The Insider Report - September 22nd, 2024

Market Overview (Member Only)

• Stocks gained last week, led by the Dow Jones Industrial Average, which finished 1.62% higher. The Nasdaq was up 1.49% and the S&P 500 rose 1.36%.
• The Fed cut rates last week as we entered a renewed period of stimulus. This could be a tailwind for risk assets near-term.
• Precious metals and crypto continue to act as strong diversification opportunities.
• Investors must beware of inflation making a comeback at some point, however.

Stocks I Like

1. Intapp (INTA) – 27% Return Potential

What's Happening

• Intapp (INTA) provides AI-powered solutions around the world, largely through its subsidiary Appliance and its DealCloud solutions.
• The company made $430.52 million in 2024, but still lost $32.02 million on the year.
• INTA has an elevated valuation with its Price-to-Sales at 7.89 and its Book Value at 5.39.
• From a technical standpoint, INTA just broke out from a saucer formation. This could take prices to a new high as upside momentum accelerates.

Why It's Happening

• Intapp, a leading global provider of AI-powered solutions has announced the expansion of its partnership with Monarch, a provider of implementation and customer success services. The enhanced partnership now includes direct-to-customer and subcontract opportunities, which enable Intapp to leverage Monarch’s technology and improve its operational efficiency and subsequently attract more customers to its platform. 
• Artificial Intelligence (AI) is an area that Intapp has been heavily investing in, and if materialized would present the company with a unique advantage relative to its peers. The company confirmed the strategic role of AI technology to its future when it quoted CEO John Hall as saying that fiscal 2024 “has been a strong and exciting year for Intapp as we lead our clients to adopt and apply AI to the work of their professionals.”
• Intapp’s revenue came in at just over $114 million in the last quarter. That was 21% higher year over year, and topped the average analyst estimate of less than $112 million. 
• The bulk of the company’s top line came from software-as-a-service (SaaS) and support activities, which collectively saw a 25% improvement to $85 million.
• Looking ahead, Intapp is projecting its SaaS revenue to be between $326.7 million and $330.7 million for the fiscal year 2025. The company’s strategic partnerships, product innovation, and international expansion have been identified as key growth drivers.
• INTA has a free quarterly cash flow of $25.17 million.

• Analyst Ratings:
• Citigroup: Buy
• Barclays: Overweight
• UBS: Buy

My Action Plan (27% Return Potential)

• I am bullish on INTA above $40.00-$41.00. My upside target is $62.00-$63.00.

• Construction Partners (ROAD) – 18% Return Potential

What's Happening

• Construction Partners (ROAD) is a civil infrastructure company that builds and maintains roadways in the southern region of the United Sates.
• The company brought in $1.56 billion in revenue during 2023, along with $49 million in earnings.
• When it comes valuation, ROAD is rather expensive. Its P/E is at 50.14, its Price-to-Sales is at 2.00, and its EV to EBITDA is at 20.10.
• At a technical level, ROAD is emerging from an ascending triangle formation, which signals that a continuation of the uptrend is in the works.

Why It's Happening

• Construction Partners has announced that it has acquired John G. Walton Construction Company, Inc, headquartered in Mobile, Alabama. In connection with the transaction, the Company added a hot-mix asphalt plant and related crews and equipment serving the greater Mobile and southwestern Alabama market area. This strategic acquisition is a power move to expand its market share and generate more revenue for shareholders. 
• The Company’s President and Chief Executive Officer, Fred Smith III, has high conviction that the acquisition is going to generate positive synergy for the company. “This transaction provides us with an exceptional location from which to begin serving the dynamic and rapidly growing Mobile metro area. We now have plants in the four largest markets in Alabama and continue to seek attractive investment opportunities to further enhance our operations in the state.” 
• Institutions have been quietly accumulating positions in ROAD, highlighting the bullish undertone of the stock that’s going on. For example, Dimensional Fund Advisors LP lifted its position in shares of Construction Partners by 13.4% during the fourth quarter. Vanguard Group also lifted its stake in shares of Construction Partners by 2.4% during Q4. 
• Recent times have been pleasing for Construction Partners as its earnings have risen. The company grew earnings per share by an impressive 126% last year. The latest three-year period has also seen an excellent 131% overall rise in EPS.
• Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the five analysts following the company. That’s shaping up to be materially higher than the 15% growth forecast for the broader market, which should cause the stock price to surge higher. 

• Analyst Ratings:
• DA Davidson: Neutral
• Raymond James: Strong Buy
• Stifel: Buy

My Action Plan (18% Return Potential)

• I am bullish on ROADabove $58.00-$59.00. My upside target is $85.00-$86.00.

• Tesla (TSLA) – 51% Return Potential

What's Happening

• Tesla (TSLA) is an electric vehicle and technology company.
• The company generated $96.77 billion in revenue 2023 along with $15 billion in earnings.
• TSLA's valuation is high. Its P/E is at 63.70, its Price-to-Sales is at 8.30, and its EV to EBITDA is at 54.63.
• From a charting standpoint, TSLA is attempting a breakout from a symmetrical triangle formation. If successful, it could lead to a continuation of the short-term bull trend in this stock.

Why It's Happening

• Tesla is the leader in an under-the-radar sector, humanoid robots, that can see explosive growth in the next few years. It has built a humanoid robot called Optimus. The prospects for Optimus are particularly lucrative, considering it can complement Tesla’s existing core car business while also diversifying the entire operation since the company could commercialize the robotics business. 
• Tesla CEO Elon Musk is also highly optimistic about the future of humanoid robots. He suggested that Optimus alone could eventually be a $200 trillion opportunity. This is backed by due diligence conducted by Cathie Wood, who stated that humanoid robots have two broad applications: households and manufacturing—both which represent a $12 trillion market opportunity.
• Tesla’s full self-driving (FSD) technology will be its primary source of profitability in the future. The company already monetizes FSD through subscription sales, but CEO Elon Musk has discussed licensing the technology to other automakers, which will more than double its current revenue from the FSD segment.  
• Additionally, Tesla plans to launch an autonomous ride-hailing business at some point. The company has not set a specific date, but information may be forthcoming when Tesla unveils its robo-taxi in October. This release should hype investors up, thus attracting more buying inflows due to the launch.
• Looking ahead, Tesla is one of the companies best positioned to monetize autonomous driving technology. Its large, growing fleet of FSD-enabled vehicles supports data collection on a scale no other automaker can match, and quality data is essential for training machine learning models.
• Tesla’s revenue increased 2% to $25.5 billion, despite facing significant capital expenditure outlay and costs associated with the Cybertruck production ramp-up. The increase in revenue also highlights the company’s extremely strong pricing power in the EV market. 

• Analyst Ratings:
• Cantor Fitzgerald: Neutral
• Canaccord Genuity: Buy
• Guggenheim: Sell

My Action Plan (51% Return Potential)

• I am bullish on TSLAabove $193.00-$195.00. My upside target is $360.00-$370.00.

Market-Moving Catalysts for the Week Ahead

The Rate Cuts Have Arrived

Last week, the Fed went ahead and finally cut rates on the short end of the curve. The market initially popped, then dropped, but then on Thursday, we saw a strong bid again. This is why I always say the day after Fed Day matters more than Fed Day itself.

Now that more liquidity is being injected into the system, we have to be on our toes for shifts in capital flows from a macroeconomic standpoint. The Dollar has been weakening over the past couple months, and I expect this to continue in the near-term.

But when the day comes that the Dollar starts to rally again, it'll signal the real shift towards a potential economic slowdown. The big threat now is inflation, even though it's on virtually nobody's radar. We'll have to watch crude oil to see how it responds to the money printing.

GDP and The Consumer

This week, we have the final revision number for Q2 GDP. The reviewed expectations are for the economy to have grown 3% in the previous quarter. I'm not expecting this reading to rock the boat at all, as I'm still in the camp that another recession in the immediate-term is unlikely.

Lately, I've ranted about how I think we had a recession in 2022. I view it as a double-dip of the recession from 2020. The thing is… both of those periods saw two consecutive quarters of negative GDP. But of course, it was a bit steeper in 2020.

If this is our base assumption, then I find it unlikely that we have a third recession within a period of five years. I just don't see how 2020 was a recession if 2022 wasn't. If we want to modify the traditional recession definition to include a magnitude of contraction, I'm all for it. But until then, I think we're still in growth mode.

The Next Chapter in A.I.

I don't think the artificial intelligence saga is over just yet, but I do think we could be on the cusp of another chapter in its story. So far, the biggest drivers of the A.I. trade have been large tech companies innovating in the space, and companies that manufacture the chips.

In recent months, I've dared to expand on what's next for the artificial intelligence trade. My two favorite sectors in this regard are biotech and telecom. Interestingly, they both are sectors that would benefit from lower interest rates as well.

I think artificial intelligence will revolutionize the way disease is diagnosed and health is maintained. In terms of telecom, all those data centers will need to be connected via fiber optic cables. This means more investment and greater opportunities.

A New Crypto Run?

The cryptocurrency sector has continued to perk up in recent weeks, and as I normally do, I'll take you through a thorough technical breakdown of Bitcoin (or Ethereum) at the end of this report.

But I want to briefly address some of the fundamental and macroeconomic tailwinds emerging in this sector. It's been noted that there is a strong correlation between M2 growth and crypto prices. We have M2 growing again with the rate cuts.

However, I've also discovered a very strong correlation with liquidity levels, as observed by credit spreads, and crypto prices. In other words, as spreads narrow further due to rate cuts, I think this will be an additional tailwind for crypto prices.

Sector & Industry Strength (Member Only)

The tale of the tape from last week is largely unchanged, but it remains in a generally constructive direction. Utilities (XLU) are still the top-performer year-to-date, which needs to change at some point, as it's not a risk-on sector.

Technology's (XLK) recovery is still good, although I noted a nice pop in the energy sector (XLE) in the last week. This signals that the Fed's rate cuts could turn out to be inflationary, despite signs that price increases are under control for now.

The spread between the consumer discretionary (XLY) and consumer staples (XLP) sector narrowed notably last week, and I still like what's happening in the healthcare sector, mainly driven by biotech.

1 week	3 Weeks	13 Weeks	26 Weeks
Energy	Consumer Discretionary	Real Estate	Utilities

Editor's Note:

Energy claiming 1-week leader warns the Fed could be playing with an inflationary fire, but the 3-week leader being claimed by consumer discretionary is a bullish sign.

Just How Cheap is Energy? (Sector ETF: XLE/SPY) 

The worst-performing sector year-to-date is energy. It's been a complete round trip over the past couple of years for this downtrodden sector, as it remains the smallest and least significant sector in the S&P. Let's have a look at the ratio between XLE and SPY.

The thing with energy is that it typically outperforms in the later-stages of the market cycle. The good news for bulls is that XLE continues to underperform the index, as the ratio continues to make lower-lows and lower-highs.

But with the Fed's rate cuts and the firing up of the money printers again, could we be seeing a low of significance forming here? It still broke from the rectangle formation, and it would have to reclaim former-support-turned-resistance to start seriously considering such a situation.

Key Tech Indicator Holding Up (Sector ETF: SMH/QQQ)

Let's shift gears a bit and have a look at one of the market's most important indicators – the ratio between chips (SMH) and the Nasdaq 100 (QQQ). This is a special ratio that I developed over the course of this bull market, where if SMH outperforms QQQ, it's a risk-on signal.

It's plainly evident that the ratio is in an uptrend as seen by the series of higher-highs and higher-lows. The latter part is the most important right now – we need to see the ratio form a higher-low here and have a go at the highs again in order to maintain the integrity of this bull market.

The logic behind this ratio is simple – tech stocks need chips in order to perform their basic functions. If demand for chips drop, and SMH underperforms QQQ, it's a sign that the market moving sector that is tech is susceptible to a downturn.

Big Base Building in Bond Ratio (Sector ETF: HYG/TLT)

With the Fed pivot now official, it's time to check in on an important bond market ratio to gauge whether capital markets are confirming the generally bullish nature of rate cuts. This chart looks at the ratio between junk bonds (HYG) and long-term Treasuries (TLT).

These two types of bonds are on the opposite ends of the risk spectrum when it comes to the fixed income market. TLT is considered very safe while HYG is known to act like stocks. The idea is simple – when HYG outperforms TLT, it's a good sign for capital markets and liquidity, but when TLT outperforms HYG, it signals caution.

The ratio has trended higher over the past couple years, even while the Fed had a hawkish policy. Now that they're dovish again, we could look for an upside resolution from the ascending triangle formation seen on the chart below.

Editor's Take:

Lower rates are likely to give the junk bond market a notable tailwind. If this doesn't materialize, then it will provide a key signal that something isn't right in the market. The whole idea is that conditions shift before actual directional shifts in markets take place.

I still think the Fed is playing with fire by cutting interest rates before inflation dropped below 2%. It's probably going to be all fun and games until it's not—the risks for a return of inflationary pressures remain.

The biggest thing I'm watching for is the fiscal situation. Leaders in Washington have an opportunity—perhaps the last one—to make some serious refinancing reforms to the federal debt. If they don't seize this opportunity, it may be lost and the fiscal spiral may begin even sooner.

Cryptocurrency 

I want to stick with Bitcoin's technical picture this week, because the picture continues to improve from a technical standpoint. The most bullish feature of this chart is how well it held support in the $50,000-$55,000 zone.

As long as Bitcoin is above there, the risk-reward favors the upside. The key resistance zone remains in the $60,000-$62,000 zone. If it breaks above there, look for a quick surge up to the $70,000-$72,000 zone. And if that breaks, look out above.

The reason why we need to focus on Bitcoin especially is because it's the "Dow of Cryptos." Whatever Bitcoin does, the other coins will eventually follow. The duration of its range within the descending price channel suggests that a big move is coming in this market.

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