On the passive investing side, Nvidia is part of major indices, such as the S&P500 Index. All the funds that track the index must own the shares regardless of the valuation, keeping the demand high. However, the heightened demand continues beyond that.

​The second fuel behind Nvidia's rally is the benchmarking force. The more Nvidia's stock price goes up, the more significant the impact on the all-important S&P 500 Index and similar indices that are benchmarks for hundreds, if not thousands, of mutual funds and ETFs.

Morningstar estimated that 85% of mutual funds that benchmarked themselves against the S&P 500 index or similar indices found themselves underperforming their benchmark last year because of Nvidia. Many will end up caving in under the market pressure and loading up on the stock to avoid underperformance, resulting in a higher Nvidia price, irrespective of the valuation.

​And the last structural reason is the rise of machine-powered algorithmic trading. The more momentum the stock price shows, the more trading algorithms pour money into it, resulting in crazy valuation inflation.

hat's why the stock price rally can continue regardless of valuation. But there is a caveat. If risk is the probability of permanent loss of capital, the higher the stock price, the higher the likelihood of decline. Suppose in one of the upcoming quarters Nvidia faces supply issues, as has happened in the past, competitors like AMD catch up, or an unforeseen macro factor impacts the chimp market. In that case, the market's structure will work against Nvidia. Algorithms will start selling Nvidia, and those who bought Nvidia reluctantly to stay in sync with their benchmark would have no reason to hold on to the stock. 

Regardless of the stock price direction and which stock we are discussing, one fact about the market's structure stays true: Index passive investing, benchmarking, and algorithmic trading are killing valuation analysis. One might even call it killing the market sanity. The stock market is structurally insane now.

​I'll see you next time!

Of course, as stock pickers, we can't hear about a methodology that beats the market and not be curious about how to find stocks that meet the criteria. In my research, I learned David Einhorn focuses on small companies, typically under $5B in market cap, with no financial debt and positive earnings, with shareholder-friendly management who allocate some of their earnings to buybacks. You can screen the stock market for companies like that. 

I used Stock Card's stock screener tool to find stocks like that, using a market cap lower than $2B, strong financial, no cash concerns, and undervalued filters, and I got to roughly 118 stocks that met the criteria. I leave a link to this screener here in case you'd like to continue the research. 

But, there is a more interesting way to get to a few stocks that meet the criteria. David Einhorn’s Hedge Fund, Greenlight Capital, has to release its holdings every quarter through the 13F filing. Since we know the fund is extremely long-term oriented, what's on the list from the end of the last quarter is still very relevant and a good stock to research and buy if you want to follow this value investing style.

From Greenlight Capital's latest 13F, two stocks grabbed my attention:

The first one is Kenvue Inc., ticker KVUE, the latest addition to Greenlight Capital’s fund. It is a $36B consumer packaged goods company behind brands such as Neutrogena and Listerine. It's not that small, but it owns iconic brands. The stock is valued at 2.3 times sales and 16 times forward earnings. It generates solid free cash flow and has lots of cash and a rather solid balance sheet. The stock doesn't strictly meet the criteria we discussed a few minutes ago, but it is certainly interesting to research. The fact that not many financial analysts cover the stock means it can be sliding under the radar while it pays a nice 4.2% in dividends.

The next stock is even more interesting. It is called Alight Inc, ticker ALIT. Greenlight started buying it in Q4 2023. It is roughly $5 billion in market cap and offers an employee benefits management platform for more than 36 million employees. It reminds me of ADP but in baby stages, but much more technologically advanced. Its core platform is already AI-powered, generates solid recurring revenue, and has an almost 100% retention rate. The stock is priced at 13 times forward earnings, 1.3 times price to sales, and one times book value. This is certainly an interesting company to keep an eye on. I'll be researching this in more detail for my own portfolio. 

Talking about good stocks to buy now, I discussed how to find quality stocks at a reasonable price two weeks ago and shared a few stocks to buy now based on such investment methodology. If you missed it, it's a good next post to read. I leave a link to it here. 

I'll see you next time!

Things get scary when the word "collapse" comes before banks or real estate sectors. The important question is whether more regional bank failures due to commercial real estate challenges will have a broader impact on the economy. 

The broader risk of regional bank failure is that businesses that depend on these regional banks for funding and growth will lose access to funds and banking.

However, there is a reason regional banks are NOT in the so-called too big to fail category. There are more than 4000 regional banks in the U.S.; if a few fail, it won't be a systematic risk to the broader economy. 

Moreover, these bad commercial loans are not coming due simultaneously, and the problems are easier to anticipate. Just because we are talking about them now means there is an expectation in the overall financial system that some banks would fail. 

The last point is that not all regional banks are exposed to troubled commercial real estate, specifically office buildings. Jill Castilla explains many regional banks focus on relationship-based banking and have already taken the steps required to avoid disastrous outcomes. Therefore, most regional bank are not at risk. 

Final note on risk: Before we move to stocks you may consider investing in now to benefit from the regional bank challenges, I want to warn you that there is still a risk to the broader economy due to this commercial real estate and high interest cost. As they say, risk is what's left after you've thought about everything. Today, we thought about possible ways the real estate sector may impact banks and concluded it would be manageable for the broader economy. But there is always the risk of us not seeing other dependencies in the broader economy. Be mindful of the unforeseen risks, always.

If not all regional banks are doomed because they have done a good job at their due diligence, and similarly, if not all commercial real estate and specifically office buildings are in trouble, this means there are investment opportunities for all of us at a reasonable price in the commercial real estate market. 

Luckily, stock market investors don't need to buy commercial real estate to benefit from the market opportunity. We can find the right fund or a Real Estate Investment Trust (REIT) that is reasonably priced or undervalued.

Cathy Marcus, Global Chief Operating Officer of PGIM Real Estate with $208B in assets under management, gives us some clues into such commercial real estate investment opportunities in her conversation with Barry Ritholtz on the Masters of Business show. 
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First, we have many companies that are back to the in-person model. And a bigger portion of companies allow a hybrid model. In both cases, companies use their office quality to attract talent and employees into in-person collaboration. This means only a certain type of office building will be in demand. According to Cathy Marcus, those are Class A buildings with wellness and ESG attributes that have higher quality than employees' houses, encouraging them back into in-person setting. Anything lower than that isn't in demand and has a hard time generating rent income. 

That means REITs focusing on Class A buildings may offer interesting investment opportunities. I searched for Office REITs on our company's website, stockcard.io, and a few names grabbed my attention:

Alexandria Real Estate Equities, ticker ARE, is one good example. It focuses on Class A office buildings in the life sciences sector. According to financial analysts, the stock has more than 13% upside compared to its current price and pays more than 4% in dividends.
​
Boston Properties, ticker BXP, is another one. This REIT focuses on premium, Class A offices in Boston, New York, San Francisco, and Washington DC, with more than 11% upside, according to financial analysts, and 6.2% in dividends.

Consider researching those REITs as a part of your portfolio.

Talking about good stocks to buy now, last week, I discussed how to find quality stocks at a reasonable price and shared a few stocks to buy now following such an investment methodology. If you missed it, reading it now is good. 

I'll see you next time!

Quality is the ability to deliver high return on capital. To deliver that you have to have something competitors can’t replicate. It used to be a physical asset or brand. In the tech era, it is network effect or platform companies. Management quality is also a part of the company’s overall quality. Good management keeps the balance sheet strong to create stability across economic cycles and allocates money when required.

The good news for stock-pickers who want to focus on quality companies is that they tend to stay high quality for a long time. Therefore, you don’t have to recognize them right off the bat. You can be wrong early on and ignore the stock; when you see the evidence, you can turn 180 degrees, admit it, and invest in it. For example Apple is a quality company and both GMO and Warren Buffett were late to Apple’s quality party and their eventual investment still did great. Even though Warren Buffett didn't invest in Apple’s IPO or the dot com crash. Still, it turned out to be one of its best investments ever.