Monte Investments Model Portfolio Vol. XXXIX: K-Shaped Market

This is the first week of the full transition from ThePeachPit to Monte Independent Investment Research. At this point, just about every feature has been updated on the Substack. Though the name doesn’t quite roll off the tongue as smoothly, I figured an investment research blog would best have a name that makes it sound like an investment research blog rather than some café in a TV show.

This is also an extremely short week with Thanksgiving and Black Friday right around the corner. With Christmas lights springing up faster than the leaves turning, I’m feeling quite festive and will be giving y’all a nice 50% discount to your purchase of a premium subscription.

Lastly, because of the holiday, there will be no Friday report this week, and we’ll resume operations next Tuesday.

Economic Briefing

Brent/WTI

With the close of the year come next year’s forecasts. Oil is expected to remain in a bear market at the turn of the year with Brent prices estimated to float around the high $60-70/bbl range, leaving WTI to the lower end of the low-to-mid-$60/bbl. This follows 3 years of the largest global effort to prop up oil prices with the target of $100/bbl, a target that was shortly lived as a result of faltering economies, a large productivity expansion in the shale basins through enhanced oil recovery [EOR] efforts, voluntary cuts across OPEC, and the skirmish between Russia & Ukraine.

A JPMorgan commodity analyst is calling for $70 Brent and $64 WTI at the close of 2025. The 2026 forecast looks even more grim for the industry with $60 Brent and $53 WTI at the close of the year. Albeit they called for $100/bbl for 2023 and were severely off; so take this forecast with a large grain of salt.

Citi sees Brent as low as $60/bbl in 2025. Goldman Sachs sees Brent prices in the range of $70-85/bbl for 2025.

Let’s be honest;nobody really knows where oil prices will be heading in 2025. What we do know is that a number of projects in the Gulf of Mexico will be coming online in the next two years, Guyana’s oil production is gradually expanding, and Suriname is providing promising results for a potentially strong ramp-up in production. OPEC+ will likely increase production after years of postponement.

On top of this, there are major geopolitical risks with ongoing wars, a high probability of a Trade War 2.0 with China as the new administration rolls out a hoard of new tariffs, deregulation of the automotive industry with the potential removal of the EV sales mandate, and consumer preferences remaining in ICE & hybrid vehicles.

Consumer Sentiment

One factor that just baffles me is how “strong” the consumer remains, despite the continued inflationary pressure from things like food, electricity, and insurance. At least this is according to the data points gathered by the University of Michigan for its Consumer Sentiment Index or the Bureau of Economic Analysis Consumer Spending.

I realize that I have discussed this topic numerous times in this newsletter, but I cannot stress it enough.

1. Do not trust the government data reporting agencies.

2. Just talk to people, whether it is business owners, patrons, or really just anyone at just about any income level.

3. Take the Monte Investments approach and see what the retailers are actually saying.

Target (TGT) reported that consumers’ budgets are stretched and that they are shopping for deals and on an as-needed basis. Walmart (WMT), on the other hand, reported no like-for-like inflation in the quarter with some price deflation.

One point that I’d like to discuss relating to the matter is how Walmart sort of sits smack dab in between the demographics to take full advantage of the collapse of the consumer.

CEO Todd Vasos has been voicing significant concerns of Dollar General’s consumer base for a few quarters now, suggesting that there is significant deterioration at the low-income band.

I want to provide some additional context around what we're seeing and hearing from our customers. The majority of them state that they feel worse off financially than they were six months ago as higher prices, softer employment levels and increased borrowing costs have negatively impacted low-income consumer sentiment.

As a result, our core customer who contributes approximately 60% of our overall sales comes predominantly from households earning less than $35,000 annually. Inflation has continued to negatively impact these households with more than 60% claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items, in addition to paying more for expenses such as rent, utilities and healthcare.

More of our customers report that they are now resorting to using credit cards for basic household needs and approximately 30% have at least one credit card that has reached its limit. And in our latest survey, 25% of our customers surveyed noted they anticipated missing a bill payment in the next six months.

Todd Vasos, CEO of Dollar General

Bear in mind that this is the lowest end of the customer income levels. At the opposite end of the spectrum, the middle-to-upper-middle class consumer, Target is a good proxy for consumer confidence. With more consumers focusing on savings or even transitioning to shopping at Walmart to reinforce savings, one has to wonder just how confident consumers really are.

Consumers tell us their budgets remain stretched and they're shopping carefully, as they work to overcome the cumulative impact of multiple years of price inflation. They're becoming increasingly resourceful in their shopping behaviors, waiting to buy until the last moment of need, focusing on deals, and then stocking up when they find them.

Brian Cornell, Chair & CEO of Target Corp.

This week’s economic calendar will be light but impactful with the q3’24 GDP revision coming out on the 27^th. This will pair well with the revision to personal consumption, durable & capital goods orders, October personal income & spending, and October PCE later that morning.

When I say don’t trust the government economic publications, I really mean to read the reports with a large grain of salt. As my father would always say: “trust but verify.”

Use the information as reported but take a deeper dive into what’s really going on. Don’t have the time to do it yourself? Upgrade to a premium subscription of Monte Independent Investment Research and let me do it for you.

Take advantage of the Black Friday sale going on this week. It’ll be your best deal all year!

Let’s take a look at this week’s research updates

Nvidia Corporation (NASDAQ: NVDA)

Nvidia Has A Large Growth Trajectory On The Horizon

Nvidia reported earnings on November 20 followed by anticlimactic price action by traders. For the most part, Nvidia’s earnings beat both guidance and consensus but underperformed the top end of the analyst range, resulting in the most mundane movements this stock has seen to date.

I believe the sticking point was the 7% sequential growth guidance, suggesting that capacity is about peaked. One factor that must not be forgotten is that Taiwan Semiconductor is about to expand its CoWoS capacity, essentially doubling its Nvidia GPU manufacturing capacity in the coming months.

What analysts seem to be forgetting about is the ~$185b capital investments across the three major hyperscalers, Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOG), most of which will be dedicated to compute capacity and data center facilities.

The point I’m drawing across is that Nvidia’s growth is purely a capacity headwind rather than a demand headwind, placing the chip designer on good footing.

As part of my regular coverage of Nvidia, Seeking Alpha asked me to comment on the name for its earnings release newsletter, which can be found through the link below. It’s kind of cool to have my name and comments next to sellside analysts’.

Before diving into a position, one must ask if this company is worth $3.5T and just how much larger it can get. One must also consider the fact that Nvidia is the single most important semiconductor company on the face of the Earth right now with the most powerful GPU on the market. Though I’m a firm believer that AMD will be hitting the ground running with its MI350 GPUs, the complete hardware/software stack offered by Nvidia compares to none.

Nvidia's results and guidance were exceptional. Wall Street says ignore the noise.

Alphabet Inc. (NASDAQ: GOOG)

Google Begins Realizing Economies Of Scale For Cloud

Alphabet is a big headscratcher for me. Well, not really. The firm reported a huge uptick in Google Cloud margins, growing from low-single digits to 17% in q3’24. A few people in the comments section raised some good points, that Alphabet may be broken up and forced to sell Chrome.

Let’s take a step back for a minute. When is the DOJ not trying to break up Alphabet? Sure, this time may be different, but until material efforts to break up the company come forth, I have no doubt that Alphabet will remain intact. If Apple can keep the Play Store, Alphabet can comingle Chrome with its advertising business. Same goes for Microsoft, Bing, and its advertising arm.

This factor may create a good “buy the news” opportunity for investors seeking to build a position in the tech giant.

Palo Alto Networks (NASDAQ: PANW)

Palo Alto Networks May Scale With AI

I can honestly state that I have been writing about Palo Alto Networks since 2015. That’s nearly a decade of covering the cybersecurity name.

Cybersecurity is one of those tech subsectors that remains resilient despite the challenging macroeconomic environment. Despite CIOs & CISOs’ goals of maintaining a tight budget, investments in cybersecurity is almost mandatory as an enterprise cannot risk a breach.