To The Moon

The AI-scare that happened last week is still continuing its rampage this week.

With US market near record highs, combined with a sharp tech sell-off and persistent questions about an AI bubble has made many investors cautious, especially against a geopolitically unstable backdrop.

New Age Alpha, Chief investment officer, Julian Koski, has a differing view:

• His firm’s model sees an unusually low 28% median probability that S&P 500 companies will fail to deliver the growth embedded in their stock prices.

• He says that result supports staying invested, even though it does not eliminate the risk of short-term declines.

Koski, who co-founded New Age Alpha, sat down with TheStreet’s Caroline Woods to explain the reasoning behind his optimism.

What is Koski saying ?

Koski’s argument is less a call to ignore risk than a different way of defining it.

He focuses on the gap between (a) the growth a stock’s price appears to require and (b) the growth the company has delivered historically.

In his framework, the danger is not simply that a company is labeled a growth stock, value stock, or a supposedly safe stock.

The danger comes when investors have pushed a price so high that the business is unlikely to meet the expectations embedded in it.

Practical conclusion for diversified, long-term investors:

• He would put fresh money into the S&P 500 rather than wait for a cleaner entry point or try to trade every headline.

• His framework also offers a useful way to separate a broad-market decision from a decision about any one company.

Below depicts how Koski’s method works, where it produces counterintuitive answers, and what investors should watch before treating a market pullback as either a buying opportunity or a warning."

How implied growth changes the valuation question

Koski begins with a simple premise:

• A stock price carries an expectation about the growth investors believe the underlying company can produce.

• He calls that expectation the implied growth rate.

• Next step is to compare ‘the implied growth rate” with the company’s own recent record, using its median growth over the past 12 quarters.

• The wider the gap between a demanding implied growth rate and a weaker historical record, the greater the risk that the company will disappoint investors, according to Koski.

New Age Alpha expresses that judgment as a failure probability, its estimate of the odds that a company will not deliver the growth implied by its current stock price.

• A lower number is better in the firm’s framework.

• Koski repeatedly stressed that even a company with favorable odds can miss expectations, while a company with unfavorable odds can still work out.

His formulation challenges the conventional habit of treating a high price-to-earnings multiple (or a growth-stock label) as a complete valuation verdict.

He argues that a company may look expensive on a traditional measure and still have a manageable hurdle if its operating growth has been stronger than the growth its stock price requires.

Conversely, a company with a defensive reputation can become risky if its price reflects a story the business has not historically supported.

The approach is most useful as a question rather than as a shortcut: How much growth does the current price appear to demand, and how does that compare with the company’s actual record ?

Truth is investors cannot calculate New Age Alpha’s proprietary score from interview alone, but the question helps explain why Koski reaches different conclusions from investors who begin with sector labels or headline valuation ratios.

NVDA & GOOG passed Koski’s test.

(1) The case for NVDA.

$NVIDIA(NVDA)$ illustrates the comparison, perfectly.

NVDA’s stock price implied a +68% growth rate, while its median historical growth rate over the past 12 quarters was +78%.

New Age Alpha assigned NVDA a 31% failure probability, meaning a 31% estimated chance that the company would fail to meet the growth required by its price.

He viewed those odds as favourable enough to support owning the stock.

(2) The case for GOOG.

$Alphabet(GOOG)$ produced an even more striking result based on Koski’s modelling.

Accordingly, GOOG has a 3% probability of failing to deliver the growth implied by its stock price because the implied rate sat well below the company’s historical growth over the preceding 12 quarters.

His conclusion was conditional in an important way:

• Until there is evidence that GOOG can no longer produce that level of growth, he would continue to own it.

The distinction matters because the method does not require a company to be flawless.

It asks whether the market has set a bar that a listed stock can plausibly clear.

• Although NVDA’s reported 31% failure probability is higher than GOOG’s reported 3%, but Koski still considered both acceptable.

• This is because, the number is meant to rank risk, not divide stocks into a simplistic good-or-bad list.

(3) Other Mega-cap stocks.

Koski applied the same reasoning to $Meta Platforms, Inc.(META)$, $Tesla Motors(TSLA)$, $Netflix(NFLX)$, and Apple Inc(AAPL)$.

This is what he has to say:

• META could experience substantial price volatility around earnings while still remaining attractive on a fundamental basis.

• TSLA’s price implied growth it could deliver.

• NFLX - even though stock continued to slide after latest earnings, Koski still believed NFLX's core business remains strong.

• AAPL’s failure probability is abut 34%, a level Koski described as low enough to continue owning, even though GOOG & META fared better in his framework.

Why falling stock can be attractive ?

One of the more unexpected implications of Koski’s approach is that a falling share price can improve an investment case.

His argument is when a stock falls,the implied growth rate falls as well. Therefore, a company then needs to produce less growth to justify its lower price.

The qualifier is that not every declining stock is a bargain, but it can reduce the expectations hurdle that made the stock unattractive at a higher price.

Koski summarized the principle with an intentionally blunt contrast:

• A good stock at a bad price can be a bad investment.

• At the same time, a bad stock at a good price can be a great investment.

The key is price discovery, the market process through which a lower price can eventually bring expectations closer to a company’s underlying performance.

The main idea is finding the right price. When a stock price drops, it aligns investor expectations with the company's actual performance.

Importantly, investors thinking about buying the dip must still check if the company can deliver on these new, lower expectations, rather than assuming a cheaper price makes it a safe buy.

TSLA is a great example of how a company's hype can get mixed up with its actual stock price.

TSLA is both a company - (a) New Age Alpha (Koski) already owned and (b) a stock investors should approach carefully when considering a new purchase.

Vague & ambiguous information surrounding TSLA, including hype associated with its CEO, Musk and the broader market, can drive the share price in ways disconnected from its fundamentals.

Asked about his strategy,

• Koski said he won't buy right now.

• He will be holding his current position.

• Will only consider buying more if the price dips after earnings.

Sector rotation & Safety trades can mislead investors !

Koski’s skepticism extends to sector rotation - a practice of moving money between broad industry groups in response to changing market leadership.

He argues that the fallacy of such strategy treats all companies in a sector as though they share the same investment case.

• This is a shortcut that can obscure the important difference between a company whose price reflects achievable growth and one whose price has run too far ahead of its business.

• $Microchip Technology(MCHP)$ & $Kimberly-Clark(KMB)$ are good examples.

• MCHP’s price had moved beyond the growth the company had historically delivered.

• KMB showed how a safety trade can create a different kind of risk.

• Investors may seek perceived stability (in KMB) during a technology sell-off.

• As a result, KMB’s stock price can become disconnected from underlying fundamentals when too much optimism is placed on the defensive narrative.

The points that Koski is trying to drive across:

• Sector analysis in not useless.

• And every defensive company is overpriced.

• Rather, a sector label does not establish whether the price is justified.

A concentrated portfolio built around a popular market theme can create concentration risk, causing too much of an investor’s return to depend on a single industry or part of the market.

Just so everyone knows, a defensive basket can carry its own concentration risk if investors crowd into the same perceived refuge.

Why S&P 500 ?

Despite Koski’s focus on individual company probabilities, he does not think most investors need to build a portfolio from individual company.

Asked where he would put a new $10,000, he said he would invest immediately and direct it to the $S&P 500(.SPX)$.

His reason - diversification. Meaning the investor owns a broad collection of companies rather than relying on the outcome of a handful of stock-specific calls.

Although a S&P 500 fund includes companies he prefers to avoid, it still addresses the central problem created by uncertainty - even a stock with a very low failure probability can fail to meet expectations.

The S&P 500 holds ‘inherent’ concentration risk because its largest companies carry substantial weight.

However, Koski argued that investors can mitigate that exposure rather than try to solve it automatically through equal-weight investing, that gives every constituent the same portfolio weight.

He does questioned whether concentration should always be treated as a defect.

Today's mega-tech companies like GOOG, META & AMZN give the market a completely different structure than before.

While this is a matter of opinion, Koski warned that changing one’s strategy simply out of fear of tech concentration might cause investor to lose money in the long run.

For long-term investors, Koski’s focus on the S&P 500 shows that picking an overall index is different from picking individual stocks.

Even though his firm can spot risky companies, he believes holding a broad mix of stocks is still essential because predictions are never guaranteed.

An investor who does not have a process for evaluating implied growth may find a broad index fund more consistent with that uncertainty than a collection of conviction-driven stock bets.

The case for divestment.

Market Outlook & Investment Strategy

Koski remains optimistic about US stocks, and his investment strategy relies on strict rules rather than guesswork.

His portfolio is split into stocks (80%) and bonds (20%). This is because key signals - US economy, US market momentum, volatility, and the Fed so far remained positive.

If these signals change, his asset mix will change too.

Indicators used to help with investment strategy.

Koski ranks the 3 economic indicators he references based on their reliability:

• Leading Economic Indicators (LEI): His most important metric. He focuses on long-term economic declines rather than short-term monthly dips.

• Volatility (VIX) & Momentum: He views these as less reliable because they are driven by emotional human behavior.

• Federal Reserve Policy: He sees the Fed as slow to react, often trailing behind broader economic trends.

S&P 500 Takeaway.

Market outlook.

Despite market highs, Koski views the S&P 500 as undervalued based on historical growth models. This is not a guarantee against stock drops, but a way to measure realistic expectations.

For reference only - Actionable guidelines

• Broad Index vs. Single Stocks: Long-term investors seeking broad exposure should stick to the S&P 500 rather than chasing individual stock picks.

• Evaluating Individual Companies: Before buying a single stock, verify that the company can actually deliver the growth implied by its current price, rather than relying on market hype or headlines.

• Focus on Real Data: Base portfolio changes on long-term economic trends rather than short-term market panic or dramatic forecasts.

Core Strategy

Own the S&P 500, track real economic signals, and avoid making impulsive trades based on market noise.

My viewpoints : (mine only)

In my Wednesday post, I shared Warren Buffett’s 2013 wisdom advising shareholders to put 90% of cash in a very low-cost S&P 500 index fund, naming Vanguard VOO specifically. Click here ! for details.

Then I come across this post, serving as a reinforcement and something I will consider strongly going forward, after last week’s market meltdown and also CRWV’s tumble.

Even though I do not own any CRWV shares, I had my fair share of stocks’ disasters. Let’s just park them under “tuition” fees.

However to be ‘smart’ and come out top - it is time to listen carefully & intently to what the gurus are telling us. Right ?

Remember to check out my other posts. (See below). Help to Repost ok, Thanks.

Must Read: Click on below titles to access. Repost to share, Like as encouragement ok. Thanks.

• VOO - Buffett's Risky winning ETF bet ? Buy ?

• CRWV - Neoclouds are down. Buy or Wait ?

• US Market: Q3 Earnings, Inflation, Treasury and what else?

• Do you think concur with Koski’s review of TSLA ?

• Do you think you will seriously consider an S&P 500 ETF or still soldier on with individual US stocks ?

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