DITCH THE PLAYBOOK

03/13/25 Prospero.ai Investing (202nd) Edition (Midweek)

In what seems like a former life, I used to coach High School Football. I was an offensive coordinator in the great State of Texas. In one of the years I was coaching, we were a team that had traditionally run the football. We had great running backs and a great Offensive Line. No need to change things up. Just run right, run left, run up the middle. We rarely threw the football; and we were good. But in that particular season, we realized that our district rivals had one of the greatest run defenses we had ever seen on film. Sure enough when the game finally approached, they were absolutely dominating our run game. As halftime approached, we were down by two touchdowns. At halftime, I came to my quarterback and told him, "If we're going to win, we have to throw the football in the second half". So we essentially "Ditched the Playbook", and started running plays that were totally different than anything we'd done all season. Their defense was totally unprepared and we beat them by a touchdown. We went on to win the State Championship.

I'm telling you this little story, because at Prospero, we feel like it's time to "Ditch the Playbook". Our CEO George Kailas called me yesterday and told me about our new strategy. Let me explain…

For the last two years, we've been in a Bull Market and THIS has been our playbook; find growth oriented names that look great in our signals, hold them, and if there was a concern about a downturn, then outnumber them with shorts. It's worked great. We've crushed the market over the last 2 ½ years. But then all of a sudden, that playbook isn't working anymore. We are arguably in the early innings of a Bear Market. Here's the good news, we called this massive downturn before it happened. Prospero's Net Options Sentiment was screaming this correction from the rooftops (for a while now), and if you've been reading the newsletters, you would have been prepared for it.

But the bad news is that the old playbook isn't working anymore. So here's a new strategy we're going to implement. We realized that those growth names that have always been our bread and butter, are the names that have been hit the hardest. For example, Tesla (TSLA) is down around 25% over the last month! Nvidia (NVDA) has dropped around 13%. Now, both of those made strong upwards corrections yesterday (the first in a LONG TIME), but our point is that if we want to make significant gains in this new market environment we cannot load up on these high growth names anymore. This is because if we have 4 to 5 of these in our portfolio the losses will be greater than gains even if we are net short. Both of them had been showing relative weakness in our signals but even growth stocks looking stronger have had their issues. That is because institutions will short great long term companies to get better prices and our metrics are relative. Even the top stocks will get hammered if everything is, especially for the resons in the last sentance.

On top of that we weren’t helping our strategy too much with our shorts. Our typical target short is bad in our signals and nearing or at 52 week lows. In Bear markets these are much more attractive value targets. We realized we needed to look somewhere else for shorting "value" plays. So, here's the new strategy. We're going to look for stocks to short that have 3 things:

1. Stocks that look bad in our signals (as always).

2. They have a low EPS relative to their sector.

3. There is some room between current price and 52 week lows.

The more I think about George's new strategy, the more I'm excited about it. It makes a lot of sense. We do believe there's potential for an upward correction at some point, but the reality is that SPY Net Options Sentiment is still at 0 and so there could be more pain to come. We're going to capitalize on it! Now a word from the man himself…

A WORD FROM OUR CEO

Another poor week for the market but our paper trading portfolio is preserving our gains, beating the S&P 500 by 45% annualized, with a win rate of 62% against SPY benchmarks.

We updated our short intro + learning videos to include our new full app tour as well as advice on how to use this letter.

Don’t have our app yet? Use it to track your investments with Prospero’s proprietary AI tech.

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DITCH THE PLAYBOOK

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