The Insider Report - September 1st, 2024

Market Overview (Member Only)

• Once again, the Dow Jones Industrial Average led the market higher last week, as it hit a new all-time high, closing up 0.94%. The S&P 500 followed and was up 0.24%, but the Nasdaq was down 0.92% on the week.
• Financials have emerged as the sector leader in the market year-to-date, largely driven by insurance companies that have raised premiums.
• Interestingly, inflation data continues to come down as we saw last week with the PCE report. Now we have important labor market updates this week.
• Markets are closed on Monday in observance of Labor Day.

Stocks I Like

1. IMAX (IMAX) – 41% Return Potential

What's Happening

• IMAX (IMAX) is a theater and tech platform for entertainment and events worldwide.
• The company made $374.84 million in revenue in 2023, along with $25.34 million in earnings.
• IMAX has a pretty high valuation. Its P/E is at 56.28, its Price-to-Sales is at 3.32, and its EV to EBITDA is at 12.36.
• From a technical perspective, IMAX recently emerged from a cup and handle pattern. This could lead to an acceleration in upside momentum in the stock.

Why It's Happening

• CEO Rich Gelfond expressed optimism about the future, saying, “With the strikes and the lingering effects of the pandemic firmly behind us, we are in an excellent position to fully realize the benefits of our strong, asset-light business model.” He also noted that system installations are up and its backlog is growing.
• The company’s premium screens allow exhibitors to charge higher ticket prices to the many moviegoers willing to pay more for immersive experiences. This characteristic could become increasingly valuable as movie theater chains contend with and adapt to competition from streaming services. Top Gun: Maverick ‘s generation of more than $1 billion in ticket sales indicates people are still hungry for theatrical experiences.
• With the theater business increasingly revolving around big-budget, special-effects-heavy films that benefit from IMAX‘s premium viewing format, the company is on track to play a big role in shaping the future of the industry.
• The company also lifted its guidance, seeing installations of 130 to 150 this year, up from 128 a year ago and its earlier guidance of 120-150, showing demand for its brand of entertainment is growing. It also said the third quarter was off to a strong start thanks in part to the release of Twisters.
• Imax generated revenue of $375 million, which was up 25% year over year.
• IMAX has a free quarterly cash flow of $26.54.
• Analyst Ratings:
• Roth MKM: Buy
• Rosenblatt: Buy
• Wedbush: Outperform

My Action Plan (41% Return Potential)

• I am bullish on IMAX above $19.00-$20.00. My upside target is $30.00-$31.00.

• Planet Fitness (PLNT) – 21% Return Potential

What's Happening

• Planet Fitness (PLNT) franchises and operates gyms and fitness centers.
• The company brought in $1 billion in revenue in 2023, along with $138.31 million in earnings.
• In terms of valuation – PLNT's is elevated. Its P/E is at 45, its Price-to-Sales is at 6.36, and its EV to EBITDA is at 19.15.
• From a technical standpoint, PLNT recently broke out from a massive saucer formation. It looks poised to continue its bull run.

Why It's Happening

• The business operates a franchise model, with only 256 of these locations actually owned by the company. This means there are outside investors who front the start-up capital and pay fees for the right to open Planet Fitness locations. It’s an asset-light, freeing up company capital, which leads to the generation of positive free cash flow.
• At those 2,575 gym locations mentioned, there are a combined 18.7 million members. This allows the company to keep its cheapest monthly membership fee at $10. The low price attracts the casual gym-goer, who might only visit a few times a month, but who is unwilling to cancel because they convince themselves that they’ll stick with their fitness plan. This keeps the membership churn rate low. 
• Planet Fitness announced generally solid sales trends that are expected to run through late September. Same-store sales were up 8%, mainly thanks to the chain’s rising membership pool. The company added 26 new gym locations, too, helping push overall revenue up 14% to $278 million.
• Planet Fitness produced $273 million in operating income on $1.1 billion of overall sales.
• PLNT has $40.18 million in free quarterly cash flow.
• Analyst Ratings:
• Baird: Outperform
• JP Morgan: Overweight
• RBC Capital: Outperform

My Action Plan (21% Return Potential)

• I am bullish on PLNTabove $72.00-$73.00. My upside target is $98.00-$100.00.

• Sunrun (RUN) – 41% Return Potential

What's Happening

• Sunrun (RUN) is a solar energy developer and installer for residential properties in the United States.
• The company generated $2.26 billion in revenue in 2023, but still lost $1.6 billion on the year.
• RUN's valuation suggests a bargain may be in store. Its Price-to-Sales is 2.37, but its Book Value is just 24.00 – higher than the stock price.
• From a charting perspective, RUN is seeking a breakout from a saucer formation. If successful, I would look for RUN to explode higher.

Why It's Happening

• Interest rates have been a huge focus for renewable energy companies because projects are often financed over multiple decades. When rates rise, it makes projects less economical, so the last couple of years of rising rates have hit the industry hard. Therefore, the recently announced rate cutting cycle is going to be a huge tailwind for RUN’s stock price in the near term. 
• Another bullish tailwind for energy stocks like Sunrun is that treasury Secretary Janet Yellen also essentially accused China of flooding the global market with very competitively priced green energy products, such as solar components. Yellen added that she will exert pressure on Chinese authorities about such practices in an upcoming official visit to the country. If that materializes, that could benefit Sunrun massively. 
• The Biden Administration is also assertively trying to develop clean energy as a sizable economic sector. It is pouring federal money into the effort with a series of measures baked into the large-scale Inflation Reduction Act passed in 2022. Subsidies to clean energy companies like Sunrun would help reduce its operating expenses and boost profits easily. 
• Sunrun has also been receiving bullish coverage and updates from major institutions such as Morgan Stanley. Its top analyst Andrew Percoco stated that Sunrun is well on pace to hit the midpoint of its target for solar installations in the second quarter, with a goal of 270 to 290 megawatts’ worth of power.
• It is estimated that the solar market will increase by 15% this year over the previous year. Naturally, this favors the larger-scale installers in the business. Sunrun is one of the potential beneficiaries 
• At its current levels, RUN stock trades at 1.3x revenues, compared to the 2.1x average over the last seven quarters. This could be a potentially great time to scoop up RUN as a value play. 
• Analyst Ratings:
• Morgan Stanley: Overweight
• Deutsche Bank: Hold
• Goldman Sachs: Buy

My Action Plan (41% Return Potential)

• I am bullish on RUNabove $17.50-$18.00. My upside target is $29.00-$30.00.

Market-Moving Catalysts for the Week Ahead

GDP Comes in Hot Again

The GDP revision for the second quarter last week came in stronger than expected. The report showed that the economy grew 3% in Q2, above the previous reading of 2.8%. If this is the case, then why is the Fed set to cut rates in September?

My argument is due to the federal fiscal situation. Interest rates have led to interest expenditures becoming an even bigger line item in the budget compared to the military. Think about that for a second – the U.S. has the largest military in the world, but our interest expense is even larger.

It's also important to remember that an economic slowdown does not automatically equate to recession. The traditional definition is two negative quarters of GDP. We had that in 2022 and 2020. I don't think it's probable that we see three recessions in five years.

Nvidia Earnings and SMCI Concerns

Now that Nvidia's earnings have come and gone, markets are able to focus on the next headline risk. But I do want to take a moment to dive deeper into the company's latest report, as well as highlight some concerns regarding the accounting practices of one of their biggest customers – Super Micro Computer.

NVDA's earnings per share (EPS) beat estimates by over 5%. This is a decent result but others have pointed out that it's their smallest beat in recent reports. Their revenue exceeded estimates and now there is talk that their energy costs could come down and boost margins.

But I am concerned with what transpired with Super Micro Computer after Hindenburg released a report that implied the company has engaged in deceptive accounting practices. If so, I think this could signal a major risk going forward to Nvidia. If Nvidia were to lose even part of its business from SMCI, it could hurt their bottom line notably.

Labor Update and Outlook

After last week's inflation data that provided additional signals that it's currently under control, our attention now turns towards the labor market. This is the biggest piece of the economic puzzle that we need to consider right now, because the whole idea of a soft landing is contingent on the labor market staying strong.

After the previous uptick in the unemployment rate, it's key that we see it remain stable around 4.3%. Any notable upticks in the unemployment rate would likely trigger the Fed to cut 50 basis points in September instead of just 25-basis points.

Then of course, there's the hourly wage data to pay attention to. With inflation having come down, there's the serious potential for real wage gains again. My only concern surrounds what happens when the money printer comes back on in September. If inflation picks up again, wage growth could face a major headwind.

Intermarket Signals

It's imperative to keep track of capital flows when it comes to markets. The basic idea is that conditions precede price. In other words, things under the surface begin to shift before it's reflected in the broader indices.

The idea that nobody ever saw anything coming is totally futile. It's similar to weather forecasting. Of course, there will be times where errors are made, and I don't think artificial intelligence is going to change that either.

Right now, I think it's important that the Dollar continues to weaken for the sake of stocks right now. It's a bit early for the Dollar to start rallying with risk assets, and if it does drop again, it will be fuel for metals, stocks, and crypto.

Sector & Industry Strength (Member Only)

Very interesting update on the sector performance rankings year-to-date this week. Financials (XLF) have emerged as the top-performing sector year-to-date. In second place, we still have communications (XLC), followed by utilities (XLU), and then tech (XLK).

I need to see some improvement from tech in the coming weeks to reassert my confidence in this bull market. The fact that consumer discretionary (XLY) continues to lag is a concern, as the performance spread between staples (XLP) and discretionary isn't narrowing significantly.

The inflation trade seems rather tamed right now, with energy (XLE) and basic materials (XLB) hovering near the bottom of the back. I'd like to see real estate (XLRE) continue to improve and catch up to the rest of the pack too.

1 week	3 Weeks	13 Weeks	26 Weeks
Financials	Financials	Real Estate	Utilities

Editor's Note:

Financials dominating is probably not something we'd see if stocks were about to collapse.

Biotech Trying to Break (Sector ETF: IBB/SPY) 

Biotech remains a sector I'm increasingly keen on seeing emerge as a leader in this bull market. This chart looks at the ratio between the biotech sector (IBB) and the S&P 500 (SPY). A quick glance shows how it's underperformed the index for years.

This ratio has been making lower lows and lower-highs, and remains in a downtrend. However, it's on the precipice of breaking the downward sloping trendline, which would nullify the current slope of the decline.

The big key for me here is to see the ratio exceed the high from January 2024. If it does, we should see this sector emerge as a new leader. I think it's a sector that remains ripe for artificial intelligence trends to lead to booming stocks.

Real Estate Over Bonds (Sector ETF: XLRE/TLT) 

As mortgage rates have dropped to their lowest point of the year, I think it's fitting to check out the ratio between the real estate sector (XLRE) and long-term Treasuries (TLT). Both of these are important asset classes where investors often go in search of yield.

Despite the bloodbath that fixed income and real estate faced over the past few years, XLRE actually held up much better than TLT. Since 2022, the ratio consolidated into an ascending triangle formation, which is a continuation pattern.

The ratio has started to breakout from the pattern, which portends positive omens for the real estate sector. Keep in mind that real estate typically offers higher-yields, so when the "risk free" rate drops, it helps bid up other sectors tied to capital markets.

Waiting for Liquidity to Explode (Sector ETF: LQD/IEI)

Of all the ratios we cover on a weekly basis here in the Insider Report, the one between investment-grade corporate debt (LQD) and 3-7 Year Treasuries (IEI) may be the most important one right now.

This ratio is key to measure liquidity conditions in bond markets. Remember that bonds are a significantly larger market compared to stocks, and crises often transpire in that asset class before moving into equities.

I'm watching this ratio for a potential breakout from the rounding bottom formation. I expect this to happen around the time that the Fed starts to cut rates next month. Interestingly, spreads are right around where they were one month before the Fed starting hiking back in March 2022. How's that for an orderly market?

Editor's Take:

Even though stocks were faced with a lot of selling last week, it was orderly price action. In other words, we didn't see significant gaps lower and closes near the lows of the day in the indices. This is a good sign.

In fact, I continue to expect the strengthening liquidity levels to absorb any further selling pressures in the near-term. The truth is, unless credit spreads blow out, and this ratio crashes lower, we're unlikely to have a stock market crash.

We know that the Fed watches credit spreads carefully. It's the reason why they went out and bought corporate bonds during the covid crash of 2020 – they wanted to narrow this ratio. For now, it's doing exactly what they want, and rate cuts are likely to push the spread to even narrower levels.

Cryptocurrency 

Back to analyzing Bitcoin this week. If we consider a broader time frame going back a few months, Bitcoin remains in a longer-term consolidation within a descending price channel. It's important to remember that these patterns often lead to continuations of trend. The long-term trend remains up.

In fact, during last week's sell-off, one could make a strong argument that a higher-low was completed. This would be the first major step in the re-establishment of a short-term bull trend. But in order for bulls to reassert their dominance, they'd have to close Bitcoin back above 70,000-72,000.

The big thing for me is to continue seeing the support zone at 50,000-55,000 holds. We saw this on two separate occasions in July and in August. If this fails, then it could lead to a major crypto winter and dismal prospects in the near future.

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