The đŸ”„H.E.A.T.đŸ”„ Formula

AI Driven Insights to Spark Your Portfolio

February 06, 2025

The H.E.A.T. Formula is a radically different way to look at investing your portfolio.

‍H- Hedges, you should always have hedges and be agnostic as to being long or short. Bonds are not a hedge

‍E-Edges, you should always look for edges. Preferably these are edges with some sort of psychological underpinning, structural edges, or some sort of barrier to entry.

‍A-Asymmetric. Everything you do, be it trades or your overall portfolio, should be designed so that heads you win a lot, tails you lose a little.

‍T-Themes. You should always be invested in the top themes. Most everything else is just noise.

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In the News

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Market Recap

Despite rough earnings from GOOGL and downturns in TSLA and AMZN, the S&P managed to do pretty well yesterday. A lot of that probably had to do with NVDA pulling and undercut and rally at it’s 200 day moving average
.

The drop below on Friday could have been a short signal, if you were nimble. I’d be real careful if you are trying to short NVDA longer term.

We also didn’t have any market moving quotes from Trump, which probably added a sense of calm.

The Magnificent 7 as a whole is up less than 1% YTD, lagging the S&P and NASDAQ. So, the market rally has been led by the other names, with small and mid caps joining in. Right about now we ought to be seeing articles about diversification, small over large, value over growth, etc. Here’s a quote from Mike O’Rourke last night
..

The reality of the situation is that AI's hyper growth mode of the past two years had made the leadership unassailable. Now each leader has had some cracks emerge, whether it is the competitive threat of disruption risk or the risk of overspending in what is expected to be a more competitive landscape. After spending tens of Billions and adding Trillions in market capitalization, nothing is a given. The only clear winner has been Nvidia and its position is now being threatened.

Jefferies had a similar theme this morning
.

APPETITE OUTSIDE TECH & AI INCREASING: As highlighted yesterday, I may be clutching at straws ..but my conversation with most LO and even HF’s is – as per fears highlighted last week – Nvidia / Open AI and Datacentres, investors looking for potential new homes from traditional bias towards Tech


APPETITE OUTSIDE TECH & THEMATIC SECTORS / REGIONS: If above is the case – then investors are beginning to look at alternatives – esp. where downside risk limited, and upside could be significant 
Jef-X has been highlighting defensives / Staples and real economy which includes Europe & China!!

I asked GPT to weigh in
..

Bottom Line:

  • Short-Term: Value and smaller caps lead; Mag7 is lagging due to HPC meltdown mania, political swirl (TSLA), and real AI competition.

  • Long-Term: If you believe HPC expansions outpace near-term AI efficiency gains, the big AI leaders remain well-positioned. NVDA’s bounce shows capital can quickly rotate back.

Recommendations

  1. Maintain Core Positions in Mag7 if your horizon is more than a year or two.

  2. Trim or reallocate a portion if you want to capitalize on the short-term cyclical rotation or reduce TSLA-specific or HPC meltdown risk.

  3. Don’t short the Mag7 en masse unless you believe HPC meltdown is structural, not cyclical. O’Rourke’s note shows short-term rotation but doesn’t necessarily mean permanent dethronement.

Hence: Keep your core AI-laden holdings but consider partial rebalancing into mid/small-caps or cyclical “value” if you want to ride the wave that’s currently outpacing the “Magnificent Seven.”

I’m going to be thinking through this. My sense is that the Magnificent 7 had such a post election run that a pullback was needed. Every time we have seen a “rotation” stocks have rotated back, but this is something to watch and continue to go through ideas.

Tonight’s fun is AMZN earnings after the bell.

VRT

VRT has been one of my core holdings for a while. Barron’s wrote an article about it yesterday
.

GPT still likes it also


Rating VRT’s AI-Driven Potential: 8.5 / 10

  1. High AI Synergy: VRT is a pure-play on data-center expansions—essential for HPC infrastructure.

  2. Short-Term Overreaction: The DeepSeek panic hammered HPC names, but the long-term AI usage story still tilts favorably.

  3. Potential Headwinds: If HPC meltdown mania persists or tariffs bite more deeply, share price could remain volatile. But existing relationships with hyperscalers mitigate major downside.

  4. Long-Horizon Upside: Jumps in HPC capex (like Google’s new $75B plan) reaffirm data-center expansions. VRT’s pricing power + consolidated industry structure => robust margins and strong EPS growth.

Bottom Line: While near-term HPC meltdown fears and new tariffs dented the stock, VRT remains a top beneficiary of data-center expansions for AI. The recent ~28% drop from highs looks like an opportunity for long-term AI-infrastructure investors—and merits an 8.5 on the “1–10 potential” scale.

HON

Honeywell has been a core holding for me for a while. I had GPT analyze this news


Honeywell announced Thursday plans to separate its aerospace division from its automation business and move ahead with plans to spin off its advanced-materials arm, confirming an earlier report from The Wall Street Journal.

Verdict:

  • If you’re comfortable waiting for potential “sum of parts” upside, hold. The spin-offs might yield a bigger total valuation or let you selectively keep the automation business (mild AI synergy).

  • If your HPC/AI focus is paramount and you see better HPC opportunities (NVDA, TSM, or AI software) and you don’t want an industrial breakup story, you might consider reducing or selling.

Given your “core HPC” theme, Honeywell’s breakup might be less relevant to HPC adoption. Holding until the spin-offs might yield a nice value unlock—but if your HPC capital is better deployed in true HPC/AI growth names, reallocate some portion.

I own the calls, so I asked GPT to tailor it’s analysis to those
.

Owning the calls doesn’t drastically change the fundamental analysis that Honeywell’s spin-off is less HPC-focused. The difference is that options have expiration risk and can get messy once spin-off adjustments occur. Unless you have long-dated calls that extend well beyond the final spin dates—and you strongly believe Honeywell’s breakup will produce a big near-term share price bump—it’s likely better to close or reduce your HON calls and funnel that capital into more HPC-pure names.

If your calls are deep in the money and you’re near your target, capture gains now or roll them out at a suitable strike/expiration if you truly see short-term upside. But given your HPC/AI focus, Honeywell’s spin-off* might not deliver a big HPC payoff soon, so rotating out or trimming the calls is a logical approach.

Probably getting out.

SITM

GPT flagged this one out of a research report this morning. I do not own it and honestly have never heard of it. Got crushed on the DeepSeek news and has been working it’s way back


Thesis for Owning SITM

  1. Specialized Timing Solutions

    1. SITM is the leader in MEMS-based timing devices, replacing legacy quartz. Their timing chips reduce jitter and power consumption—crucial for HPC/AI data centers, networking gear, optical modules, and advanced automotive/industrial systems.

  2. Robust Data-Center/AI Tailwinds

    1. Recent results show strong demand from HPC/AI:

      1. Stifel notes a +156% yoy jump in SITM’s Comm/Enterprise/Data Center category.

      2. HPC expansions continue to require ultra-precise clock signals in GPUs, NICs, optical interconnect. SITM’s advanced MEMS timing can solve the stability and accuracy demands of large-scale AI/ML clusters.

  3. Margin Expansion & Growth

    1. SITM has consistently posted beat-&-raise quarters. Management guided 25–30% revenue growth (Stifel calls it “likely conservative”), plus a return to 60% gross margins in 2025 after cyclical rebounds.

    2. This underscores SITM’s ability to pass on specialized solutions to HPC/AI customers with pricing power.

  4. Long-Term Market Share Gains

    1. SITM’s MEMS solutions are steadily displacing quartz, thanks to better performance in temperature stability, shock/vibration resistance, and power consumption. HPC meltdown mania might moderate near-term expansions, but eventual AI usage growth should keep SITM’s addressable market growing.

2. Why Not Own SITM

  1. Volatility & Valuation

    1. SITM is a smaller mid-cap with a premium multiple relative to standard semis. If HPC meltdown mania or cyclical slowdowns intensify, SITM could see disproportionate stock swings.

  2. Customer Concentration & HPC Lumps

    1. HPC expansions can be “stop-and-go,” subject to big orders from major data-center vendors. Timing solutions get designed in for specific products, but large new HPC rollouts can pause or accelerate unpredictably. SITM’s revenue may be lumpy.

  3. Competitive Landscape

    1. Although SITM’s MEMS solutions lead in advanced timing, established players still produce high-end quartz-based solutions. Converting big HPC/telecom OEMs from quartz to MEMS can be multi-year design cycles.

3. Definitive Recommendation

  • Verdict: BUY SITM for HPC/AI synergy, if you can handle higher volatility.

Why:

  • SITM’s specialized timing solutions are increasingly essential for HPC data-center expansions and AI networking equipment. Four consecutive beat-&-raise quarters and robust HPC segment growth (+156% yoy in Comm/Enterprise/DC) affirm strong near-term demand. Management’s outlook for 25–30% yoy growth and margin rebound is compelling, suggesting the HPC meltdown narrative hasn’t truly derailed SITM’s core HPC data-center story.

However, SITM is a smaller mid-cap name with premium valuation—expect bigger stock swings. If HPC meltdown mania spooks the entire HPC supply chain, SITM could temporarily decline. But for a multi-year HPC/AI portfolio, SITM’s unique MEMS timing solutions offer high upside as HPC demand eventually outstrips near-term cyclical lumps.

Conclusion: Go ahead and build a position in SITM if you want a specialized HPC timing “picks & shovels” play with the tolerance for mid-cap volatility and a multi-year horizon.

ARM

ARM is a name I do not own. They had disappointing earnings last night, so I wondered whether I should buy the dip and if their report had any ramifications for other areas of AI, the verdict was no and no


Final Recommendation: Buy or Stay Away?

If Your Goal is Pure HPC/AI Infrastructure

  • Arm remains mostly a mobile/IoT IP licensing model. Its HPC/AI data-center exposure is less direct than investing in Nvidia (accelerators), TSM/ASML (manufacturing), or even AMD/Intel (server CPUs).

  • The modest guidance plus the big YTD run caution that the short-term risk/reward isn’t great if you’re purely HPC-driven.

If You Like Arm’s Broader Ecosystem

  • Long-Term: Arm is widely used in embedded devices—billions of shipments. Gains in data-center or PC CPU markets are possible, but that’s an if story.

  • A small position might pay off if you believe Arm can dominate edge AI usage in phones or embedded, but it’s not a straightforward HPC star.

Recommendation

  • No immediate HPC synergy emerges from these results—stay away if your main aim is HPC data-center alpha.

  • If you want broad-based semiconductor IP coverage and trust in Arm’s future market share expansions, consider waiting for a deeper pullback. The 6% dip might not fully correct the 40% run if the Street sees no HPC upside soon.

  • Conclusion: For HPC/AI focus, you likely have better targets. Arm’s mild quarter/outlook doesn’t call for immediate buy-the-dip. It’s a hold or skip for HPC-centric investors.

Does the Earnings Disappointment Impact Other AI Areas?

  1. Semiconductor IP:

    1. If Arm’s “just okay” outlook implies consumer device softness, it might hint that smartphone/consumer electronics are not going to drive HPC expansions.

  2. AI HPC:

    1. Arm’s mild quarter doesn’t directly spook HPC or data-center stocks more than the existing meltdown mania. Google, Amazon, MSFT still set HPC expansions—Arm is tangential, not central.

  3. DeepSeek Efficiency:

    1. Possibly overshadowing hype for large HPC expansions. Some HPC‐heavy semis might feel ripple effects, but Arm is more about licensing to phone & IoT chips, not HPC GPUs or specialized accelerators.

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