Adam Khoo, a prominent investor and author, has outlined his investment strategy for the remainder of 2023, emphasizing a balanced approach across AI infrastructure, hyperscale technology companies, and "anti-bubble" stocks. This strategy comes as Khoo prepares to launch his latest book, his first in 13 years, detailing his evolved investment methodologies.

Portfolio Performance and Allocation

Year-to-date, Khoo's portfolio has achieved a 26.61% return. This performance significantly outpaces the S&P 500. Khoo attributes a substantial portion of these gains to cybersecurity companies, including Fortinet (up 139%), CrowdStrike (up 121%), and Palo Alto Networks (up 115%). Other key contributors include AI-related stocks such as SOXX (up 80%), ASML (up 57%), and Apple (up 26%).

Underperforming stocks in his portfolio include Nike (down 43%), LVMH (down 41%), Copart (down 32%), Pool (down 28%), and Booking (down 26%). Khoo stresses the importance of allocation, noting that these underperformers represent a small fraction of his overall portfolio, thus minimizing their impact.

Investment Philosophy: Fundamentals Over Sentiment

Khoo's decision to hold or sell underperforming stocks hinges on the underlying fundamentals. For companies like LVMH, Copart, and Pool, he identifies a decline in revenues and profits, attributing it to short-term macroeconomic factors. He believes these issues are cyclical and fixable, allowing him to hold these positions without adding to them.

Nike's situation is deemed more complex. While the business is considered fixable, the turnaround is taking longer than anticipated. Khoo is not adding to his Nike position until revenue and profit growth metrics improve. Booking, however, is an exception. Despite a share price decline due to concerns about potential disruption from AI consumer agents, its fundamentals remain strong. Khoo, having bought Booking at a significant discount during the COVID-19 pandemic and already selling half his stake at a profit, is comfortable holding his remaining profitable position.

The "Anti-Bubble" Strategy and Portfolio Buckets

Khoo categorizes his investment strategy into three main buckets:

1. AI Infrastructure (17% of portfolio): Stocks directly involved in building AI infrastructure, such as Nvidia, ASML, Broadcom, and ETFs like SOXX and AIPO. Khoo focuses on undervalued or fairly priced companies within this sector.
2. Hyperscalers (26% of portfolio): Large technology companies like Google, Microsoft, Amazon, and Meta. These companies benefit from AI capex but also have diversified revenue streams from advertising, e-commerce, and other services. Khoo views these as a 50/50 play, with potential benefits if AI capex growth slows and their profits increase.
3. Anti-Bubble Stocks (57% of portfolio): Companies that do not directly build AI but benefit from its productivity gains, such as banks (JPMorgan), insurance companies, and cybersecurity firms. This bucket represents the majority of his portfolio and is expected to perform well when AI capex growth eventually slows.

Khoo emphasizes that he does not attempt to predict market timing or the bursting of any potential AI bubble. Instead, he focuses on building a robust portfolio that can withstand market fluctuations, likening it to building a strong ark to weather any storm.

Market Outlook and Technical Analysis

Khoo anticipates a bullish market for the remainder of the year and into the next. His outlook is supported by several factors:

• Technical Trends: The market is in a clear uptrend, with all major moving averages (20 EMA, 40 EMA, 50 SMA, 150 SMA, 200 SMA) sloping upwards and in the correct sequence.
• Valuation: The S&P 500's forward P/E ratio of 19.1 is below its 5-year average (19.8) and equal to its 10-year average (19.1). This indicates the market is fairly priced, and cheaper than at the start of the year when the forward P/E was 22. This is due to earnings growth outpacing price appreciation, with S&P 500 aggregate earnings forecasted to grow by 32% for the full year, while share prices have risen approximately 14%.
• Midterm Election Cycle: Historically, the period from November of a US midterm election year through the following year has been highly bullish for the stock market. Since 1950, the market has shown a 95% probability of being higher three months after November, and a 100% probability six and twelve months later, with average gains ranging from 8.1% to 22%.

Individual Stock Analysis

Khoo provides insights into specific holdings:

• Amazon: His largest position, considered the most diversified hyperscaler with significant profit margin expansion potential from AI and robotics. It is currently slightly overvalued with an intrinsic value of $233, and he would only add shares on pullbacks to support levels.
• Microsoft: Undervalued with an intrinsic value of $570. However, Khoo would wait for a pullback to a support level before adding to his position.
• Alphabet (Google): Currently undervalued with an intrinsic value of $374. It has bounced off a support level and is consolidating, with potential to move higher.
• Meta Platforms: Khoo believes Meta has significant short-term and long-term upside potential. The company's new AI consumer agent app, Muse, has seen rapid adoption, surpassing ChatGPT in download speed. Meta is also pivoting towards hardware, potentially becoming the "next Apple." While its conservative intrinsic value is $900 (17$2,000 based on higher growth projections. Khoo notes that Meta's social media addiction case has been resolved, and the launch of its new AI frontier model could lead to a breakout.
• Nvidia: Considered the "granddaddy of AI infrastructure," Nvidia is surprisingly undervalued according to many metrics, with a discounted cash flow intrinsic value of $39 (27% undervalued) and a forward P/E ratio of 14.

Khoo reiterates his Q4 game plan: remain invested in his three core buckets, focusing on undervalued AI infrastructure, diversified hyperscalers with significant upside potential (particularly Meta), and anti-bubble stocks that are poised to benefit when AI growth moderates. He concludes that the statistical probability of market gains in the coming months, driven by the midterm election cycle, supports a continued invested stance.