Investing in the Dromedary Camel market
29th October 2020 |
I’ve got a confession to make.
I’m anti-tech.
You heard it here first. Astonishing really, considering how much of a technophile I am.
Okay, you see through me so easily these days… perhaps my self-deprecating humour just doesn’t fly like it used to?
I’m not anti-tech… I just don’t like the situation with “Big Tech”. Not necessarily in the sense of I hate what they do, what they make, what they have contributed to our world. Albeit I do have issues with their abuse of data and power, but that is another discussion for another time.
The really big problem I have with Big Tech is the valuations they’re currently trading at.
Now I will preface what I’m about to tell you with something else. In October 2016, I was presenting at a conference called The Great Repression, in front of about 1,200 people in Port Douglas, Queensland, Australia.
The title of my presentation was, “The Rise of the MAFIA in the New World Order”. I was talking about the rise of Big Tech (Microsoft, Apple, Facebook, Intel, Amazon, and others) and what that meant for investors.
I included the chart below showing how “tech” had come to dominate the big end of the US markets. Most notably how they’d replaced big oil.
Source: Visual Capitalist
However, at the end of my presentation I also said something I strongly believed would come to fruition.
I said, “I think the NASDAQ, it’s at all-time highs now, I think it will double again.”
This was October 2016 when the Nasdaq Composite was trading around 5,200. In July this year I was proven correct. When the Nasdaq Composite closed over 10,400 on 8 July 2020 my prediction was complete.
Well, I’m making another prediction. Except it’s a little more specific. I think the Nasdaq 100 is wildly overvalued. I’m not saying there’s no value, nor am I saying it’s a bubble.
But Apple is trading at a price/earnings (P/E) ratio of over 33-times. Microsoft is trading at over 32-times. Facebook is trading over 32-times. Amazon is over 121-times! Alphabet is trading over 33-times.
The big end of the tech town is overvalued. And I think there could be as much as a 30% correction in these valuations. That’s why last week I made a call to short the Nasdaq 100.
I think just the top 100 companies that make up Nasdaq have a whole bunch of heat to come out of them. Predominately, it’s these mega-cap giants that are really going to unwind.
Over the rolling year, 18 stocks in the Nasdaq 100 have seen a negative return.
Of those, many aren’t even what you’d call “tech” stocks:
- Walgreens Boots, down 32%
- Ulta Beauty, down 8.27%
- Ross Stores, down 17%
- Marriott, down 24%
- Fox, down 18%
- Dollar Tree, down 19%
But then you look at others:
- Adobe, up 75% and trading at a P/E ratio of 58-times
- AMD, up 151% and trading at over 102-times
- com, up 161% and trading at over 564-times
- MercadoLibre, up 133%, worth over $63 billion and doesn’t make a profit
- Nvidia, up 156% and trading at over 92-times
- Tesla, up 540% and trading at over 790-times
These aren’t the only stocks in the world trading at eye-watering valuations based on their actual earnings. These also aren’t the only stocks in the Nasdaq 100 with insane earnings ratios.
The Nasdaq also has some companies that have still shown a rising stock price and might even be considered undervalued, like eBay Inc. that’s up 48% for the year and trading at a P/E ratio of just 7.71-times.
But when I consider the whole Nasdaq 100, it screams overvalued. So I’ve shorted it with an ETP.
I’m not saying you should do the same, this isn’t a recommendation. I don’t recommend ETPs or complex financial products here in Frontier Tech Investor. I’m just saying that I think the big end of the tech world on the Nasdaq specifically is very much overvalued and it’s why it’s one area I think is best avoided right now.
I might be bang on, I might be wildly off. Yesterday was a good day for that call – today, not as much. But we’ll see. It’s also why I’ve shifted focus away from the US market to focus here in the UK.
The UK market is one in which I think we’ve got a bounty of stocks that UK investors underappreciate, and the world’s investors underappreciate.
I think that while the US market is one to avoid, the UK market is one to go head first into. While I’ve shorted the Nasdaq 100, I’ve also never invested more into UK stocks than I have over the last few months.
Yet I still find people resistant to the UK market.
What I noticed most coming from Australia was the obsession here with the US markets. In Australia, investors love to talk about and look at the US markets, but they almost exclusively invest in the domestic market.
Here it’s similar, except in general, investors prefer the US markets for investment. I think that’s a by-product of the raging bull market we’ve seen in the US over the last few years. But my question to you now is, what if that gravy train is over?
I think it is for the short term. And I think what we’ve seen in the last week around the US markets is a little indication of what’s to come.
That will have a flow-on effect to the markets in the UK here. But what’s currently driving the UK market is the impending spectre of another massive lockdown, tough winter restrictions and the utter, unadulterated fear of a “second wave” that’s being thrust into our faces at every moment.
While I don’t think we’ll see the impact anywhere near what we saw in March and April, that perpetual fear being thrown at the mass public inevitably flows to the market.
It’s created a dromedary camel hump from March to today. It could get worse.
That means we’ve got to think about all our positions, and consider our strategy for what kinds of stocks we bring next and how we play the current ones.
My take is that what we’re building here in this moment as investors is a core portfolio that should stand the test of time for the next three to five years. Conditions won’t be like this in October 2023.
Things will be normal again by then. You can whack that prediction into the time capsule too. What I’m saying is that you should put yourself into your own shoes in October 2023 and take a retrospective look back.
What decisions did you make today that were the right ones? What didn’t you do what you wished you had? In October 2023 do you wish you’d taken the foot off the gas, or slammed it down?
I think conditions are such that investing now is as good an opportunity that you’ll ever find. Don’t dump in wads of cash all at once, feed your investments, dollar-cost average to help mitigate volatility.
But continue to invest, build the core base, add to holdings that have long value at depressed prices. Any new ones I bring you (which I will in a couple of weeks) will have the same focus.
Where is the real value in the UK market now for the next three to five years? That’s what you should focus on, that’s what I’ll be focusing on for you.
Regards,
Sam Volkering
Editor, Frontier Tech Investor
