top of page
  • Writer's pictureJoe Cardello

Spring Alterations

June 1, 2023 In the portfolios, I have decided to sell what we call our innovation basket of companies. We first identified this theme in July of 2021. Some of these names are very popular currently: NVDA, SNPS, CDNS, ANET. Some of the characteristics of these companies, and why we included them in the portfolio are:

  • Strong and growing free cash-flow.

  • Earnings depressed because of the expensing of intangible investment.

  • High barrier to entry into their field (could be described as mini monopolies in their respective markets).

  • Structural macro backdrop of industry growth.

  • Reasonable valuations.

  • High returns on total capital

If you are interested in more detail, you can read the commentary from July 2021:

The reasons for risk reduction in this theme:

  • The market has clearly started to recognize the value in these names based on their recent price appreciation.

  • Although I believe Artificial Intelligence is changing many aspects of our lives and economy, this is not new information. It has been going on for many years.

  • Companies used to be able to deduct Research and Development in the year incurred. This depressed current year earnings, which increased Price / Earnings ratios. In my view, this made many of the companies described above appear more expensive, and this likely kept some investors away. Tax law changes starting in 2022 (provision of the 2017 Tax Cut and Jobs Act) now require spreading the deduction over longer time frames. Hence, this accounting illusion of depressed earnings should be less pronounced.

In summary, although everyone seems to be clamoring to invest in the “picks and shovels” of the artificial intelligence gold rush, I find investing in names like this quite a bit more difficult than it was 12-24 months ago. Even though these companies are likely to produce abundant earnings well into the future, I am far less certain about their return on investment at current prices. Additionally, many of these companies now have a greater weight in the long-term diversified index funds which remain in the portfolio.

As I described in my recent commentary this month, I believe many small and medium sized businesses will increasingly benefit from Artificial Intelligence in the coming years. In the short run, the market seems to only recognize the companies that supply the tools to meet the increasing demand for AI applications. I try to demonstrate this in the two charts below:

  • The first chart shows the YTD performance of the Nasdaq as measured by QQQ (orange line) vs. the YTD performance of the Russell 2000 measured by IWM (purple line).

  • The second chart shows a longer-term version of the same.

The backbone of the US Economy is in these small and medium-sized companies, and I believe at some point, the market will recognize the benefits that many of these companies will harness from AI. It is difficult to know the timing, and it is also difficult to identify which companies might be the next big thing. As always, I will take a long-term view, respect what I do not know by:

  • Diversifying across asset classes, within asset classes, and across time.

  • Determine the appropriate level of market risk.

  • Selecting quality companies for our baskets.

As always, if you have any questions, do not hesitate to send me an email.


Joseph Cardello, Principal

August Wealth Advisors, LLC

51 Riverside Avenue, First Floor

Westport, CT 06880

Direct (916) 461-9451 toll free (800) 985-9477

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and August Wealth Advisors are separate entities.

Trading instructions sent via email, fax or voicemail will not be honored. There is no assurance that these messages can be retrieved on a timely basis, nor is there any sure method of confirming the customers identity.

The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but August Wealth Advisors makes no representation about their timeliness, accuracy, or completeness. Content in this material is for general information only and not intended to provide specific investment advice or recommendations for any individual. Investing involves risk including possible loss of principal.


bottom of page