Are These Stocks too Cheap to Ignore?

Here's a comprehensive summary of the YouTube video transcript, maintaining the original language and technical precision:

Key Concepts

All-Time Highs vs. Declining Stocks: The S&P 500 reaching new highs while some individual stocks are significantly declining.
Economic Moat: A company's sustainable competitive advantage that protects it from competition and disruption.
Intrinsic Value: The perceived underlying value of a stock, independent of its market price.
Valuation Methods:
- Oracle Value: A proprietary valuation method used by the speaker.
- Discounted Cash Flow (DCF): Valuing a company based on its projected future cash flows.
- Discounted Free Cash Flow (dFCF): Similar to DCF but focuses on free cash flow.
- Discounted Net Income (dNI): Valuing based on projected net income.
- Price-to-Sales (P/S) and Price-to-Earnings (P/E): Common valuation ratios.
Technical Analysis Patterns:
- Double Bottom Pattern: A bullish reversal pattern indicating a potential bottoming of a downtrend.
- Bullish Pin Bar: A candlestick pattern signaling potential upward price movement.
- Bullish Engulfing Pattern: Another bullish reversal candlestick pattern.
- Bear Trap: A pattern where prices fall sharply, trapping short-sellers, before reversing upwards.
Support Levels: Price points where a downtrend is expected to pause or reverse.
Resistance Levels: Price points where an uptrend is expected to pause or reverse.
Investment vs. Trading:
- Investment: Long-term commitment to a company with strong fundamentals and a durable moat, often without stop-losses or profit targets.
- Trading: Short-term strategy focused on profiting from price movements, typically involving stop-losses and profit targets.
Implied Volatility: A measure of the expected volatility of an asset's price.
Put Options: Contracts giving the holder the right, but not the obligation, to sell an asset at a specified price.
Bull Put Spread: A strategy involving selling a put option and buying another put option with a lower strike price, used to profit from a moderate rise in the underlying asset's price or limited decline.

Lululemon (LULU)

1. Current Situation and Decline:

Lululemon's stock is down approximately 68% from its all-time high.
The speaker previously owned Lululemon, buying at $251 in mid-2024 and selling at $399 on February 3rd, achieving a 59% return. The proceeds were reinvested into Microsoft and Palo Alto.

2. Speaker's Rationale for Selling:

Deteriorating Economic Moat: Concern that Lululemon's competitive advantage was weakening due to increased competition in the athleisure wear market and dated styles.
Management Missteps: Executional errors by management, similar to Nike but with Lululemon being more focused.
Loss of Focus: Diversion from core athleisure into casual wear and loungewear, which did not resonate with the core audience.
Product Fatigue and Brand Predictability: Management admitted to long product life cycles leading to consumer boredom and a lack of innovation.
Changing Consumer Behavior and Intense Competition: Fashion business modes are less durable due to shifting consumer tastes.
Exiting Above Intrinsic Value: Sold when the stock price exceeded the calculated intrinsic value of $350 at the time of purchase.

3. Current Issues and Financials:

Weak US Demand: US sales are falling (down 1%), and same-store sales dropped 4%.
Softening International Sales: Growth in other markets, including China, is also slowing.
Lowered Guidance: Full-year EPS outlook was cut from $14.58-$14.78 to $12.77-$12.97. Revenue expectations were trimmed from $10.85-$11 billion to a lower range.
Product Issues: Product fatigue and a lack of innovation.
Brand Niche Erosion: Moving away from athleisure into less resonant categories.

4. Investment Perspective:

The speaker will not invest in Lululemon for the long term due to the perceived deterioration of its economic moat.
"I only invest in companies with very very strong modes. The moment I think that their mode is deteriorating it's not strong enough I'll not invest in it."

5. Trading Perspective:

Interested in Lululemon for a short-term trade, not a long-term investment.
Valuation:
- Oracle Value (proprietary): $273.83
- DCF: $292
- dFCF: $182
- dNI: $273
- Currently considered undervalued based on the Oracle Value of $273.
Trading Strategy: Looking for a reversal pattern, specifically a double bottom or bear trap, at support levels.
- Support Levels: $250, $225, $185, $159, $128.
- Target Entry: Watching the $159 level for a bullish reversal candle (bullish pin bar, bullish engulfing).
- Stop-Loss: Placed below the entry point.
- Profit Targets: Previous support levels that have now turned resistance.
- Alternative Entry: If $159 breaks, watch the $128.89 level for a double bottom pattern.
Example of Double Bottom: UnitedHealth showed a double bottom pattern on the weekly timeframe. This pattern involves a price drop, a rally, and a second swing low below the first, designed to trigger stop-losses and allow market makers to accumulate shares before pushing the price up.

Duolingo (DUOL)

1. Business Overview:

Duolingo is a language-learning app.
The speaker's daughter uses it to learn Spanish and Russian.

2. Financials and Strengths:

Revenue: Growing strongly.
Net Income: Turned profitable after an initial unprofitable period.
Free Cash Flow: Growing strongly.
Balance Sheet: Strong cash position with very little debt.
Return on Equity (ROE): 13.44% (considered good, above 12%).
Return on Invested Capital (ROIC): 12.38%.
Predictability: Medium (due to being a relatively new company).
Profitability: Medium.
Growth: Very high.
Financial Strength: Very strong due to low debt and high cash.

3. Speaker's Hesitation for Investment:

Lack of Durable Economic Moat: The primary concern is whether Duolingo's business model can be easily disrupted by competitors or technological changes.
"To me, what's the most important thing? The most important thing is the economic mode. To me, that's the most important thing because the economic mode is what protects the business from competition, from future disruption."
Disruption Risks:
- Google's AI Translation Tools: Concerns that free AI translation might make language learning obsolete.
- Apple's AirPods: New AirPods offer direct translation, potentially reducing the need for language learning apps. This news caused a sell-off in Duolingo.

4. Trading Perspective:

The speaker will not invest in Duolingo for the long term due to the uncertain moat.
Undervalued: Intrinsic value is $582, and the current price is roughly half that, making it very cheap for a trade.
Trading Strategy:
- Pattern: Identified a double bottom pattern on the weekly and daily charts.
- Weekly Chart: A double bottom pattern is forming, but the candle has not closed yet. A conservative approach would be to wait for confirmation on Friday.
- Daily Chart: The speaker entered a trade based on a double bottom pattern on the daily chart on September 8th.
- Entry Price: $278.
- Current Price: $289 (up 4%).
- Stop-Loss: A mental stop-loss was placed below the entry.
- Profit Targets: $347, $380, and $400.
- Risk-to-Reward: Considered a pretty good risk-to-reward ratio.
Personal Trade Experience: The speaker entered the trade aggressively on the daily chart. The announcement of Apple's translation AirPods caused the price to drop below his mental stop-loss, but he was asleep and not stopped out. The stock has since recovered, and he is still in the trade.

Synopsis (SNPS)

1. Business Overview:

Synopsis operates in a duopoly with Cadence Design, dominating the electronic chip design software market.
Major chip companies like Nvidia, Intel, and AMD rely on their software.
The speaker considers it a very strong and durable economic moat, comparable to Visa and Mastercard.

2. Recent Earnings and Issues:

Synopsis announced earnings that missed expectations for both earnings and revenue.
Main Issues:
- China: Impacted by trade wars.
- One Big Customer Cancellation: Likely Intel, canceling an order.
The speaker views these as short-term problems that will resolve over time as China and Intel resume purchases.

3. Investment Perspective:

The speaker will not buy Synopsis at the current price because it is not cheap enough.
Valuation:
- Intrinsic Value (Oracle Value): $324.
- Current price is 34% below intrinsic value, but still considered overvalued.
- Other valuation methods (DCF, dFCF, dNI) suggest a lower value, with the Oracle Value being more optimistic due to algorithm adjustments.
Condition for Investment: Would be interested if the stock drops significantly below $324.

4. Trading Strategy (Options):

Selling Put Options: The speaker enjoys selling put options when implied volatility increases due to significant price drops, but only if willing to buy the stock at the strike price.
Bull Put Spread: Since Synopsis is not yet undervalued for investment, the speaker employed a bull put spread ("selling insurance and buying reinsurance").
Execution Challenges:
- Interactive Brokers: The system did not show strike prices below $450 due to the large price drop, preventing entry in the main account.
- Think or Swim: The smaller account had updated option chains, allowing entry.
Trade Details (Think or Swim):
- Sold a put credit spread: Sold the 360 put and bought the 350 put.
- Premium received: $25, $211 (this figure seems to be a combination of strike prices and premium, or a typo, as the explanation focuses on the strategy).
- Profit Mechanism: The more the price drops, the more money is made on selling a put.
Potential Future Trade: If the price remains stable or drops further and Interactive Brokers updates its option chains below $450, the speaker may enter more put credit spreads.

General Investment Philosophy and Conclusion

Distinction Between Investing and Trading:
- Investing: "Marriage" – long-term commitment to high-quality companies with strong, durable moats. No stop-losses or profit targets.
- Trading: "One-night stand" or "affair" – short-term strategy for profit, requiring protection (stop-losses, profit targets).
Rarity of Investable Stocks: "Less than 1% of stocks are safe enough to invest in."
Strategy for the Other 99%: For stocks that are not great enough or cheap enough for long-term investment, the speaker engages in short-term trading ("hit and run," "have fun with them").
Example: The speaker has made significant money trading Tesla, which he would never invest in due to its unpredictability and overvaluation.
Key Takeaway: The speaker emphasizes the importance of identifying companies with strong, durable economic moats for long-term investment. For other companies, short-term trading strategies can be employed to generate profits, but with different rules and risk management.

Actionable Insights and Takeaways

For Lululemon: Monitor the $159 and $128.89 support levels for potential bullish reversal patterns for short-term trading opportunities. Avoid long-term investment due to moat concerns.
For Duolingo: While financially strong and undervalued, the lack of a durable moat makes it unsuitable for long-term investment. A double bottom pattern has formed, presenting a potential short-term trading opportunity, especially on the weekly chart confirmation.
For Synopsis: The company has a strong moat but is currently overvalued. Wait for a significant price drop below $324 for potential long-term investment. Short-term trading strategies like bull put spreads can be considered if the price action and option chains are favorable.
General Trading Approach: Utilize technical analysis patterns like double bottoms and support/resistance levels for short-term trades. Employ stop-losses and profit targets for trading positions.
Investment Focus: Prioritize companies with demonstrably strong and durable economic moats for long-term wealth creation.