long-term, BCI-enabled AR glasses are likely to replace smartphones. And Snap has positioned itself as an early leader in what will likely be an industry approaching $1 trillion. But in the short term, things have not gone well for Snap. Last week, the company slightly missed its revenue and profit estimates for the quarter. More importantly, Snap declined to issue any forward guidance. This lack of clarity is worrisome. It’s clear Snap is having a difficult time adjusting to Apple’s IDFA changes. IDFA stands for “identifier for advertisers,” and it allows advertisers to target and track users within apps on iOS devices. And a recent update from Apple to its iOS makes this type of in-app tracking an “opt in” situation. The impact of this on advertisers is that they have less visibility into which ad spending is useful. Combined with the ongoing economic uncertainty, advertisers have been pulling back spending on Snap’s platform. If Snap manages to get back on track with its ad business, we may look to reestablish a position in the future. But for now, the disciplined thing to do is to close our position and walk away. And we can use our loss in Snapchat to offset our tax liability in our other positions. We will use today’s closing price as our official exit for these positions. Action to Take: Sell shares of Equinix (EQIX), Palo Alto Networks (PANW), NVIDIA (NVDA), and Snap (SNAP). | Regards, Jeff Brown
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