Bonawyn Eison on Fast Money A Comment -- General Comments From an Expert A Commentary COMMENT Aug 13, 2021

Analysts come into the year perhaps overly optimistic. We get to the end of August, and they say "Oh boy, I better cut back my estimates." Seasonally, we've seen a lot of weakness at this time of year. But that's in every year.

This year, analysts took estimates down pretty sharply in Q1 and Q2. They've now been revising up later in the year. That's one thing that's different.

Second thing is, the market came in on a pretty good footing into the middle of August. That makes it different as well. In years when the market's come in on pretty solid footing, Q3 doesn't wind up being so bad.

That being said, he generally comes into this time of the year with 5-7% cash. Global markets are behaving really well. Canadian markets are, too. But you have to address the fact that markets can be sloppy from the end of August till the end of October.

If you look at the revisions that have been taking place over the last month, a little over 60% of them have been higher. Revisions are going higher in Q4 of this year and in Q1 of 2026. That's positive. 

There are sectors where we're seeing that. Financials, industrials, tech, and communications show this trend. But healthcare is going the other way. So it's sector by sector. There are definitely haves and have nots in the market right now.

A lot of it is some air coming out of the system. If you look at multiple expansions over the last little while, some stocks were trading at crazy valuations. Take PLTR, for example. Trading at over 70x EV to revenue. Though it does have a premium in terms of growth rate and profitability, you have to pause and say that some of these valuations have to come back down to earth.

We still have a lot of fundamental growth ahead, and you're going to get some opportunities over the next little while to pick away at these names.

You have to look at the entire stack of all similar companies together. You have the hyperscalers, the semiconductors, the supporting infrastructure, and the power component. Across a particular stack, look for dislocations where you have these massive selloffs. A lot more air can come out of the market when it comes to multiples. 

You will get opportunities to pick up some of these long-term growers, with very strong fundamentals, as they sell off and the multiples compress.

When you look at the dot-com bubble, today it's a different buildout. Back then, it was funded very much with debt. A lot of the companies were taking on very aggressive debt profiles, with very high interest payments.

This time around, we have the hyperscalers that are extremely cashflow generative. They've enjoyed decades of monopoly-like businesses to give them strong cash balance sheets. So a lot of the growth is getting funded with cash. 

On the other side, we're also starting to see a lot of the revenue come up. On the cost structure, companies are also starting to optimize. A lot of operating leverage as companies roll out their solutions. These companies are also eating their own cooking, as they implement a lot of these AI applications internally within their own ecosystems. This also adds to the operating leverage.

People are now asking whether AI will eat software. There's a case to be made that if you look at individual point solutions, then they will absolutely be decimated. But you still have power, infrastructure, and platform companies.

Look at LPSN, which automated call centres. Low-hanging fruit that got crushed 98% as soon as ChapGPT came out. Market's still trying to figure out what's going to happen to a company like CRM, which has been a behemoth in the space. Its software is expensive, but it isn't great. Co-CEO left to start his own company with an AI-first principle, and that's what other companies need to adopt.

Revenue models need to adapt and adjust to this new normal. Per-seat models have to shift to some sort of consumption model, because AI adoption leads to fewer "seats" to sell to. CRM is trying to do this.

An area of software he really likes is infrastructure, everything that powers the back end behind the scenes. 

Software as it exists today should be dead soon, as you can build a lot of it yourself. But you still need the back end and infrastructure to support it. Companies need to reimagine their fundamental DNA and their business models. 

As recently as a week or two ago, interest-rate derivatives markets have been pricing in close to a 90% chance of a 0.25% rate cut in September. But the market is tightly wound these days after the rally we've seen since April. There's been a step up in risk appetite, FOMO, and the resurgence of zero-day expiry options. 

What the chair said at Jackson Hole does certainly validate a rate cut in September, as was widely expected.

Right to script. Everyone waits on pins and needles for the Jackson Hole speech, which often validates ingoing expectations. 

In the back half of August, you typically see lighter trading volumes. Once you get the bulk of Q2 earnings results behind you, tend to have light news flow in terms of economic data and corporate earnings releases. And, of course, people take vacations in the weeks leading up to Labour Day. More of the fund flows are retail, and not dominated by professional money. Big players are often sidelined this time of year.

His team is intrigued. The Mag 7 have dominated for close to 3 years. So much so, that their collective weight in the S&P reached an all-time high of just above 34% last week or the week before. Since then, there's been a bit of a rotation away from those names. 

Money has flowed to undervalued and underlooked areas of the market. Cyclicals and some interest-rate sensitives have shown leadership in the last 2 weeks relative to the growth stocks.