In this episode, I dive deep into the story of Etsy, a contrarian bet against the prevailing market sentiment. Once a darling of investors during the pandemic, Etsy's stock has faced a dramatic downturn amidst the bear market 2022. Despite nearly doubling its revenue and tripling its earnings during the pandemic, short-termism and a fear of looming recession have led to a drastic undervaluation of Etsy's stock.

Join me as I unravel the layers of short-sightedness plaguing the market's view on Etsy, shedding light on the platform's true essence, its indispensable role for makers and creatives, and its remarkable resilience and potential for growth beyond the pandemic years.

Discover why Etsy is not just surviving but thriving, poised for significant expansion by aligning its fees with marketplace competitors, and how it continues to define its identity and value in a rapidly evolving digital marketplace.

Etsy's story is more than just numbers; it's about understanding the depth of a business and its ecosystem. Tune in to explore the untold story of Etsy, a testament to the power of long-term vision in the face of herd mentality.

While researching businesses is my true passion, tracking the herd’s movements via stocks is exhilarating! There is so much meaning expressed in the price changes. It's almost never what the headlines say. Things are almost never as they appear on the surface. This week's episode is yet another case study proving this reality.

While the average stock in the Pragmatic portfolio increased just .3%, looking beneath the surface reveals many unfolding stories. In this week's episode, I shed light on several interesting topics, including:

- The implications of Elliott securing 13% ownership in Etsy and appointment to the Board.

- Spotting short sellers in your portfolio and what to do about them.

- Meta’s strong earnings sending shockwaves across advertising, which drove demand for Pinterest, The Trade Desk, and Magnite.

There will be several key questions answered, including:

- What to do when an activist fund opens a large position in two of your stocks?

- What can we infer from Datadog's massive spike ahead of earnings?

- Why over 90% of the stocks in the Pragmatic portfolio beat earnings estimates?

- How can a curation of under 20 stocks give a portfolio substantial diversification without sacrificing performance or lowering your standards?

- How to process a stock that is having wild swings on no news?

Episode Overview

In this week's episode of the Pragmatic Portfolio Manager podcast, we delve into the critical market developments for the week ending January 26. This episode offers insights into the Pragmatic Portfolio's performance and broader market trends.

Key Insights:

• Portfolio Performance Analysis: The episode provides a comprehensive analysis of the Pragmatic Portfolio of concentrated contrarian Investments, highlighting its impressive over 2% growth this week, a continuation of its upward trajectory.
• Understanding Market Recovery: Gain insights into the portfolio's recovery post the early January pullback and what this suggests about its future direction.
• Stock Performance Highlights: The episode sheds light on the remarkable performance of stocks like Children's Place, Oatly, LoveSac, and RH.
• Anticipating February's Market: A forward-looking analysis predicts a robust February for the portfolio, driven by expectations of a strong earnings season.

Detailed Discussions:

1. Market Resilience Post-Pullback: An in-depth look into the early January market dynamics and the resilience of the portfolio, offering a nuanced understanding of market signals.
2. Industry Trend Analysis: Explore the positive trends in industries where the portfolio is invested and their impact on market movements.
3. Economic Data Overview: Analyzing the latest data on consumer spending, GDP, and the PCE price index, and interpreting their implications for the broader economy.
4. S&P Index Analysis: A critical examination of the return to parity between the equal weighted and weighted S&P, with insights into its significance for the market.

Earnings Season Outlook

The episode discusses the upcoming earnings season, highlighting the consistent performance of businesses within the Pragmatic Portfolio in surpassing consensus estimates. This segment offers valuable perspectives for those looking to understand potential catalysts.

• Outperformance Analysis: In-depth discussion on how and why the Pragmatic Portfolio outperformed the broader market. This section highlights the strong performance of specific stocks like AMD, Taiwan Semiconductor, Datadog, RingCentral, and PayPal.
• AMD and Taiwan Semiconductor: A thorough exploration of why AMD and Taiwan Semiconductor experienced significant spikes, including an analysis of their market position and future potential.
• Other Key Performers: Examination of other notable stocks in the portfolio, offering insights into their individual performances and how they contributed to the overall success of the portfolio.

• Market Movements: A detailed analysis of the market's behavior in the past three weeks, emphasizing the significance of the post-pullback week, the following rally, and the subsequent week. This section underscores the importance of distinguishing between market noise and meaningful signals.
• Hypothesis on Early January Contraction: Reiterating my hypothesis that the early January contraction was a reaction to external factors rather than an indicator of market health. This viewpoint is supported by the market's response to the earthquake in Japan, Apple's stock downgrade, and the holiday trading lull.

• Market Indices and Sector Performance: Detailed comparison of the Pragmatic Portfolio's returns against major indices like the S&P, Nasdaq, and Russell, as well as an overview of the underlying sectors.
• Retail Sales Impact: Discussion on how strong retail sales not only influenced the market but also supported my optimistic forecast for a strong market performance in 2024.

• Predictive Factors for 2024: An informed prediction for the market in 2024, based on factors like potential Fed rate cuts, continued economic growth, and the abundance of undervalued stocks.
• Strategic Recommendations: Recommendations for listeners on how to position their portfolios in anticipation of the predicted market trends.

• Market Context and Analysis: Learn how to distinguish meaningful market signals from noise, understand the criticality of post-pullback market direction, and challenge the conventional mutual fund strategies in response to interest rate changes.

   

• Broad Market Observations: Gain insights into the resilience of the market signaling a bull trend, decode key economic indicators like the VIX and 10-year yield, and explore sector-specific movements, especially in IT giants like Apple, Microsoft, and NVIDIA.

   

• Pragmatic Portfolio Insights: Uncover strategies behind the portfolio's rebound, the advantages of a concentrated contrarian approach, and predictive analysis for portfolio stability.

   

• Economic Analysis: Join us in questioning the accuracy of the Consumer Price Index and anticipate the impacts of the upcoming earnings season on portfolio performance, along with strategies to capitalize on valuation gaps for growth potential.

This episode delves into quantitative analysis techniques, crucial for interpreting market movements and supporting qualitative research. The main focus is on discerning between signal and noise in market developments, especially regarding the recent market downturn.

Episode Highlights:

1. Market Downturn Analysis: The sharp downturn in the market's first week of 2024 is discussed, highlighting it as a mechanistic, knee-jerk reaction rather than a substantial shift in sentiment. This was triggered by an earthquake in Japan and subsequent speculations about the selling of U.S. Treasuries.

2. Economic Data as Signal: The positive jobs and wage numbers released on Friday indicate that the U.S. economy's momentum is a crucial signal supporting the ongoing market rally. This data, coupled with the Fed's indications of rate cuts in 2024, has been a driving force in the market.

3. Quantitative Analysis Case Study: The episode uses the recent sell-off as a case study for quantitative analysis application. A regression analysis was conducted on S&P 500 sectors, showing a negative correlation between their performance in Q4 2023 and the week ending January 5th, 2024.

4. Industry vs. Sector Performance: The relationship between the industries Pragmatic Capital is invested in and their respective sectors was analyzed using regression analysis, indicating that the sell-off's impact was similarly mechanistic at the industry level.

5. Interpreting Herd Mentality: The episode emphasizes the importance of understanding the mechanistic nature of mutual fund decisions during sell-offs. It advocates for holding positions with conviction rather than succumbing to herd mentality, using quantitative methods to support this approach.

    

Conclusion: The episode concludes that the recent market downturn is more noise than signal, reinforcing the belief in the ongoing bull market. It highlights the importance of using quantitative analysis to underpin investment decisions and to differentiate between reactionary market movements and substantive economic trends.

For more in-depth insights and techniques on how to capitalize on these market developments using quantitative analysis, tune into the Pragmatic Portfolio Manager podcast. This episode offers valuable guidance for investors looking to navigate market volatilities with confidence and principle.