by Jason Bodner
May 3, 2022
Time has a funny way of changing perception. For instance, treadmills were designed as forced labor machines in British prisons, but in the 1900s that was deemed cruel and inhumane punishment. Now, you can’t enter a gym without seeing lines of treadmills, and sometimes you must still wait your turn to use it.
Similarly, everyone wants cash, because “Cash is King.” Or is it?
When I worked on Wall Street, I put savings away for my three boys every paycheck. It wasn’t much, maybe $50 or so for each boy, but it went into savings accounts under their names and accumulated over time. After leaving my job, I forgot about those accounts. Recently, I checked, and they each had a few thousand dollars, but through the hidden tax of inflation, those dollars I saved are worth less today.
Since that time, stocks have skyrocketed in price, so putting savings in cash was a missed opportunity.
Last month, I put the boys’ cash into new brokerage accounts, waiting for the right moment to jump in. It’s not time yet, but it’s getting to be time. I am going to buy tech shares for them, with high conviction, but I won’t look at the bottom line on their account totals for at least the next few years. Here’s why:
Many tech stocks have reached silly lows, while many “safe” stocks are ironically obscenely expensive.
Fear of war and inflation shoved COVID out of the spotlight and have absolutely wrecked the tech sector.
Let’s view that conundrum by looking at the QQQ (NASDAQ tracking index). As of the April 26th close, the QQQ is down -21% for the year and exhibiting bear market nastiness, as shown in this chart:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But here’s the thing: I started saving for my boys around 2005. Even including the 2022 decline, the QQQ ETF is still +282% since then, while their cash has barely earned 1% per year since the crisis in 2008.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Meanwhile, inflation grew far faster than interest: That cash I worked so hard to save for them is worth way less today. It takes $1.47 today to buy $1.00 worth of 2005 goods. That’s value eroding away!
Keep in mind that during those 17 years, we endured the Great Financial Crisis, the Flash Crash, a U.S. credit downgrade (2011), the Taper Tantrum, the first (2014) Russia-Ukraine war, Ebola, China’s Slowdown, the fear of negative rates, a trade war, government shutdowns, and COVID-19!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s before all the crises we’re experiencing now!
The point is that there will always be something to fear. But what we should most fear is holding cash and just “waiting it out.” As I just showed you, in 17 years, my sons’ cash lost real value while tech stocks soared, so if “value” is what you seek to own and not pay too much for it, then you should look at tech.
Why?
The Case for Buying Tech Stocks
Imagine our future and ask yourself these questions. In five years:
- Will you be less reliant on Siri and/or Alexa?
- Will you be going back to relying more on Cable TV?
- Will you use a word processor (if you even know what it is) instead of a laptop?
- Will your computer be less powerful?
- Will chips become slower?
- Will our networking needs be reduced?
- Will we need fewer (or slower) communications?
Naturally, the answer to all these questions is No.
Since November, some tech stocks have fallen between 50% and 80%! As scary as that sounds, and as unpleasant as it is if you are holding them, bailing out now (for cash or overpriced “safe” stocks) is guaranteed to perform worse over the long term. I’m no gambler. I only care about stocks with superior fundamentals – plus the vote of confidence from big professional investors. In other words, I don’t like to own crappy stocks, only good ones. And in this environment, where growth is being punished for fear of a slowdown, good stocks are getting mauled, too. Babies are getting thrown out with the bathwater.
Here’s an example of what I mean.
I went into my data and looked for tech stocks with superior fundamentals: profitable companies growing sales, earnings, with solid balance sheets. Then I screened for stocks with a Price to Earnings ratio of 20 or less. (P/E ratio indicates the premium shares are trading relative to the money companies earn.)
Tech stocks historically trade at higher P/E’s because they typically grow like weeds. I found 95 tech stocks with an average fundamental score of 75% out of 100, and an average P/E of 14.
This list excites me. There are phenomenal businesses in there. The list includes some biggies you already know… like Facebook, or Meta Platforms, Inc. (FB), now with a 14 P/E, and Netflix (NFLX, 17 P/E). Some smaller companies are significantly cheaper, but in contrast some “value” stocks reached nosebleed levels. For instance, Clorox has ho-hum sales and earnings growth and is loaded with debt, but is trading at a current P/E of 73. Even its forward P/E is 36x. That’s expensive. It’s not just Clorox. Many typically cheap household names are now expensive. Companies like Kraft Heinz (KHC), Walmart (WMT), Colgate-Palmolive (CL), PepsiCo (PEP), and Hershey (HSY) all have P/Es of 30 or more!
The world has flip-flopped. Investors are paying through the nose for value and ditching great tech companies to do it. Don’t be fooled: This won’t last forever. I bet it doesn’t even last through this year.
Recent tech price action may make you second-guess me, but on Tuesday, April 26th, the QQQ closed down 3.77%. That’s ugly indeed. I also saw 209 sell signals in my data, with zero buys. Now that’s rare. Since 2003, out of 4,863 trading days, that diversion only happened 113 times (2.3% of trading days).
On those days of 200+ sells and under 10 buys, here are the forward average returns of the QQQ:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Friday’s ugly close just makes the case even stronger, so if you’re worried about inflation or Russia or anything else, try to remember this: Your cash is guaranteed to fall in value, while history strongly suggests that shares in American businesses will rise in value.
If I could name one area that is being undervalued right now, it’s technology. If you do nothing else with your cash other than just buy the QQQ, you’ll be glad you did – a few years from now.
Buying tech certainly beats letting cash rot in a savings account – like I did from 2005 to 2021. Don’t make that mistake. As Gautum Adani said, “Either you sit on a pile of cash, or you continue to grow.”
Navellier & Associates owns PepsiCo (PEP) in managed accounts. A few accounts own Kraft Heinz (KHC), Walmart (WMT), Hershey (HSY) and Meta Platforms (FB) per client request only, in managed accounts. We do not own Colgate-Palmolive (CL), Netflix (NFLX) or Clorox (CLX). Jason Bodner owns Netflix (NFLX). He does not own Clorox (CLX), Kraft Heinz (KHC), Walmart (WMT), Colgate-Palmolive (CL), PepsiCo (PEP), Hershey (HSY) or Meta Platforms (FB) personally.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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Geopolitical Storm Conditions Are a Boon to Energy Income
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Global Mail by Ivan Martchev
Oil is in a Volatility Squeeze
Sector Spotlight by Jason Bodner
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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