Is it time to jump into or get out of the tech bandwagon?

Welcome to Finance and Fury. A lot of people may be feeling regret right now - regret for not holding technology shares like Afterpay – it is up around 850% from the low in March

Was not buying tech shares a bad decision? And is there potential from here? Look at this in this episode –

Most people want to make the correct decision for investments – hard to know what is the correct decision -

When looking at some sectors of the share markets - technology stocks in particular – might be having some regret for not investing But looking at these companies – the price may indicate that these are great companies Is it sensible or a bad idea to buy a company with a negative earning per share? Or a massive PE? There are plenty of shares in this basket - Afterpay – APT on a PE of minus 450x this year – technically doesn’t have a PE – but looking at the losses per share of $0.15 to $0.20 – looking at future projected earnings – in 2 years company would have a PE of 230x Xero - XRO on a PE of more than 1,000 times - 180x on 2022 forecasts Wisetech Global - WTC on 110x PE - and 50x on 2022 earnings forecasts NextDC - NXT on minus 305x PE and 231x 2022 forecasts – has a debt to equity of 100%   List goes on – rate to find a company with a PE less than 70x in the tech basket In the US – The FAANG - Facebook (FB), Amazon (AMZN) 142PE, Apple (AAPL), Netflix (NFLX); and Google (GOOG) - stocks plus Microsoft account for 27% of the S&P 500 but only 8% of the revenue. The equity market in the US is valued at 152.2% of GDP - a record. Returns over the past 5 years – on the S&P500 – 78% of the gains have come from tech, telecommunication or e-commerce – around 50% comes from tech alone Also have other companies – like Tesla Tesla is up +330% since March 18th, and over +760% since June 2019 – remember back then it was troubled by bankruptcy concerns Since March, Tesla has added just over 8 Ford Motor Companies, 27 Renaults, or more than the entire market cap of Toyota ($176bn USD) Tesla is over 3 times the size of the “S&P 500 Automobiles and Parts” sector,even though it’s not a member or in the S&P 500 (it would be the 15th largest) Tesla’s market cap ($287bn) has grown to over a third of the combined market cap of the US, EU and Japanese auto indices. Where does Tesla rank compared to other auto companies – VW, Toyota, Daimler – top 3 – top two around 10.5m cars each year – TLS made 380k cars a year Tesla is at $280bn market cap – Tesla EPS -$0.81 = PE of negative 1,852 Toyota – has a EPS of $16.40 – PE of only around 7.5 times Tesla’s overall share of the global autos market has grown from 0.1% in 2017 to an expected 0.8% in 2020 – which is impressive - but remains minuscule - VW is at 14% - has a market cap of $82bn USD and pe of under 7

 

What is going on?

It has become fairly obvious – it has little to do with fundamentals - PE, the future projected earnings or intrinsic value Most of the price growth has been about not missing out on getting into the big winners and household names – i.e. making easy gains Comes back to extraordinary volatility and getting into the massive momentum – the rebound in the markers that has been behind the opportunity to buy these growth companies in a world where rates are near zero logic suggests the equity market should be down the drain right now due to a global economic downturn Growth versus value shares – Since the market downturn – value shares have started to underperform March 2019 – Jan 20 – was about even – sitting at 100 of neither growth or value outperforming the other – since then growth has started to outperform – gone up from 100 to 145 – meaning that there is an out performance of 45% on growth shares compared to value This isn’t just coming from individuals getting in on household names Professional managers – The monthly Fund Manager Survey from Bank of America is best known for the monthly chart showing what everyone on Wall Street thinks is the most crowded trade Crowded is what is thought to be the top trade – or largest holding positions What was it this month - not only did it confirm that the one trade - is the most popular sector on Wall Street – but also – that it is also the fact that this trade has been made with the biggest margin on record – i.e. the largest amount No surprise that this trade is Long US tech stockswhich is what 74% of BofA survey respondents said they thought was the most crowded trade on Wall Street The sentiment on Wall Street at the moment – is that they are convinced that others like them who are finance professionals are all in on tech – backed up by the percentage of agreement behind tech being the most crowded trade is the highest of any monthly response in polling history Outside of shares – looking at the bond market – which is three times the size of the equity market – painting a different story US bond yields are at record lows and discounting negative rates from mid-2021 to 2023 despite the Fed saying they will resist that. The equity market is not reflecting the bond market. Record low bond yields are not consistent with a V-Shaped recovery – sign that the economy isn’t fairing so well Which market is right? Time will tell – no way to predict what markets are going to do in the short term with this momentum behind the tech sector But there is a disconnect – when looking at what the companies are worth versus to performance – technically performance is all that matters – or all that people care about Value only based investors have missed out on large returns recently because they are long-term and want to see "value" before they buy But These tech stocks are being traded as a bloc by the herd - they are all going up massively because the US technology sector is flying Also - the alternative traditional slow and steady investments in Australia are not sexy - consumers, Healthcare, Resources - Slow going by comparison – not what is in fashion right now technology it is – the global position for a quick return – which generates the price movements when everyone jumps in

What to watch out for – but also are they overvalued?

At this stage – who is happy with these price gains - the CEOs and shareholders of these companies are very happy – and also probably not going to openly admit that there is the chance that these companies are overvalued But can tell that they are rather happy – hence why they are raising capital (high prices per share) and why some of the insiders like the Afterpay guys are selling some shares All of this has the potential to fuel a further tech bubble - There are similarities to previous tech bubbles- but also differences Back in 2000 in the Tech Boom – there was a massive rise in prices and there was regrets about missed opportunity - but there are differences Compared to a lot of the companies in 2000 - This time there are some very substantial revenues in the tech sector – but the earnings and profits are mixed depending on the company Compared to back in 2000 – the profits were definitely lacking – but so were the revenues But now - when a company is real, and profitable, there is a price for everything – there is a growth potential, there are future profits and revenues – but there is still a price for everything For example – take Tesla – Tesla cars are great cars – come with teething issues – just like Tesla being a company with teething issues – but would you pay $2m for a Tesla car? This is how these shares currently are acting Compare this to property - You don't pay the eventual price for what a house price may be in a decade – prior to it even being built But the conditions of the market are different – the concept of the new normal Tech is seen as immune but also to benefit from Government shut downs The monetary system – tech growth companies do well with low interest rates -

What to do?

Unfortunately for most compelling argument for an 'investment' in these stocks is momentum - This is a herd phenomenon – and a powerful one – There is little in the way of fundamental reasons to invest – like earnings But the easy money from the Fed and the flow of capital has started a massive momentum If you hold them – there is the chance that they go up further – wouldn’t rush out to sell – looks like the ride is not over – yet Course of action would be to try and trade this rally – which is almost impossible to time correctly – But don’t consider it a long term ‘investment’ at the current prices Full disclosure – I do own an allocation to a lot of these companies – im not rushing out to reduce this – but at the same time – there is little that shows that they are worth buying at their current prices This bubble will likely burst - watch it – when – who knows – may not be years - Don’t sell because these stocks have gone up a lot It takes time for the market to trust a company and its value The market overprices assets regularly - this is occurring now - is a extreme sentiment – so if you don’t own any of these shares – may not be the time to join in – as downside seems to be far greater than the upside The contrarian saying of buying when others are fearful and selling when others are greedy But being a contrarian for the sake of being a contrarian appears a losing position at this stage – seems like most of the market is indeed long tech stocks - A quick look at the hedge fund top 50 stocks shows that tech names account for 8 of the top 10 most popular stocks whatever works will continue to work until there is a reason for it not to work since the Fed is now effectively punishing growth stocks - the growth to value outperformance will continue until there are no more value investors left Something to watch out for – have the potential for much higher level of losses compared to other shares in the market But momentum can change – unlike other sectors – unlike that the momentum change will come from economic news – but rather mass profit taking in institutions

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