Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Markets

The ONLY Metric That Matters

Recently, I have begun to reconnect with my alma mater – the University of Pennsylvania.

I graduated from the Wharton School of Business and the College of Arts & Sciences in 1995. After that, I went back maybe a half dozen times in the following ten years.

Over the next twenty years, though, I went back only a couple of times.

Not for any bad reason. Simply had been too busy with life.

In the last couple of years, though, I have returned to the East Coast and settled down in rural Connecticut. My relocation – along with selling a business I had started a decade ago – have enabled me to simplify my schedule.

My goal has been to find more time for my young children. That mission has been accomplished!

It also has been to free up my time to think about new projects.

One of those projects that I am deciding to pursue is working to revive an investment club at Penn of which I was an alumnus - the Pennsylvania Investment Alliance.

This club was established by undergraduates around 1980 and operated for the next 40 years as the premiere training ground for students interested in learning investing.

It has been student run with older students teaching the younger students the basics of investing. I had the great privilege of teaching this class (called “Basic Research”) for two years.

It was one of the most enjoyable experiences of my life.

Unfortunately, the club faded away during the COVID period. Two years away from campus posted many challenges for students and the continuity of clubs was one of the victims.

As I have thought about restarting the club, I have found myself thinking about the “Basic Research” class. At the time I taught it, I was 20 years old and essentially had NO experience whatsoever picking stocks or managing money.

We are three decades later and I have managed billions.

So, I have asked myself – what would I teach these undergraduates? What lessons are the most important?

In the past, we had a half dozen training sessions of just a couple of hours. What would I jam in there that they HAVE to know?

Well, I am working on the curricula and will likely share it with our readers.

This exercise, though, got me thinking about if I could share JUST ONE LESSON about investing, what would it be?

Fortunately, this is an easy question for me as I have thought about it a lot.

It is also the answer to the question of what I would tell my younger self about money management if I met him.

The answer is BUY GROWTH.

What do I mean buy that?

Find companies that are growing earnings – or whatever metric is most important – and those will be the stocks that go higher.

If a company grows earnings from $1 per share to $10 per share, then that stock is GOING HIGHER.

It may go up sooner or it may go up later. It may go up 10x, less than 10x or more than 10x, but it IS going up.

Let’s take a look for instance at one of the greatest stock success stories of all time – Apple Inc. (AAPL).

Here is a table showing the EPS for AAPL over the last decade…

Over this period EPS has grown +425%.

If you go back a little further to 2007 (before the iPhone), the company was earning just $0.30 which means EPS has grown +2500% over that period.

How has the stock done?

Here is the chart of the stock price since 2007…

The stock has gone from $3 per share to $260 today or +8600% over that period.

In my thirty-year career, I have never seen a company that grew earnings tenfold NOT go up.

In fact, they almost always not only go up as much as the earnings growth but most often go up even more.

The reality is that consistent high growth is rewarded both with share appreciation and increase in the multiple. You can see this in the performance of AAPL with the stock going up three times as much as the earnings.

While we are only sharing this one example, our personal experience has seen this hundreds of times.

So, if we had five minutes with the undergraduates at Penn, what would we tell them?

BUY GROWTH.

Nothing else works as well or as consistently.

Now, maybe in next week’s HX Weekly we will also share HOW you can find this growth in the future…

While above we have emphasized that there was ONE METRIC that matters in the big picture, there is a SECOND metric that is almost as important. In this note from June of 2024, we go through that metric. The combination of these TWO is the key to a winning investment strategy.

HX Daily Redux

One Financial Metric to Rule Them All

If you listen to the financial media and the "smart" money, they will run you through many complicated metrics they say drive a stock's success.

We have been active in the financial markets now for over three decades. During that time, we figured out that a stock's performance really only comes down to just a few key metrics.

Those readers who have followed us for the last few years are familiar with those metrics.

Today, we wanted to highlight THE single most important of those metrics.

If we were asked to look at only ONE metric to figure out what a stock will do – THIS would be the metric we would want.

The metric is EARNINGS REVISIONS.

Let's define what we mean by that term.

First, let's focus on the second part of that term – the "revisions."

You may be familiar with it, but most stocks of a reasonable size have a group of analysts covering the stock. These analysts work for the various brokerages and investment banks.

People who work for those companies are called "sell-side" analysts. They "sell" their services to the "buy-side" or buyers of the stock who run the mutual and hedge funds.

Depending on the size and liquidity, there might be just a few analysts or many.

Let's discuss everyone's favorite stock – NVIDIA Corporation (NASDAQ: NVDA).

Right now, 72 (!) analysts cover the stock. Not all of them will have full financial models with all the metrics, but most will have one.

“Revisions” refers to the change in those estimates.

Let's focus on the first part of that term – the "earnings."

Most larger companies are driven by their revisions to their earning per share or "EPS."

Some industries, though, may key off another measure of "core" profitability called earnings before interest, taxes, depreciation, and amortization" or "EBITDA." This is a decent proxy for the earnings of the core business without considering the balance sheet.

Finally, there are even some companies where the revisions that count the most are revenue.

We use the term "earnings revisions" because 90%+ of stocks key off an earnings metric, but it could also be termed "the most closely followed metric revisions." That one doesn't exactly roll off the tongue, though!

Returning to NVDA, let's look at a chart of the earnings revision for 2024 EPS and the stock price. Here is that chart…

The blue line is the estimate for 2025 EPS, and the white line is the stock price.

Want to know why $NVDA stock has been +333% since a year ago?

The analyst's earnings estimates across that time have gone from $0.60 for 2024 to $2.70 today. That is an upward revision of +350%.

The stock has gone up pretty much one-for-one with the earnings revisions!

Want to see another example from recent history?

Here is the same chart for Meta Platforms, Inc. (NASDAQ: META) – the parent company of Facebook, Instagram and WhatsApp.

Again, the blue line is the estimate for EPS, and the white line is the stock price.

This example shows you both the impact of negative AND positive earnings revisions. META got crushed as their earnings estimates were cut in half in 2021/22. Then, the stock recovered all of that and more as the estimates recovered.

A critic would say this is great, but this is all backward-looking data.

We agree, but focusing on the earnings revisions is a great place to start if you are trying to figure out where a stock will go.

Your view on whether revisions will be positive or negative could be based on a fundamental analysis of the business, its industry, and competitive positioning. We do a lot of this type of analysis.

Do you follow earnings revisions on the companies you own? Tell us more at [email protected] or in the comments section online.

We also, however, have a lot of respect for what we call “operational momentum.”

This means we look at what the company has already been doing.

Companies that have been seeing negative earnings revisions for an extended period will tend to continue to see them.

You can see in the META chart that the estimates did not see any material bounce from August 2021 until February 2023. Does this mean you buy the stock on that bounce in estimates?

Maybe. We usually would wait and want to see several more positive revisions. This is what happened in the next couple of months with META.

You would have missed the move from $100 to $200 in the stock or a double. With the stock now at $500, though, we don't think you would mind.

What does this mean for NVDA?

Right now – nothing. As long as estimates continue to increase, we think the stock will also go higher.

Watch out once these estimates flatten out and/or start going lower. Given the momentum in the stock, it could easily be down -20% or more from current levels.

The key to all of it is focusing on this ONE KEY METRIC.

Both metrics we just covered are certainly key to successful investing and trading. That said, there’s one factor that’s just as important, and often even more decisive - your psychology.

Market Wizard’s Wisdom

Defeating Your Internal Wiring to Win

Here at HX Research, we spend a lot of time thinking about and writing about human biology and psychology.

We mention biology because we believe that almost all of our psychological biases are hardwired into our bodies as part of evolution.

These psychological biases prevent us from being good (or great) traders and investors. They are also the biases that create significant opportunities for those able to identify them.

We recently read a good note from "The Million Mission" by Davis Wilson. Davis writes a free newsletter about his journey to turn $100,000 into $1 million through trading and investing.

This might sound familiar to some of our readers who have been with us for a while, as we did something similar with "The Hard Money Million Dollar Podcast" several years ago.

Now, our mission was to turn $10,000 into $1 million through legal means!

Trying to increase our money by a factor of 100 led us to take some extreme risks. Davis is doing something much more sensical (haha!), but like The Hard Money team and myself, he has some great lessons for investors in his journey.

We encourage you to sign up for his newsletter, which you can do here.

In his note, he shared a fascinating psychological study that speaks to one of the strongest biases in investing.

Here is the story…

He talks about two versions of a New York Times book review shown to two different focus groups.

Here is the first version:

In 128 inspired pages, Alvin Harter, with his first work of fiction, shows himself to be an extremely capable young American author. A Longer Dawn is a novella - a prose poem, if you will— of tremendous impact. It deals with elemental things: life, love, and death, and does so with such great intensity that it achieves new heights of superior writing on every page.

Here is the second version:

In 128 uninspired pages, Alvin Harter, with his first work of fiction, shows himself to be an extremely incapable young American author. A Longer Dawn is a novella - a prose poem, if you will— of negligible impact. It deals with elemental things: life, love, and death, and does so with such little intensity that it achieves new depths of inferior writing on every page.

As Davis points out in his note, the reviews are very similar.

The only differences are simple changes in words. For instance, "inspired" became "uninspired."  There were several other similar changes.

One is a positive review, while the other is a negative one.

The fascinating point about this study is that the NEGATIVE review was judged to be 14% more intelligent and have 16% greater literacy. The negative reviewer was also considered more experienced, while the positive reviewer was considered more naïve.

This is a bias that we talk about at HX Research ALL THE TIME – our biological programming to be negative.

Biological studies have shown that the human body responds to negative stimuli at a ratio of eight to one. This means that our bodies are programmed to respond more to bad news.

As we often point out, this makes a lot of sense when thinking about evolution.

In prehistoric times, eating a good meal sated our hunger and kept us alive for another day. On the other hand, getting eaten by a sabretooth tiger meant the end of our lives and genetic line.

It sounds like a silly example, but it is a powerful one.

The media uses this psychological bias to get us to click on their stories. It is also the bias that the "smart" money uses to get you to pay them hefty fees to manage your investments.

Finally, it is the bias that can end up costing YOU a lot of money.

Our money-making system is based on turning this weakness into a strength. We actively seek out situations where we can take advantage of other investors' overreactions.

Remember this study about perspective the next time you are afraid and thinking of selling. Maybe you will end up buying instead…

Have a good weekend!

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].