1k Sub Special: 4 In-Depth Contrarian Trade Ideas
Spanning stocks, bonds, FX and commodities, we offer some more eyebrow raising alternative ideas to consider.
Firstly, we’d like to thank everyone who has supported our growth on Substack since we started publishing our content here earlier in 2023. We hit 1,000 subscribers earlier this week. With our weekly Monday top trade ideas being our most popular piece, we wanted to provide some contrarian trade ideas as a feature as a one-off in our 1k sub special piece.
Before we get into the ideas, we have two tiers of readership on Substack available. Free subs get partial access to the Monday trade ideas and Wednesday, Friday and Sunday articles — these range from stock specific deep dives to macro thoughts and central bank previews.
Paid subs get full access to all of the above. For example, on Monday, we post our trade ideas. Free subs can access one or two ideas, and paid subs can access all 10.
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Onto the ideas…
Stocks: AI Euphoria
AI has been the hottest theme in 2023. It’s been the driving force behind the driving force of the market. The ‘magnificent seven’ have led the way for the S&P 500 and Nasdaq, and that has been due to the high expectations of AI and future possibilities within the tech sector.
However, this week has shown that the markets cannot rely on AI (or Nvidia’s first-class performance) to keep the market rally going. Despite analysts setting the bar at perfection for Nvidia in the last quarter, Nvidia managed to outshine. After guiding a 171% YoY growth rate for the next quarter, things looked positive. The result? Markets sold the stock off at the open on Thursday. The price fell from $502.66 to a closing price of $471.63.
Now, this is not saying to short Nvidia. In fact, we think this will be a great name in the years to come as AI continues to grow. Rather, we want to use the company as an example to show that the euphoria on AI has been stretched too far and may need to cool off. So, we turned to some AI-related stock names to find something that can unwind as the hype settles. The best option? $AI itself.
I can’t deny that C3.ai has a great ticker (NYSE: AI). But this may be, in part, why they have captured so much of the trend this year. At YTD highs, the stock price was up 332%. But behind a popular name, there is a disappointing AI company. In the four years of being a public company, they have consistently lost money. While the shortfalls are starting to be made up, it is still losing as much as it did in 2019.
Thursday’s trading saw the price close 40% below these highs. Just in yesterday’s trading, the price fell 13.8%. We believe this name will unwind back to reality.
We would not be surprised to see this name trading below $20 at the year's end.
Bonds: Long UK Gilts
At the moment, interest rate projections put the UK base rate close to 6% by the end of Q1 next year.
We think this looks rich, and although strong wage data and labour market figures show that the UK economy is holding up, feel that the tide will soon turn.
The cost-of-living pressure on UK households is becoming more pronounced. The impact of the sharp rise in interest rates is going to force the UK economy into a recession in H2 of next year (in our opinion).
Therefore, our contrarian view of UK rates coming lower (and not peaking at 6%) can be expressed by being long UK Gov bonds (Gilts). If we are correct in our view, the pricing of lower yields in this space will be reflected by an increase in the price of the underlying bonds.
Given that we feel the move could be quite sharp, we like to be long duration. The longer duration the higher the risk, but also the chance of higher return. Below is the 10yr Gilt that we feel could have legs to appreciate (remember the coupon pick up while you wait), but equally could take on the 20yr or even 30yr for a higher conviction.
Our next two ideas come from FX and the commodity space…
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