Alpha Prime Capital

Top picks: $AMZN $CPNG $DKNG $FISV $FOUR $GPN $JD $MELI $META $MNDY $MSFT $PDD $PINS $PYPL $RDDT $SE $SM $XYZ

The volatility in individual stocks continues despite the index holding relatively calm. How is that happening? Why did $SHOP fall close to 30% in an hour on good results? Why did silver $SLV fall roughly 40% in 24 hours? Covid started the initial change, but the market has become more chaotic over time. More and more people (and computers) are trading. Less and less investing. This is how we end up with a market that is broken from a fundamental perspective and continues to break down as time progresses, moving further away from Warren Buffett and closer to Wall Street Bets. Society has become gamified and the markets have joined in as a momentum casino.

Although retail traders are becoming a larger force, the biggest reason for the warped market and insane volatility under the surface are pods (https://www.trustnet.com/news/13451872/the-rise-of-pod-shop-trading-why-hedge-funds-like-citadel-and-millennium-are-redefining-wall-streets-approach-to-valuation) and other quant momentum strategies. They do not care about fundamentals. They are just trading day to day (and sometimes millisecond to millisecond) based on charts and their only objective is to make money right now. This results in stocks wildly swinging to levels in both directions that fundamentals do not support.

The reason pods are the bigger driving force is that they like to stay market neutral. Retail trades in one direction. Pods are largely behind shorting software $IGV recently. They need to pair their short with a long to avoid making directional bets on the overall market. Are stocks like $JNJ, $KO, and $XOM up a lot YTD because their businesses have fundamentally changed dramatically? Not at all. In 2022 $XOM net income was $59B and the stock was around 80 when oil spiked in the spring/summer. In 2026 they are supposed to have a net income of $27B and the stock is 154. Huh!?! They just needed something to go long against their short. These types of stocks are the opposite of software and had nice looking charts. In Covid it was a small set of fringe companies that were meme stocks. Now they have turned $XOM and so many other large cap companies into meme stocks.

So what is one to do? Have conviction in everything you do. Have a plan. What are you going to do if your stock falls 5% tomorrow for no reason? Having conviction helps you stay in an investment when it is moving against you in the short term. When people like Tom Lee or Dan Ives come on CNBC, they just spew out buzz words and nonsense. They never discuss fundamentals in great detail (especially Dan Ives). Tom Lee was calling for bitcoin to make an all-time high by the end of January. It did the complete opposite. Being wrong is ok. I have been wrong a lot before and will be in the future, but his call was based on feelings and not facts. That is what makes it bad. In general, sell-side analysts have become momentum chasers. Look at their company estimates as those are still worthwhile, but they will just turn a valuation multiple up or down to get their price target close to where it is currently trading.

Fundamentals are all that matter in the long term. When I look for an investment, I look at the overall business and the estimates. What if the estimates are wrong? That is a risk with any firm, especially smaller companies. I won't invest in something unless it would still be a wise investment if the estimates were moderately too high. Seek out a margin of safety.

Stay diversified. If you were heavily concentrated in software, you were quite happy until very recently. Now you are living a nightmare. Given how chaotic the market has become, doing extensive research on a high conviction bet isn't enough. Stocks like $PDD and $JD are growing firms that trade at over a 20% FCF/EV yield and net cash balance sheets. Should this be possible? No. But that is where they trade today. Despite AI making progress on improving the efficiency of overall society, it has somehow made markets less efficient.

Keep your humility. There will be times when you feel like you can't lose. Other times it will feel like you can't win. These are extremes and neither lasts forever. Don't shape your viewpoint on an extreme.

If you are emotional, don't make any big moves. Some people will revenge trade and take on oversized positions when they are angry. Others panic sell wise investments at the worst times. Avoid both.

Stay disciplined. Some companies deserve premiums over others. Some companies are more cyclical than others. Know where your investment falls in this, but never overpay for something just because it has a cool story and a nice chart. That is what happened to software. No one cares about valuations when they are making money. It can get ugly quickly when things turn without valuation support.

I included a table of my top picks and of popular stocks. Although I like all of my top picks, my top 5 for buy and hold secular growers would be $JD $PDD $SE $CPNG $MELI. Some on my list are secular growers and others are more stagnant companies in an investment year that are trading at ridiculously cheap levels. Crazy these stocks are trading where they are while people are piling into $WMT with almost no growth and a 1.3% FCF/EV yield. Objectively, everything on my best ideas list is better than almost everything on the popular stocks list, sometimes by a gigantic margin. There are some stocks like $NFLX that look intriguing on the popular stock list, but generally speaking, the majority are bad investments. Yes, a lot of them are dominant players and deserve a premium, but the premium has gotten out of control. You are better off buying a bond than $WMT stock at this price. I don't know when the stocks on my best idea list will start working, and not all of them will work as I expect, but in the long term I am confident they will outperform the overall market on average.

Absurdly cheap stocks I like. This is 2026 FCF yield on enterprise value, not market cap. Many of these are still growing rapidly, with FCF in 2027 supposed to grow 19% for $PDD, 25% for $MNDY, 31% for $JD, 31% for $XYZ, and 33% for $CPNG. Haven't ever seen so many stocks this cheap with so many bubbles at the same time. Pods, retail, and many other trading-oriented strategies have warped the fundamental landscape and gotten us here, but incredibly rewarding opportunities are there for long-term investors. Truly a bizarro world all around us.

$SM 29%
$PDD 21%
$JD 20%
$PYPL 13%
$MELI 9%
$GPN 9%
$FOUR 8%
$MNDY 8%
$XYZ 8
$FISV 6%
$SE 6%
$CPNG 5%

If you’re a professional trader riding the wave in a bubble, that’s a different story, but there are three big issues with today’s “investors” new to the game.

They don’t look at valuations. Not looking at valuations is like someone telling you a 7 series BMW is an amazing car and you buying it without asking the price. The car starts around $100k retail. If you are buying it for $50k, that’s an amazing deal. Unfortunately most bubble participants are buying this car for $1M thinking they are a genius. You are simply currently winning the greater fool’s contest.

The second issue is gains are being pulled forward a decade in advance. Even sell-side analysts are guilty of this. That’s not how things work. If you pull forward gains dramatically, you’ll never make any money even if the story you bought into plays out similar to your wildly optimistic projections. It would be like me saying I’m going to build the best clothing brand in the world and giving my firm a $50B valuation even though I don’t have any products as of now. More than a leap of faith being taken by many that will end in a free fall.

The third issue are these overly optimistic projections. Even if a firm is in a rapidly growing industry, that doesn’t mean anything. $INTC was the biggest semi firm in the world and has lost out to competitors for decades. Being in a rapidly growing industry doesn’t mean the firm will be successful. There will be lots of competition that may provide a better good or service, or the firm could simply just be poorly run and not do well due to a self-inflicted wound.