The Insider Report - October 13th, 2024

Your Exclusive Benzinga Insider Report

(DO NOT FORWARD)

By analyst Gianni Di Poce
Volume 3.41

Market Overview (Member Only)

• The stock rally continues. This week, the Dow Jones Industrial Average led higher, closing up 1.21%. The S&P 500 and Nasdaq followed, finishing up 1.11% and 1.13%, respectively.
  
• Inflation reports came in hot, but I'm still looking for a low in bonds.
  
• Crypto is starting to accelerate to the upside. I think a real bull trend is in its early stages.
  
• Technology stormed back and we're seeing market internals improve.

Stocks I Like

Vertiv Holdings (VRT) – 25% Return Potential

What's Happening

• Vertiv Holdings (VRT) designs and services critical digital infrastructure technologies for data centers and communications networks.
  
• The company generated $6.86 billion in revenue in 2023, along with $460.2 million in earnings.
  
• VRT has an elevated valuation. Its P/E is at 83.38, its Price-to-Sales is at 5.76, and its EV to EBITDA is at 41.38.
  
• From a technical perspective, VRT is looking to emerge from a saucer formation. This could lead to an acceleration in upside momentum.

Why It's Happening

• The company’s focus on high-growth areas such as data centers, edge computing, and 5G infrastructure positions it well to benefit from ongoing digital transformation trends. As these markets continue to expand, Vertiv’s specialized solutions should see increasing demand.
  
• According to Barclays, data centers account for 3.5% of electricity consumption in the U.S. Moreover, Barclays is forecasting that this figure will jump to 5.5% by 2027 and 9% by 2030.  As power consumption from data centers rises, so will the costs needed to take care of this infrastructure. This positions VRT well to ride on the AI tailwind. 
  
• Vertiv Holdings is the industry leader in liquid cooling technology. The company would see an increase in demand for its services thanks to the rising need for cooling infrastructure for the explosive growth in data centers.
  
• Vertiv’s Europe, Middle East & Africa segments saw a substantial increase in operating profit, reaching $109.5 million in Q2 2024 compared to $79.9 million in Q2 2023. This 37% growth demonstrates the company’s successful expansion and market penetration in these regions.
  
• Vertiv’s adjusted operating margin expanded to 15.2% in Q1 2024, compared to 11.5% in Q1 2023. This consistent margin expansion and revenue growth suggest that its products and services are resonating well with customers.
  
• Vertiv’s adjusted free cash flow in Q2 2024 was $333.4 million, a significant improvement from $227.3 million in Q2 2023.
  
  Analyst Ratings:
• Wells Fargo: Overweight
• Susquehanna: Positive
• Benchmark: Buy

My Action Plan (25% Return Potential)

• I am bullish on VRT above $89.00-$91.00. My upside target is $140.00-$145.00.
  
  NuScale Power Corporation (SMR) – 75% Return Potential

What's Happening

• NuScale Power Corporation (SMR) develops and sells modular light water reactor nuclear power plants for electricity.
  
• The company produced $22.81 million in revenue in 2023, but still lost $58.36 million on the year.
  
• SMR isn't profitable right now, but its valuation metrics are nonetheless expensive. Its Price-to-Sales is a whopping 74.45, and its Book Value is at 1.43.
  
• From a technical standpoint, SMR broke out from a falling wedge about a month ago, and formed a higher-low in the process. This reinforces the existing uptrend.

Why It's Happening

• NuScale is actively pursuing opportunities in the booming data center industry, where consistent and uninterrupted power supply is critical. The ability to locate power modules on-site for data centers could open up a massive new market for the company’s technology.
  
• It is the only small modular reactor (SMR) company with U.S. Nuclear Regulatory Commission certification, giving it a significant first-mover advantage in the rapidly growing SMR market. This certification positions NuScale to capitalize on the increasing demand for clean, reliable nuclear energy solutions.
  
• The company’s innovative SMR technology allows for flexible power generation, with modules that can be scaled from 77 MWe to 924 MWe. This scalability makes NuScale’s solution adaptable to various customer needs, from small communities to large industrial applications.
  
• NuScale is expecting additional revenue from Fluor Corporation over the next year, further strengthening its financial position and proving the value of its partnerships. This ongoing collaboration with a major engineering firm adds credibility to NuScale’s projects.
  
• NuScale has successfully reduced its operating expenses, with Q2 2024 operating loss improving to $41.9 million from $56.1 million in Q2 2023. This $14.2 million reduction demonstrates the company’s commitment to efficient operations and cost management.
  
• SMR has a short interest of around 22.22% of floated shares, potentially setting it up for a squeeze higher.
  
  Analyst Ratings:
• Craig-Hallum: Buy
• CLSA: Outperform
• B. Riley Securities: Buy

My Action Plan (75% Return Potential)

• I am bullish on SMR above $10.50-$11.00. My upside target is $23.00-$24.00.
  
  Valero (VLO) – 27% Return Potential

What's Happening

• Valero Energy (VLO) manufactures and sells petroleum-based and low-carbon liquid fuels.
• The company had $139 billion in revenue in 2023, along with $8.84 billion in earnings.
  
• VLO has a very reasonable valuation. Its P/E is at 8.16, its Price-to-Sales is at 0.34, and its EV to EBITDA is at 4.59.
  
• From a charting standpoint, VLO is testing critical support. If it holds here, it could prove to be a very favorable area to begin long entries.

Why It's Happening

• Valero has made significant strides in sustainable energy by committing to supply sustainable aviation fuel (SAF) in Florida. This move positions the company at the forefront of the green energy transition, potentially opening up new revenue streams and attracting environmentally conscious investors.
  
• Institutional investors have been showing high optimism and confidence in Valero. For example, firms like Wolfe Research have raised their targets, with Wolfe increasing from $169 to $172. This optimistic outlook suggests that industry experts see potential upside in Valero’s stock, even in the face of market challenges.
  
• The company’s Diamond Green Diesel venture positions it to capture market share in the growing demand for cleaner energy solutions. As environmental regulations tighten and consumer preferences shift, this strategic initiative could become a significant driver of future revenue growth.
  
• Valero’s robust revenue stream, with total revenue of $144.77 billion, demonstrates the company’s strong market position and ability to generate substantial cash flow.
  
• Valero’s cautious approach to debt management, with a total debt-to-equity ratio of 0.42, indicates prudent financial stewardship. This conservative leverage position reduces financial risk and provides the company with ample room for future borrowing if needed for strategic investments.
  
• VLO has a free quarterly cash flow of $2.27 billion.
  
  Analyst Ratings:
• BMO Capital: Outperform
• Barclays: Overweight
• JP Morgan: Overweight

My Action Plan (27% Return Potential)

• I am bullish on VLOabove $119.00-$120.00. My upside target is $181.00-$182.00.

Market-Moving Catalysts for the Week Ahead

Inflation a Bit Higher… So What?

Last week, we had a CPI inflation report that came in slightly above estimates. For the month of September, the annual CPI was 2.4% while the monthly CPI was 0.2%. Each exceeded respective estimates by 0.1%.

Obviously, this raises questions as to whether inflation remains a threat. I think that it is, but not quite yet. I find it outrageous that the Fed had the gall to start lowering rates before inflation dropped below the annual inflation target of 2%, however.

Right now, it looks like we'll get another 25-basis point rate cut on November 7. Note that this next FOMC rate decision comes two days after Election Day. It may be a turbulent period for markets, but I don't think anything is going to stop the Fed from easing at this point.

Did the BOJ's Bluff Get Called?

In the past year, I screamed from the rooftops that the Bank of Japan was in a very difficult position in terms of maintaining the value of the Yen. Then, earlier this year, my call was vindicated as the carry trade blew up, which sent the Yen soaring.

This corresponded with the Yen finally lifting interest rates off the zero bound. In fact, the Bank of Japan remains the only central bank in the developed economic category to not be easing right now. But let's get something straight – they still have the lowest rates.

Ergo, I think the market called the Bank of Japan's bluff, and they'll demand more from the BOJ. If they can't offer it, I wouldn't be surprised to see another major drop in the value of the Japanese Yen.

Election Outcome Risks?

With Election Day less than a month away now, I think it's important for the periodic reminder to keep politics out of one's portfolio. I'm not here to tell anyone how to think, and especially how to vote. The only reason to be in the markets is to make money.

Over the years, the policies of the parties have evolved. While historically, Democratic presidencies have led to better stock market returns, it's also worth highlighting that split chambers of Congress have led to the best-performing markets.

I would take it a step further and argue that the president only has a marginal impact on the economy's performance. Thus, the tendency for sitting presidents to be the economic savior when things are going well and to blame their predecessor for when things go poorly is just politics.

The Window of Opportunity in 2025

Regardless of the outcome of the election next month, the most important issue in Washington D.C. right now from an economic standpoint is the fiscal situation. The interest expenditure as a line item in the budget as grown out of control.

Unless policymakers tackle this issue seriously in the coming year, I think we will pay dearly. The Treasury Department needs to act on this window of opportunity coming in 2025, where interest rates will likely continue declining.

The best thing that could be done now is to issue a long-term bond—as long as possible. If they can do a 50-year or 100-year bond, even better. But the point is they need to lock-in low rates over a long period of time if there is any hope of maintaining sanity in the budget. Otherwise, we'll probably go over the edge from a fiscal standpoint.

Sector & Industry Strength (Member Only)

The sector performance rankings saw some really positive developments in the past week. First and foremost, the tech sector (XLK) stormed back and is vying to reclaim leadership against its peers.

Utilities (XLU) is holding up but lost ground against other sectors, but I'm happy to see this as it's good to see defensive sectors underperform. Financials (XLF) made a nice recovery well and are neck-and-neck with technology (XLK).

Real estate (XLRE) slipped back into last place in the rankings, but this is attributed to the recent uptick in interest rates. Consumer discretionary (XLY) is still trying to overtake consumer staples (XLP) in the rankings, and if successful, would be another accomplishment for the bulls.

1 week	3 Weeks	13 Weeks	26 Weeks
Technology	Energy	Utilities	Utilities

Editor's Note: Tech back as the one-week leader. This is a bullish signal.

Commodities On-Sale? (Sector ETF: DBC/SPY) 

The ratio between commodities (DBC) and the S&P 500 (SPY) is a great way to gauge inflationary pressures, especially when it comes to an acceleration or deceleration in price increases. There is a big difference between the two.

The ratio between DBC and SPY peaked back in June 2022, along with the CPI data. Stocks have historically showed to be the best hedge against inflation in the long-run. But when price increases are accelerating to the upside, commodities offer better protection.

In other words, if inflation is present, but declining year-over-year or month-over-month, stocks are going to do better for you. But if inflationary pressures are increasing, commodities will do better. Note that the ratio between commodities and stocks is back to levels last seen in 2021 – right around the time inflation began accelerating.

Key Tech Ratio Accelerating (Sector ETF: SMH/QQQ)

Time to check back in on one of the market's most important ratios when it comes to the tech sector—the ratio between semiconductors (SMH) and the Nasdaq 100 (QQQ). Time and time again, this ratio has proved to be reliable in terms of gauging risk sentiment near-term.

As a quick reminder, when SMH outperforms QQQ, it's risk-on, but when QQQ outperforms SMH, it's risk-off. The basic thinking is that tech companies, which make up most of QQQ, need chips to conduct business. Lack of chip demand signals issues within the tech sector, while strong chip demand signals robust activity.

The ratio just completed another important higher-low with respect to the trend. This reinforces the bullish nature of this ratio, and signals positive prospects for the overall market. It's hard to go wrong when chips are leading the way higher.

The Battle of Durations (Sector ETF: BIL/TLT)

There's been some interesting price action that's transpired in the bond market over the past couple of weeks, as we saw a big spike in interest rates, which sent bonds tumbling lower. And unsurprisingly, we saw the most damage at the long-end of the yield curve.

This chart between the 1-3 Month T-Bill fund (BIL) and 20+ Year Treasuries (TLT) helps us gauge where capital is flowing across various maturities in the bond market. When TLT is outperforming, it usually means risk-on for bonds, but when BIL outperforms, it means one needs to keep duration as short as possible.

There was a meaningful shift in the trend in this ratio over the past couple of months, as a lower-high was printed back in April, which was followed by a lower-high in September. In theory, this establishes a bear trend in this ratio, which means duration could continue its recent outperformance.

Editor's Take:

I do want to draw the reader's attention to the notable pop we saw in this ratio back in September. Note how this occurred almost simultaneously to the Fed's first rate cut, which effectively signaled the restart of money printing.

When inflation is on the rise, long-duration bonds suffer the most. I think this pop was just an initial reaction in this ratio, but I don't expect it to last long. The key now for the sake of the bond market's bull run is for another lower-high to form in this ratio.

With the price of crude oil staying contained, it should help bonds continue to rally into next year. Inflation will likely become a problem again, but I don't expect it to become so until the second or third quarter in 2025.

Cryptocurrency 

The spotlight of this week is XRPUSD, as it is once again demonstrating bullish potential. 

The most striking feature is the strong bounce from the $0.502 support level, indicating demand in this price zone. The price action shows a series of higher-lows and higher-highs since the July lows, forming an upward channel that suggests bullish momentum.

Plus, the recent pullback from the $0.65 resistance has been relatively shallow, with the price finding support above the previous swing low. This price behavior often indicates underlying strength and accumulation.

While the overall trend since October 2023 has been choppy, the recent price action is showing signs of a potential trend change. The bullish case could be favored here, with a stop loss below the recent swing low, targeting the upper resistance around $0.65 initially, with potential for further upside if this level is breached convincingly.

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