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Financials Stage a Strong Comeback

The Financial Select Sector SPDR Fund (XLF: $44), a leading ETF with exposure to the Big Banks and some Financial Services industries, including retail banking, investment banking, payments processing, fintech, and more, has been on a stellar streak over the past year and a half. Following a rollercoaster beginning in 2023, it rallied by 40% starting in November, when the Fed’s hawkish stance finally ended.

It is showing no signs of slowing down, with leading banks emerging unscathed from last year's liquidity crisis and clearing the Fed’s recent stress tests with flying colors. The tests show that 31 of the largest banks in the country are well-positioned to withstand a severe recession, helping assuage various concerns that investors have been harboring regarding the industry over the past year.

The fund distributes its assets across a basket of 71 stocks, with the top 7, including JP Morgan, Goldman Sachs, Bank of America, Wells Fargo, and Berkshire Hathaway, making up nearly 50% of the assets. Thus, the resilience and outperformance showcased by the big banks in their recent quarterly figures have renewed interest in the sector and its most prominent ETF.

Last night, Goldman Sachs released its second-quarter results, posting a 17% YoY growth rate with $12.7 billion in revenue. With this, the company joins the ranks of JP Morgan, Wells Fargo, and Citigroup, all producing strong quarterly performances, often exceeding consensus estimates by wide margins and primarily driven by growth across investment banking, advisory, and wealth management divisions.

After a sluggish year, corporate mergers and acquisitions are experiencing a resurgence. This shift coincides with the Federal Reserve's change in interest rate policy, suggesting companies are more confident about future economic conditions with limited expectations for further rate hikes. Similarly, banks are benefiting from a renewed wave of activity. The return of IPOs, debt refinancing deals, and other financial transactions generate significant fee revenue. We anticipate a surge in the IPO market throughout the latter half of 2024, with continued growth in 2025 and 2026. This is partly driven by the emergence of numerous artificial intelligence companies, often called unicorns, due to their high valuations and desire to raise capital through public listings. Based in Silicon Valley and beyond, these AI pioneers are poised to be a significant force in the upcoming IPO wave.

The stock market, which hit new records in June, helped improve profitability across the asset and wealth management divisions of the big banks. Alongside their trading desks, which are raking in fat profits for the first time in years owing to rising volumes and volatility, these strong secular tailwinds are leading up to what is being termed one of the best years for the industry in the recent past.

Markets are riding on the increasing possibility of Trump 2.0, which means tax cuts, deregulations, and trade wars at the very least, all of which bodes well for the domestic US industry and the Banks. The Financial Select Sector SPDR Fund is undoubtedly one of the best vehicles to ride this trend, with its extensive track record going back 26 years and an incredibly low gross expense ratio of just 0.09%.

Our Target is $47, and our Sell Price is $35. The stock has rallied from the low of $32 in November to its current level, and we expect more of the same as this bull market continues. Yes, today is a rough day, and this, too, shall pass. With AI leading the parade, we believe the market will be higher at the end of the summer and year. We are raising the Target today to $52 and the SP to $39.

Strong AI Tailwinds to Persist for Nvidia and SMCI

The rise of Artificial Intelligence over the past year, and the resulting race for AI infrastructure across the world have led to a stunning rally in stocks that were even tangentially related to the mania. The biggest beneficiaries of course were semiconductors giant,Nvidia (NVDA: $902) and server management and storage systems provider Super Micro Computer (SMCI: $783) posting rallies of 240% and 250%, respectively in 2023, showing no signs of slowing.

Nvidia is up another 84% so far this year, and Super Micro Computers by an incredible 175% in just 4 1/2 short months. With the former’s valuations at $2.2 trillion, it seems only rational to question the rationale behind this run-up, but this is because most analysts and industry watchers fail to grasp the sheer scale and magnitude of what lies ahead and the role of these two companies in this exploding business.

From tech giants such as Google and Amazon to automotive companies such as Tesla, everyone is going all out to gain the upper hand with AI, and Nvidia’s graphic cards are perfect for parallel processing power that is essential for large language models (LLMs). The company currently has a 90% share in the burgeoning AI chip market, with a robust product roadmap aimed at maintaining this sizable lead.

To put this in perspective, Nvidia’s 2023 data center revenues stood at $48 billion, more than triple that of its prior year, with the potential to multiply by nearly three times more over the coming years. At the same time, its closest competitors in this segment, AMD and Intel have forecasted 2024 revenues from AI graphics cards and accelerators at $4 billion and $500 million, respectively, leaving them eons behind.

Coming to Super Micro Computers, while the company does not make AI chips, it does manufacture crucial server products and components on which the AI infrastructure is built on. It makes the metaphorical shovel that is fueling this AI gold rush. Just like Nvidia, Super Micro’s sales have grown at an unprecedented rate in recent years, 46% in 2022 and 37% in 2023 riding the same tailwinds. The company currently controls half of the $12 billion AI server market, which is expected to hit $50 billion by 2029. Its biggest competitive edge is its deepening partnership with Nvidia, whose products come mounted in Super Micro’s racks. With this, the company is all set to double its revenues in 2024, to $15 billion, making its current valuation of 4 times sales and 22 times earnings compelling.

Prominent analysts from firms such as Goldman Sachs and others have raised their Price Targets for the stock, to the $1,100 range. The same goes for Super Micro, with an average Price Target of $1,130, an upside of 40% from current levels. When dealing with forces set to have a $7 trillion impact, the age-old tried-and-tested rules of value investing no longer apply. We do not believe we are in a bubble, which some on Wall Street are espousing. We believe it is just the beginning of a massive change in computing that is changing the world that we live in, at home, at work, and at play.

Our Target for Nvidia is $900 with a Sell Price of $700. We are hereby raising our Target to $1,200 and leaving the Sell Price at $700, although if the stock drops to that level, we would more than likely be looking to add more at that price. For SMCI, our Target is $1,300 and our Sell Price is also $700. We had set the Target at $1,300 during the months of February and March when it rallied from the $800 level to $1229. We fully expect new highs to be reached in both stocks this year.

Note that Super Micro is still a puppy compared to Nvidia, clocking in at $45 billion in market cap but still a sizable firm. We believe both are split candidates and the stocks will surge when management makes the announcements.

Shopify Stumbles. Walk Away

Shopify (SHOP: $63, down $15 yesterday) reported mixed results for Q1 2024 Tuesday evening. Revenue grew 23% year-over-year, exceeding analyst expectations. However, the company posted a net loss due to increased expenses, a shift from the previous year's profit.


  • Revenue: $1.86 billion (up from $1.51 billion)
  • Gross merchandise volume (GMV): $61 billion (up 23%)
  • Monthly recurring revenue: $151 million (up 32%)
  • Gross margin: 51.4% (up from 47.5%)
  • Strong cash flow position: $5.2 billion cash, $1.1 billion debt


  • Net loss: $270 million (vs. $60 million profit in Q1 2023)
  • Management transparency: We have concerns about the company's communication during the earnings call.
  • Increased competition: The e-commerce landscape is competitive, and Shopify faces pressure to maintain its market share.

BMR Take:

Shopify's core business remains healthy, with strong growth in revenue, GMV, and recurring revenue. The company's focus on AI solutions holds promise for the future. However, the net loss and questions about management transparency are causes for concern. We are removing Shopify from our portfolio, but the long-term potential remains. We are generally displeased with the company. We loved this company and they have let us down. The comments from management are in many cases hyperbole and we don’t believe many of them. Once you start to disbelieve a company’s management, you lose trust in the company. It is hard to get trust back.

We thought we had a company for the ages, like Microsoft or Google. But they have let us down. We added the stock at $73 in 2017 and it rose to $1,763 in 2021, a 24-bagger, but the stock has faded to its current level of $620. Of course, after the 10-1 split in 2022, you can divide all these numbers by 10. We still have an 8-bagger, which is not bad in the whole scheme of things. But the company has let us down, so we are removing the stock today.

Where will the stock be in a year or two? Perhaps right where it is now; perhaps higher, as the platform they have built is second to none. But competition is heating up and if management can screw up like they have in the past year, then the whole franchise could be in trouble. We’d rather have our money in Amazon.

Berkshire Hathaway Produces a Strong Q1 Performance

Stocks for Success Portfolio

Diversified conglomerate, Berkshire Hathaway, (BRK.B, $407, BRK.A, $611,000 per share!!) released its first quarter results last week, reporting $90 billion in revenue, up 5% YoY, compared to $85 billion a year ago. It posted a profit of $12.7 billion, or $5.20 per share, compared to $8.8 billion, or $3.69, with a beat on consensus estimates on the top and bottom lines, driven by a strong performance across its insurance underwriting and energy divisions.
Note that this isn’t the net profit, which would include the company’s investment gains and losses, which Warren Buffett has asked investors time and time again to ignore, given that these gains or losses are unrealized. When it comes to the pure operating performance of its subsidiaries, Berkshire’s insurance underwriting earnings swelled to $2.6 billion, up almost triple YoY, compared to $910 million.

The energy division similarly saw earnings double during the quarter to $720 million, up from $410 million a year ago. The company’s railroad business witnessed a slight decline in revenue, at $5.6 billion, down from $6.0 billion a year ago, owing to strikes and staffing issues that have plagued the industry for over a year. Other segments, however, point towards resilience and a resurgence in the broader US economy.

The spotlight during the quarter was Berkshire’s ever-rising cash hoard, which hit a fresh high of $190 billion, up from $168 billion the prior quarter. What an amazing number. This was the result of the company dumping $20 billion worth of stocks, and redeploying just $3 billion in fresh investments. Much of the disposal comprised of Apple stock, which has long been the conglomerate’s prized holding. The company trimmed its Apple holdings up to 13% during the quarter, and while the consumer tech giant is still its largest stock holding, this marks a major shift in strategy. This comes as Apple itself unveiled a record $110 billion stock buyback program.

By being a net seller of stock for 6 consecutive quarters and hoarding an ever-increasing pile of cash, the Oracle of Omaha has quietly hinted at his disapproval of present equity valuations. Hence, Berkshire is focused on delivering value to investors via its repurchase program, with $2.6 billion in buybacks during the quarter, made possible by its $190 billion in cash, $120 billion in debt, and $51 billion in cash flow. We expect these buybacks to increase dramatically this year.”

We believe Warren Buffett will announce a big purchase in the coming quarters. He has a legacy that will stand for all time, but one more big deal would be the way to go, as he leaves this world. Almost $200 billion in cash is burning a hole in his pocket, of that there is no doubt. Hold tight and watch. We added the stock at $208 in 2019; we have almost a double. The all-time high is listed at $430, but we can’t verify that in our research. We see it as $424 on April 4th. We aren’t going to quibble over $6. Our Target is $450 and our Sell Price is “We would not sell Berkshire Hathaway.”

Eli Lilly - The Pharmaceutial Company for the Future

Pharmaceuticals giant Eli Lilly (LLY: $730) blew past estimates during its fourth quarter results Monday night after the close, posting $9.4 billion in revenues, up 28% YoY, compared to $7.3 billion a year ago. Profit was $2.2 billion, or $2.49 per share, against $1.9 billion, or $2.09, driven by the strong response to its new anti-obesity drug, Zepbound, coupled with price increases for its blockbuster diabetes treatment, Mounjaro.

For the full year, the company produced $34.1 billion in revenues, up 20% YoY, from $28.5 billion during the same period last year. Profits for the year, however, took a dip, dropping from $7.2 billion, or $7.94 per share, to $5.7 billion, or $6.32. This was largely the result of various in-process research and development charges, most of which were acquired by the company over the past few quarters.

During the quarter, the company’s incretins, or drugs that work by mimicking hormones led the way in terms of growth, with Mounjaro posting sales of $2.2 billion during the quarter, up 700% YoY, followed by its GLP-1 candidate, Zepbound, at $176 million which was just introduced in the quarter. Other key growth drivers include Verzenio, Jardiance, and Tyvyt*, up 42%, 30%, and 98%, respectively. Please re-read the first sentence of this paragraph.

* a medication used to treat Hodgkin's disease

A few detractors included the likes of Trulicity, Humalog, and Alimta, down 14%, 33%, and 81% YoY, respectively. This was largely owing to lower realized prices, coupled with persistent supply constraints in recent months. The lower prices weren’t that surprising, with the company announcing last year that it would be cutting the prices of Humalog, and its other insulin products by as much as 70% going forward

The big story about the company, however, is its new obesity play, Zepbound, which has gained strong momentum within just a few months after its launch, and is already threatening Novo Nordisk’s dominance in this space. Lilly expects demand for this drug to far outstrip supply for 2024, as it grapples to build capacity with a fresh $3 billion commitment to expand manufacturing.

Given the pace at which incretins are expanding within the US and internationally, with the entire market expected to hit $50 billion in 2030, the drug now has 90% insurance coverage and Medicare Part D. Sales are only going to heat up from here, with Morgan Stanley projecting sales for Zepbound for 2024 to be $2.2 billion. As noted above, Zepbound did just $176 million last quarter. Barclays forecasts $7.3 billion in 2024 sales for Wegovy, which as you know is made by Novo Nordisk (NVO).

In addition, Eli Lilly is working to unveil its oral weight loss drug, Orforglipron. This could be very important as all of the weight-loss drugs on the market are injectables. When you can just take a pill, this market will explode.*

* https://www.nejm.org/doi/full/10.1056/NEJMoa2302392    Read this report from September 2023. If this doesn’t get you excited about owning Eli Lilly, there is nothing we can ever say that will do so.

Following a 60% rally in 2023, the stock is already up 20% so far this year, starting at $592 on January 2nd, and is showing no signs of cooling down. The new all-time highs hit by the stock this week and all of this year, are perfectly justified. How can I buy this stock at such a high price, you are asking yourself? Very easy. Think 2025, 2028, 2030. Then sit down at your computer and buy the stock!

In addition to investing in R&D and expanding its productive capacity, Eli Lilly is increasingly generous in returning capital, with its sixth consecutive yearly dividend increase, doubling it since 2018. It ended the quarter with $2.6 billion in cash and $20 billion in debt. Our Target is $665 and we would not sell Eli Lilly. Whoops. We have to raise our Target again. It hit $742 during the day yesterday, and closed at $705, up $37 for the day. If the stock market continues its bull market run this month and on into the spring and summer, we wouldn’t be surprised to see the stock with a 9 in front of it. Our new Target is $825.