Did you know that Tesla and Mercedes-Benz earned almost exactly the same last year. Yet their stock-market valuations are vastly different. The earnings last year from Tesla and Mercedes-Benz are almost identical. The German automaker said it earned €14.26 billion ($15.47 billion) in 2023, a decline of 1.7% from last year. Tesla, meanwhile, earned $15 billion, a 19% improvement. What’s different of course is valuation. Heading into this week, Mercedes was valued at €71 billion, or about $78 billion. Tesla, meanwhile, is valued at $617 billion, even with a 22% stock price decline this year. So why the difference? There are some fundamental reasons. Analysts are expecting a lot more sales growth out of Tesla. Tesla’s sales are seen rising 81% by 2027, compared to 11% for Mercedes, according to FactSet. In addition, Tesla also doesn’t have Mercedes’s problem of what to do with factories for combustion engine-fueled cars, though the switch to EVs is taking a lot longer than many imagined. This is not necessarily a recommendation for Tesla, or for Mercedes-Benz, but rather there is much more to a stock than its fundamentals. If you pick stocks based solely on its quarterly report, or current fundamentals only, you will miss out on the excitement for what the future can hold with great businesses. Yes, over the long run, fundamentals still play an important role in the stock market’s success. But human emotions, as measured by multiple expansions, are also a very important factor in the short-term movements of stock prices. If you are a very math-oriented investor, and you love your spreadsheets and data, imagine how hard it is to suspend your mathematical belief for a while, and jump into an overvalued name. Human emotions matter in the stock market, and an investor should take advantage of them, just don't get caught when the bad moods arrive. That's why we continue to advocate for stop loss strategies and active rebalancing (trimming gains) which allows us to happily embrace growth names – like Nvidia.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(-) Booking Holdings (BKNG-US) The stock slumped after the online travel booking company issued gross booking and EBITDA guidance for the first quarter that fell short of expectations, overshadowing better-than-expected quarterly results. Owned in Opportunity Portfolio.

(+) Coterra Energy (CTRA-US) beat on the top and bottom lines demonstrating why they are such great allocators of capital. Even with the plunge in natural gas prices, the oil and gas producer delivered strong free cash flow, the most important metric for investors in the energy complex. Coterra returned $187 million to shareholders during the fourth quarter and more than $1 billion for the full year 2023. Owned in Opportunity Portfolio.

(-) Home Depot (HD-US) shares slipped after the retailer beat its fiscal fourth quarter estimates on the top and bottom line but issued lower-than-expected guidance. The company forecast full-year revenue growth of 1%, while analysts polled by FactSet expected 1.6%. Net income and sales also fell throughout the quarter. Owned in Core, ESG+, Cash Flow and US Portfolios.

(+) Nvidia (NVDA-US) Rarely has the financial world been as focused on a single company’s quarterly results as it was on Nvidia’s this week. And rarely has a massive company delivered in such spectacular fashion, with CEO Jensen Huang telling investors that “accelerated computing and generative AI have hit the tipping point,” with only blue sky ahead. The company is seeing so much demand for its AI chips that cofounder and CEO Jensen Huang had to give assurance that the company is allocating them "fairly." Huang added that Nvidia works with cloud service providers to meet their expectations and timelines. Nvidia reported another blowout quarter this week as it raked in $22.1 billion in revenue or 265% higher than a year ago and well above Wall Street expectations. The chipmaker's stock has been on a tear in the past year since the AI boom ignited by OpenAI's ChatGPT propelled the technology into the mainstream. Owned in all of our portfolios and was even a recent addition to our Cash Flow Portfolio.

(-) Palo Alto Networks (PANW-US) got slammed this week. It was the worst trading session since the cybersecurity hardware and software maker’s 2012 initial public offering. The plunge came a day after the company reduced its full-year revenue guidance. The company lowered its full-year billings outlook to a range of $10.1 billion to $10.2 billion, from $10.7 billion to $10.8 billion. The revenue guidance moved to a range of $7.95 billion to $8 billion, from $8.15 billion to $8.2 billion. Most of the updated billings forecast is related to the Defense Information Systems Agency’s $1.86 billion Thunderdome project to implement a zero-trust architecture. We continue to own the name and added to the US Portfolio on the pullback. Owned in US and Opportunity Portfolios.

(+) Pembina Pipeline Corporation (PPL-T) Record quarter for PPL with all segments coming in ahead of estimates. We continue to believe the company is well positioned to benefit from growing natural gas and natural gas liquids volumes in the Western Canadian Sedimentary Basin, alongside further infrastructure opportunities. Shares yield 5.72%. Owned in Cash Flow Portfolio.

Weekend Reading

Canadian inflation outlook still murky but January CPI growth slowed Year-over-year CPI growth slowed to 3.2% in January from 3.4% in December. RBC

Corporate Ozempic Scott Galloway has a thesis that firms (notably tech companies) have also discovered a weight loss drug and are also being coy about it. Recent financial news features two stories: layoffs and record profits. These are related. GALLOWAY

Good thing John Bogle didn't start Vanguard funds in Japan. Don't get too excited about index funds. It only took 34 years and a few months. Japan's Nikkei shakes "lost decades" funk, setting new record. AXIOS

And just a reminder the Nikkei is still below its high on a real basis. KLEMENT

Will Berkshire Hathaway Pay a Dividend? Investors have been debating the dividend question for decades. So far, shareholders have been well served by Warren Buffett's reluctance to send out dividend checks. RATIONAL WALK

Creating video from text Sora is an AI model that can create realistic and imaginative scenes from text instructions. OPEN AI

Sora, Groq, and Virtual Reality From Ben Thompson, "I don’t, for the record, think we are at an iPhone moment when it comes to virtual reality, by which I mean the moment where multiple technological innovations intersect in a perfect product. What is exciting, though, is that a lot of the pieces — unlike three years ago — are in sight. STRATECHERY

How to handle cryptocurrency on tax returns Tax experts suggest erring on the side of caution. INVESTMENT EXECUTIVE