Buy the September Dip?

Key Concepts

• September Seasonality: Historically, September is the weakest month for the S&P 500, with a lower average gain frequency and a tendency to finish down.
• "Buy the Dip" Strategy: The video advocates for buying during market downturns, particularly when volatility increases, to sell options for premium and acquire quality companies at lower prices.
• Economic Moat: A crucial factor for long-term investment, referring to a company's sustainable competitive advantage that protects it from rivals.
• Intrinsic Value: The perceived true value of a company, distinct from its market price.
• Rate Cuts: The Federal Reserve's potential reduction of short-term interest rates, which can be bullish for the market.
• Speculative Growth Company: A younger company with high growth potential but less consistent profitability, requiring smaller investment positions.

Market Analysis and Investment Strategy

September Seasonality and Market Behavior

The video begins by addressing the common perception of September as the most bearish month of the year. Data from the S&P 500 seasonality chart, averaging the last 20 years, indicates a gain frequency of 55% for September, which is lower than the overall average of 78%. Other seasonally weaker months identified are August and October, also with a 55% gain frequency. Historically, September tends to start weak, rally in the middle, and finish down, with an average decline of -0.7%. This is contrasted with the subsequent months: October (average gain of 0.8%), November (2.3%), and December (6%). The speaker emphasizes that these are not guarantees and that market fluctuations are normal.

The recommended strategy during market dips and increased volatility is to "buy the effing dip." This involves selling cash-secured puts and put credit spreads to collect premium and simultaneously building positions in high-quality companies.

Anomalous Market Conditions in the Current Year

This year, the market might deviate from typical September trends due to two primary reasons:

1. Four Consecutive Gaining Months: The market experienced four consecutive winning months leading up to September (May, June, July, August). Historical data since 1950 shows this has occurred only 10 times. In these 10 instances, September was up 60% of the time (compared to the 55% average). Furthermore, the period from September to December saw the market up 70% of the time, and the subsequent 12 months were up 80% of the time. The average gains were also higher: 3.8% for the rest of the year and 6.6% for the next 12 months. This suggests a potentially more bullish outlook than usual.

2. Federal Reserve Interest Rate Policy Shift: Federal Reserve Chair Powell's remarks at the Jackson Hole symposium on August 26th signaled a significant policy shift. The Fed has adopted a new framework that removes the explicit reference to averaging 2% inflation over time and focuses on employment shortfalls. This implies a greater concern for employment, especially given recent weaker employment data. The market is anticipating interest rate cuts, with the CME FedWatch tool showing an 87.6% probability of a cut on September 17th, 94% on October 29th, and 99% on December 10th. The market is pricing in approximately three rate cuts by year-end. Historically, when the Fed pauses rates for six months or more and then begins cutting, the market has rallied significantly, averaging a 15% gain after the first rate cut.

Case Study: Google (Alphabet) and the Importance of Economic Moats

The video uses Google (Alphabet) as a prime example of a company with a strong economic moat and the benefits of buying during dips. The recent antitrust ruling, where Google was not forced to sell its Chrome or Android businesses and could continue its $20 billion annual payment to Apple for default search engine status, led to a strong after-hours rally.

The speaker had previously advised against panicking about potential breakups, citing historical precedents where governments often "bark but don't bite" against large companies with significant lobbying power. The argument is that even a breakup would likely increase shareholder value.

The core investment philosophy highlighted is the importance of a wide economic moat, which protects a company from competition. Companies with such moats, and products that are essential to many people (like Google), are less susceptible to short-term earnings misses or cyclicality. Over time, they are expected to generate increasing profits and free cash flow, leading to higher intrinsic value and share prices.

The speaker shares personal investment results in Alphabet, showing significant profits and an average cost basis of $87 and $111 across two portfolios. However, he emphasizes that he would not buy more Google at the current moment because it is no longer undervalued. The intrinsic value is estimated at $28, while the share price is around $211-$220, indicating it is slightly overvalued. He reiterates the strategy of buying when a stock is undervalued and has retraced to a support level.

The video illustrates this with a chart of Google's price movements, showing waves of ups and downs. The advice is to "wait for the next wave down to a support level" and buy when undervalued, rather than chasing a rising price.

Identifying Undervalued Companies with Strong Moats

The speaker addresses the concern that the market is near all-time highs, making it difficult to find opportunities. He introduces two more companies that he believes are undervalued and possess strong moats:

1. ASML: Described as a monopoly in the photolithographic segment of semiconductor manufacturing, ASML's machines are essential for companies like TSMC to produce wafers.

   • Valuation: Intrinsic value of $948, current price around $725, indicating undervaluation.
   • Moat: Rated 9 out of 10, signifying a very strong and dominant position globally.
   • Financials: Solid, predictable, high profitability, high growth, strong balance sheet.
   • Technicals: Consolidating at a support level after previous waves of price movement.
   • Investment Horizon: Long-term investment, not a short-term trade.

2. Fortinet (FTNT): A top cybersecurity company alongside Palo Alto Networks and Crowdstrike, which "monopolize the cybersecurity market."

   • Technicals: Recently dropped to its 200-day moving average, which acts as strong support. The speaker notes this is a potential good bottoming point, but emphasizes that fundamentals must also be considered.
   • Valuation: Intrinsic value of $88.70, currently undervalued.
   • Moat: Strong moat, highly predictable, highly profitable, medium growth, strong balance sheet.
   • Tool: The "Stock Oracle" tool is mentioned as a way to quickly assess a company's quality at a glance.

Speculative Growth: Celsius

The speaker also discusses Celsius, a company he has been buying and is currently up 64% on. He advises against taking small profits, advocating for letting investments run for significant returns (3x, 5x, 10x), quoting Charlie Munger on the importance of patience.

• Fundamentals:
  • Intrinsic Value: $90.37, with the current share price at $61.41, indicating it's still undervalued despite recent gains.
  • Market Position: Gaining market share from competitors like Red Bull and Monster in the energy drink market.
  • International Expansion: Significant potential for growth as Celsius expands internationally, currently representing only 3% of its business.
  • Competitor Comparison: Monster has a market cap of $61 billion, while Celsius is around $15 billion. A potential 3x-4x return if Celsius reaches Monster's valuation, or a 2x return if it reaches half of Monster's business.
• Moat Analysis:
  • Oracle Mode: Assessed as a "narrow moat" based on brand popularity with younger generations.
  • AI Mode: Analyzed by AI (using GPT), which gave it a 4/10 score and "no moat." The speaker advises prioritizing the "Oracle mode" (discretionary research) over the AI mode in case of discrepancies.
• Financials and Investment Approach:
  • Maturity: Celsius is a relatively young company, so its financial statements lack a long track record of consistent profits. However, free cash flow has been relatively consistent.
  • Classification: Considered a "speculative growth company."
  • Position Sizing: Due to its speculative nature, smaller positions are recommended, allowing for growth.
  • Past Success: The speaker mentions buying Palantir at $9 as a young company that worked out well, suggesting similar potential for Celsius.

Conclusion and Takeaways

The video concludes by reiterating that there are significant investment opportunities and bargains available in the current market, provided one looks carefully. The key is to focus on businesses with strong economic moats, buy them when they are undervalued, and hold them for the long term to compound wealth. The speaker emphasizes that patience and a disciplined approach to buying dips in great companies are crucial for generating substantial returns.