Prepare for THIS Imminent Danger.

hey everyone me kevin here in this video

we're going to talk about exactly what

to prepare for for earnings season i'm

going to go through a few examples

explain to you what i'm looking for and

at the end i'm going to be talking about

some specific stocks the first thing

that we want to do is we want to go from

a strategy of sell everything into a

hunt for opportunity this is really

important because the biggest downside

of selling is trying to figure out when

to re-buy and most people unfortunately

who sell never end up rebuying and

substantially end up regretting that

decision so trying to determine when to

rebuy is very very important and

actually rebuying is very very important

the challenge that we have now is that

we have what is expected to be an

earnings recession ahead of us this is

simply put just when we actually see

earnings for companies decline rather

than just the stock prices of companies

that decline this is a very big

difference right we could see for

example example apple transition from

180 dollars per share to

140 dollars per share so we have a share

price decline the co the company is

being valued at a smaller multiple

but if now earnings also decline and

back when we were at 180 dollars

let's just say for example the company

gave us nine dollars of annual earnings

or about five percent what if all of a

sudden at 140 rather than giving us five

percent or seven dollars the company is

actually only giving us

five dollars and that could potentially

lead to more compression of the actual

price because we're getting less bang

for our buck so to speak right and so

this creates a hunt and it's going to

create a hunt prioritized in my opinion

by a few things and these are the things

that i want to show you because so far

the market and this is what this chart

shows hasn't yet actually priced in an

earnings recession the blue line

represents the decline of sort of the

blue upside down mountains represents a

decline in prices these are declines in

stock prices this year in the 2008

recession this in the dot-com bubble and

over here where we are now the white

line represents a decline in actual

earnings per share and you could see

that these earnings per share estimates

from analysts haven't yet come down so

what are we going to be looking for well

in my opinion a few things first we're

probably going to be looking away from

companies that are super highly indebted

and the reason for that is as interest

rates go up and these debts have to be

refinanced earnings per share that are

already expected to go down could go

down even more and you look at some of

the world's biggest borrowers you see

names like toyota volkswagen the auto

manufacturers have definitely come under

stress recently at t verizon deutsche

telekom which is like t-mobile

mercedes-benz and comcast you see these

companies with massive debts but it's

not just these

it's also the cruise lines take a look

for example here this is carnival and

you can see the orange bar represents

how much these companies have borrowed

during the pandemic and then the green

bars over here represent how much in the

future is coming due which coming due is

just a fancy way of saying how much of

this debt has to be paid off when and

you could see that hey maybe we're good

through 2023 but all of a sudden our

debt payoff is going to double in an

environment where interest rates are

substantially higher and don't even get

me started with what happens after 2025.

the same is true of royal caribbean and

the same is true over here at norwegian

cruise lines and so debt i think is

going to be something really really

critical that companies are going to or

investors are going to look at and are

going to evaluate as a primary indicator

of okay how long do we think these

companies can actually or can they at

all survive with remote earnings at all

going through a potential earnings

recession because again remember an

earnings recession represents income or

top line revenue going down and when

income goes down then obviously the

bottom line goes down but if in addition

to income going down

you also have costs

let's say higher interest rates pushing

up higher wages pushing up costs even

though we might see some declines in oil

and energy prices you still have sticky

wages and you still have lower margins

essentially what happens to your bottom

line it continues to go down more and so

these are companies that could end up

getting really pained going forward so

we want to pay attention to companies

with high debt even though these cruise

lines we look at them now or some other

companies we look at and we say wow

these companies they seem like they've

gotten really really cheap we want to be

very very careful of companies highly

indebted and so this is where if you

look at for example tech companies

amazon actually ranks up there in the

companies as one of the companies that

has a substantial amount of debt but so

does apple the difference here though is

we can do something known as looking at

debt to market cap to try to understand

okay how does let's say google

compared to amazon so this is pretty

simple to do if we just type into google

amazon

stock

and we can see that the amazon stock

debt is or their total market cap rather

is 1.6 trillion dollars that's for

amazon and then let's go ahead and look

at apple as well let's see what the

apple market cap is and then we'll

compare the same thing to google apple

is at

2.43 that's aapl and then google for

example

google in terms of their market cap

sits at

1.43

now what we can do is we can go back to

that chart that showed us the debt of

these companies and we could see that

amazon trades for

roughly their market cap 1.16 divided by

0.14 140 billion dollars in debt trades

for roughly

eight times their debt you could look at

a company like apple which has about 120

billion and it has a market cap of 2.43

divide that out and you can see that

apple actually trades for 20 times their

debt and you want a bigger number here

because that means you have less debt as

a percentage of market cap right

and then google for example

at 1.43

trades for just with about

see we've got about

35. five

they trade at just about

there we go

40 times look at that so you can see the

substantial difference

in the level at which these companies

trade compared to their debt and again

here the higher number is more desirable

because it means you have less expenses

but it's not just this total debt figure

that we want to look at we also want to

look at things like cash flow because

ultimately if you can have a high cash

flow while still having a lot of debt

then maybe your debt isn't that big of a

deal because maybe you have high margins

right high margins mean you're making

more money on uh your your sales and so

instead of looking at this debt page

let's jump on over here

and look at free cash flow and what's

fascinating here is you can see that

apple and google rank really high on

that free cash flow level

and amazon ranks really really low right

here next to intel and ibm and oracle

and so this really puts a highlighter on

a company like apple or google who are

substantially separated from the amount

of debt they have and have a substantial

amount of free cash flow

which kind of aligns with that debt

chart we saw here where amazon had the

most debt compared to the smaller market

cap very interesting so these things are

going to be very important going into

the next earnings cycle especially as we

look at q2 earnings so what are you

going to want to look for when you look

at q2 earnings well in my opinion you're

going to want to look for exactly the

following the first thing you want to

look at obviously is the revenue growth

of companies really important and this

is a transition we're going to go

through we want to look at what we now

call real revenue growth see nike had

negative one percent year-over-year

growth that means they lost one percent

well now if you subtract inflation it's

actually almost like they

they shrank to the tune of seven percent

or actually no sorry negative one minus

about eight percent inflation actually

means they grew by negative nine percent

which means they shrunk by nine percent

crazy right so we're going to want to

see revenue growth at companies but

we're also going to want to continue to

see that free cash flow which you don't

see at companies that are losing money

and i think companies that are losing

money while those could be great trades

when we go back to like risk on when

people are like yeah we're going to the

moon

companies that are losing money can move

very very quickly like a lemonade or a

firm or even matterport for this year

but for q2 we're going to be looking at

real revenue growth combined with free

cash flow and a big separation between

how much debt the company has and what

the company's actually selling for when

i see a big separation between that

again amazon i had the smallest

separation compared to apple and google

and the lowest amount of free cash flow

this is why some people say that the way

amazon is priced in the market right now

is that you're really just paying for

amazon web services that that's what

you're paying for and you're actually

getting the retail division that is

amazon.com totally for free now what's

remarkable about that is you're either

getting a good deal on the company that

is you're getting a sas business with a

retail business totally for free or

you're getting a sas business with an

anchor of the retail business which

continues to burn money because it's

hard to make money in retail so that's

all really important to know about

regarding the earnings season coming up

and how we're going through a transition

how we're going away from solely being

fearful about inflation and actually

moving into looking at these financials

a little bit more and trying to start

finding stocks that are looking a little

bit more valuable as in companies that

have gotten discounted because multiples

have come down but which companies can

still have real earnings of growth

without having too much debt that's

syncing them now before we talk about

the next thing we got to talk about this

series a at the beginning of august i'm

launching a series a it's a new company

that's being created it'll be a

combination of sort of real estate meets

sas meets investing be very very cool

and this isn't a solicitation for you to

invest or anything this is just to say

that the first folks who will have the

opportunity to invest in this company at

a superb valuation actually it'll be a

one-to-one valuation uh for early

investors will be course members so any

of those of you who are in the courses

on building your wealth linked down

below whether it's stocks or real estate

or property management youtube you name

it any other programs on helping you

build your wealth and make more money if

you're a member of any of those programs

you will have first dibs at investing in

the series a which though will be a

limited opportunity for folks to invest

in and we are closing that once we get

to a specific threshold of raise and

that's it probably won't raise again no

guarantees until ipo and again this

isn't here to solicit you it is just to

mention that this is coming and then

after we have our first week of august

launch for course members and we go

through august maybe in september if we

still need to or if there's extra

capacity we'll open it up to any viewer

on youtube so check that out linked down

below any of the courses will get you

access so how does this apply to some

specific stocks well unfortunately when

it comes to margins i think tesla has a

little bit of downside ahead of it in

the next earnings release which comes

out on july 20th which is in two days in

fact because shanghai which is its

highest profit margin factory was closed

for a substantial portion of the second

quarter i'm not looking forward to

margins over at tesla in this quarter

and i'm kind of worried about what's

going to happen to tesla stock though it

could be a buying opportunity now apple

has had sort of the reverse happen to it

apple had really really bad expectations

that there were going to be massive

misses due to substantial increases in

cost to the tunes uh to the tune of over

eight billion dollars and so there are

substantial headwinds kind of already

baked into apple's price and so the hope

is that hey

even though over at tesla

we expect that deliveries are going to

be lower which we already know what

deliveries are going to be we expect the

lower deliveries we're worried that

margins are going to be low here at

apple we're going in and that's the

surprise is margins coming in low here

we're going in expecting a monetary hit

but margins therefore to be pained and

if we now come and get earnings and we

see that wait a minute margins actually

weren't as bad we could see some upside

to apples that's something to pay

attention to here margins although for

both of these companies i expect any

kind of margin result to be temporary

now then you look at a company like

procter gamble personally i'm not super

optimistic about a company like procter

gamble because in their last earnings

report they talked about how consumers

really weren't transitioning to cheaper

products yet and that they were still

spending and this was based on january

february and march that is for example

they were still spending on brand names

rather than store brands that's like

getting the planters peanuts versus the

archers farms or the kirkland at costco

or getting the gillette razors versus

the store brand ones i think we're going

to see a transition in this market and

that's going to actually hurt margins at

procter gamble jp morgan just reported

and we saw that they took an elevated

amount of loan loss reserves but that

really only represented an increase

because they've done more lending and so

even though they've taken more of a loan

loss reserve that was really just a

result of lending more not necessarily a

result of more fear in the economy so if

more fear and more recessionary fear

gets priced into markets financials i

think still have some downside if we do

end up seeing that inflation is

transitory that downside will become a

quick upside

personally in terms of commodities it's

as much as it's wonderful that companies

like occidental are taking extra income

that they're able to receive from

higher oil and gas prices and they're

taking this money to pay down their debt

which is what all companies should be

doing

the days of expensive oil are gone so

while i think that we have maybe one or

two quarters left of happiness i think

once we get another three quarters out

we're going to start seeing some pain at

companies like occidental petroleum

because all of a sudden i expect oil

prices to go back down to that 70 to 80

dollar range if not even lower and all

of a sudden they're still going to

realize crap we spent some money to pay

down our debt

but

the glory days are now behind us and

then what we'll likely see is a momentum

drift away from these companies and

potentially prices come down where i do

think even though there is still some

more upside for the us dollar which

creates somewhere between a seven to

twelve percent risk i do think there's

some potential and potentially a company

like well it's not a company it's an etf

it's an inverse etf called udn and this

is shorting the dollar because at some

point when inflation does rotate down

the dollar is likely to fall with it if

the dollar falls with it udn is likely

to go up so these are just some thoughts

in terms of what to expect going forward