Markets are too hot right now, says Greenwich Wealth Management's Janjigian

Key Concepts

• Irrational Exuberance: A term used to describe excessive investor enthusiasm that drives asset prices to unsustainable levels.
• Value Stocks: Stocks of companies that are trading below their intrinsic value, often characterized by lower price-to-earnings ratios and dividends.
• AI Names: Stocks of companies heavily involved in Artificial Intelligence development and applications.
• Nvidia: A prominent technology company, particularly in the AI and graphics processing unit (GPU) space.
• Cisco Systems: A technology company that experienced significant growth in the 1990s followed by a substantial decline.
• Earnings Per Share (EPS): A company's net profit divided by the number of outstanding shares.
• Russell 2000: A stock market index that represents 2,000 small-cap U.S. companies.
• Emerging Technology Stocks: Stocks of companies in nascent or rapidly developing technological sectors.
• Biotechnology Stocks: Stocks of companies involved in the development of biological products and processes.
• FDA Trials: Clinical trials conducted to evaluate the safety and efficacy of new drugs and medical devices, overseen by the Food and Drug Administration (FDA).
• Liquidity: The ease with which an asset can be bought or sold in the market without affecting its price.
• Small Cap Index (IWM): An index that tracks the performance of small-capitalization companies, with IWM being a common ETF for this index.
• Bonds: Debt instruments issued by governments or corporations, typically considered less risky than stocks.
• Gold: A precious metal often seen as a safe-haven asset during economic uncertainty.

Market Valuation and AI Enthusiasm

Bahan Janjigian, Chief Investment Officer at Greenwich Wealth Management, expresses concern that the market, particularly certain segments, may be "a little bit too high right now." While hesitant to use the term "irrational exuberance," he notes that there's "a little too much excitement about these AI names in particular and technology in general." He contrasts this with "lots of stocks that are out of favor" and "value stocks that I think are still worth owning."

Nvidia: Business vs. Stock Valuation

Janjigian draws a parallel between Nvidia and Cisco Systems in the 1990s. Cisco, once the largest and hottest stock, saw its price increase sixfold between 1994 and 2000 before collapsing. Despite this, Cisco remains a strong company today, though its stock price is "50% off its all-time highs."

Applying this to Nvidia, Janjigian states, "I think the stock is too high, but I don't think the business is so." He emphasizes the crucial distinction for investors: "separate the company, the core business from the valuation of the stock." He believes Nvidia's business will continue to excel in the AI space, but he would be "hesitant to buy the stock" at its current valuation.

Janjigian clarifies he is not an "Nvidia hater." He previously owned Nvidia for client portfolios in 2022, considering it undervalued. However, he sold it later because clients also owned ETFs where Nvidia was a significant component, such as SMH, where it constituted "over 20%." He warns investors to be "careful because your exposure might be a lot more than you actually think" if they own Nvidia or other large-cap stocks within ETFs and mutual funds.

Outperformance of Negative EPS Stocks

Janjigian discusses a note from Torsten SL, Chief Economist at Apollo Investment Group, highlighting that companies with negative Earnings Per Share (EPS) have begun to outperform companies with positive EPS in recent months. He acknowledges that theoretically, the stock market is about buying earnings, making this trend noteworthy.

Janjigian suggests a rationale for this phenomenon, particularly concerning the Russell 2000 index. He notes that "about 40% of the stocks in the Russell 2000 have negative earnings." Many of these are "emerging technology stocks or biotechnology stocks that don't have any earnings." These companies might have "one or two things in the pipeline," making their stocks akin to "a lottery ticket." Positive news from FDA trials could lead to significant stock jumps, even without current earnings.

He attributes this trend partly to "a lot of liquidity in the market right now and people are overreaching a bit." He views this shift not necessarily as a market warning but as investors "shifting to biotech because they didn't do anything forever and now maybe you're betting on these positive outcomes." He suggests that owning such stocks can be beneficial, and a way to do so is by buying a small-cap index like the IWM.

Broader Market Signals

Beyond the specific trend of negative EPS stocks, Janjigian points to other "warning signals." He expresses concern when "all assets are going up, including bonds, stocks, gold, and the only thing that's going down is oil." This broad market rally across diverse asset classes, with the exception of oil, suggests a potential disconnect or overextension.

Conclusion

The discussion highlights concerns about current market valuations, particularly in the technology and AI sectors, exemplified by Nvidia. While acknowledging the strength of underlying businesses, Janjigian advises caution regarding stock prices. He also explains the recent outperformance of negative EPS stocks, attributing it to speculative bets on emerging technologies and biotechnology, fueled by market liquidity. Finally, he points to broader market trends, such as the simultaneous rise of most asset classes except oil, as potential indicators of overreach. The core message emphasizes the importance of distinguishing between a company's fundamental strength and its stock's valuation, and being aware of concentrated exposures within investment portfolios.