Mad Hedge Technology Letter
December 11, 2019
Fiat Lux
Featured Trade:
(CHERRY-PICKING IN TECH TODAY)
(ZM), (CRM), (GOOGL), (AAPL)
Tag Archive for: (AAPL)
The valedictorian of the IPO class Zoom Video Communications, Inc. (ZM) is finally on sale at a discount.
If readers want to indulge themselves in a high caliber tech growth stock to buy and hold stock, this is the one for you.
This one has no regulatory headwinds as well as an added bonus.
Zoom’s share price has dropped 40% since hitting the heights of $102 in July which was coincidentally the high for most post-IPO tech stocks of 2019.
It’s been an elevator straight down to no man’s land since then, but investors would be foolish to paint all hyper-growth companies with the same brush.
Filtering out the wheat from the chaff is critical and Zoom is the stock that still has the gloss on its outside package buttressed by its best in show video conferencing software.
There are no other proper alternatives in this sub-sector of software.
A few days ago, the stock slid 9% even though the company crushed expectations with its latest quarterly result and outlook.
Zoom generated revenue of $166.6 million representing a growth rate year on year of 85%.
The company then offered a forecast of $175 million next quarter when analysts only estimated $165 million.
Remember that this company grew 96% just 2 quarters ago and it would be illogical to believe that the stock is being penalized from faltering to 85% today.
Any tech company would give a left leg for 85% growth.
Zoom was trading at 33.5 times my calendar 2020 estimates compared to the fast growth software as a service (SaaS) median at 12.9 times.
Then software stocks started indiscriminately selling off on earnings over the past few weeks irrelevant to the quality of news because of worries to the broader bull market in tech stocks.
It’s true that tech stocks aren’t cheap now, and the skittishness rears its ugly head when bullet-proof earnings’ results are met with a cascade of selling.
Salesforce (CRM) was a software company that was penalized for pricey M&A because the company has been unable to organically grow forcing them to buy growth.
Buying growth is not necessarily a bad strategy but buying growth at this point in the economic cycle naturally means that companies will need to overpay for growth because of expensive valuations.
Zoom is perfectly positioned to outperform in the next 2-3 years.
The advancing runway is wide open with no competition in sight and a generous growth trajectory is firmly on their side.
We Company singlehandedly destroyed positive biased market momentum for any tech growth stock this summer, but on the bright side, quality post-IPO growth stocks are more reasonably priced with compelling entry points.
At around $60, Zoom looks appetizing and is a convincing buy and hold. At some point, this software company could become a takeover target for a larger corporate because companies such as Google (GOOGL) and Apple (AAPL) will need to acquire growth moving forward.
I am impressed with Zoom's superior products, growth prospects, and scalable business model, and the stock’s near-term risk/reward trade-off is attractive after the 9% haircut this past week.
There is an actionable and manageable clear path to a $2 billion revenue run rate with strong margin expansion potential and with its flagship product growing around 80-90%, its next growth driver in Zoom Phone could translate well into a meaningful revenue stream.
Zoom Phone is the next springboard to further success for this company.
Anyone that has used Zoom as a product can confirm the veracity of its superior performance standards.
This isn’t the type of stock to trade short-term, the volatility undermines any potential entry points.
If the broader market holds up in 2020, and Zoom isn’t a $100 stock by yearend, then the stars should align by 2021 because the value extraction potential is substantially robust in Zoom’s business model.
We finally have a reasonable level to scale into Zoom, and if it drops into the $50 range, it’s not just a scale-in type of scenario, investors should buy as much as they can with two hands.
Growth stocks can only be pinned down for so long and the best and brightest have been unfairly penalized with the rest. And let me remind you, this patch of softness in shares is only ephemeral and now is the time to act.
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 4 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: How do you see the markets playing out in 2020?
A: Well, I’m looking at small single-digit positive returns with a lot of volatility. Much of this year’s performance—30% in the S&P 500 (SPY), up 56% for the Mad Hedge Fund Trader—has already been pulled forward from 2020, thanks to super low interest rates and massive deficit spending. So, the more money we make now, the less money we make next year.
Q: How deep will the next recession be?
A: I’m looking for two quarters of small negative numbers like -0.1% or -0.2%, and then it’s off to the races again. That’s when the Golden Age of the Next Roaring Twenties starts, which I have already written a book about (click here).
And it’s possible we may not even see any negative numbers on a quarterly basis; we may just get close to zero, threatening it without actually breaking it. Of course, you could still get a 20% correction in the overall stock market if they only THINK we are going into recession, which has happened many times in the last 10 years.
Q: Are you expecting a market crash?
A: No; I do expect a meaningful pullback but frankly, right now, I do not see the conditions in place for that. None of the traditional causes of recessions, high-interest rates or high oil prices, are evident yet. The biggest threat to the market right now is the 2020 presidential election. And we are at a 14-year high in stock valuations.
Q: How bad will it get for car makers, and will the Tesla (TSLA) plant in Germany affect sales for European cars?
A: European carmakers have already been badly affected by Tesla, with Tesla taking over practically the entire luxury end of the market—that’s why companies like Mercedes, Audi and BMW are doing so badly with their shares, and they’re so far behind it’s unlikely they’ll ever catch up. The Berlin factory, I believe, is a battery factory, and after that, there will be a vehicle production factory, probably somewhere in eastern Europe where the cost basis is much lower.
Q: Double Line Capital’s CEO Jeff Gundlach says the US will get crushed in the next recession? Do you agree with him?
A: Well, my first advice to you is never take stock advice from a bond trader. Jeff Gundlach makes these spectacular forecasts, but the timing can be terrible. He can be wrong for 9 months before they finally turn. So, you can go out of business trading off of Jeff Gundlach’s stock advice, though his bond advice is valuable.
Q: Do you have any good recommendations for dividend stocks?
A: Yes, look at the entire cellphone towers REIT sector. That will be a growth sector next year with 5G rolling out and they have very high dividend yields. We’re going to get a significant increase in the number of cell towers thanks to 5G, and there are REITs specifically dedicated to cellphone towers. An example is Crown Castle (CCI), which has a generous 3.45% dividend yield.
Q: Are we in the final stages of a blow-off top for the stock market?
A: Yes, but blow-off tops can continue for many months, so don’t rush to sell short. However, next time the VIX gets down to 11, start buying six-month call options on the Volatility Index (VIX) at the $20 strike price. Go far out in the calendar to minimize time decay and far out of the money on strike prices to maximize your bang per buck.
Q: Gold had a nice day on Monday—is this the start of a reversal from the selling pressure?
A: No, as long as the market is pushing to new highs, which it seems to be doing—you don’t want to be anywhere near gold; wait for a better opening lower down.
Q: Are you sending Trade Alerts out on the Mad Hedge Biotech & Healthcare letter?
A: Not in the form that we see in Global Trading Dispatch or the Mad Hedge Technology Letter. Essentially, everything we’ve put out so far has been a long term buy. Most people know nothing about these sectors and we’re trying to get them into buyable names. So far, we’ve issued “BUYS” for 20 different companies; all of them have gone straight up. So, it’s really more of a long term buy-in hold situation. Since we’re in the very early days of the boom in biotech and healthcare stocks, you don’t want to leave money on the table with short term trade alerts for call spreads when there is a double or triple in the stock at hand. We are doing call spreads in the main market where most stocks are already at all-time highs in order to limit our risk.
Q: Fidelity just said that 50% of baby boomers who manage their own portfolio should rebalance it. What do you think is the best way to optimize my portfolio, as a baby boomer born in 1954?
A: You should always rebalance every year, especially when you get enormous moves in single sectors. The interesting thing this year is that everything went up, so you may not need to rebalance that much. When I say rebalance, I’m referring to rebalancing your weightings of stocks vs bonds. If you’re over 50, you want to have roughly a 50/50 ratio on those. That would suggest pairing back some of your equity weightings, increasing your bond weighting because stocks (SPY) (30% total return) have risen a lot more than bonds (TLT) (19% total return) this year.
Q: Marijuana stock Tilray (TLRY) has just had a pitiful year going from $100 to $20 and missed earnings targets for 4 for straight quarters. Could this go to zero?
A: Yes; after all, how hard is it to grow a weed? I never bought the story on the whole marijuana sector, not only because they are not allowed to participate in the financial sector. It’s an all-cash business; you hear about people moving around suitcases full of $100 bills doing deals in Oakland and Denver. I believe anybody can do this. My real estate agent is quitting his business to go into cannabis farming. Additionally, they’re getting a lot of competition from the black market where everybody used to buy their marijuana because it’s tax-free. There’s about a 40% price difference between the tax-paying legal form of marijuana and the tax-free black market where people used to get their marijuana. There’s no great value added there. It’s not like they’re designing a 96 stack microprocessor.
Q: What do you think about Ali Baba (BABA), the Chinese internet giant?
A: I love it long term. Short term, it will be subject to trade war gyration; so use the big dips to buy into it because long term we come out of this.
Mad Hedge Technology Letter
December 6, 2019
Fiat Lux
Featured Trade:
(AUGMENTED REALITY IS HEATING UP),
(AAPL), (LITE), (QCOM), (NVDA), (ADSK), (FB), (MSFT), (SNAP)
First, what is augmented reality for all the newbies?
Augmented reality is an interactive experience of a real-world environment where the objects that reside in the real world are enhanced by computer-generated perceptual information, sometimes across multiple sensory modalities.
Augmented reality (AR) went rival in 2016 when the Pokemon Go mania captivated everyone from children to adults.
No sooner than 2021, the AR addressable market is poised to mushroom to $83 billion - a sizeable increase from the $350 million in 2018.
Much like machine learning, corporations are learning to marry up this technology with their existing products supercharging the performance.
Ulta Beauty, for example, has acquired AR and artificial intelligence start-ups to help customers digitally test the final appearance of makeup before users purchase the product.
That is just one micro example of what can and will be achieved.
Looking deeper into the guts, Qualcomm (QCOM) is hellbent on making their chips a critical part of the puzzle.
The company is better known for a telecom and a semiconductor play, not often lumped in with a list of AR stocks.
Qualcomm is strategically positioned to capitalize on the integration of augmented reality in mainstream corporate business embedding their chips into the devices.
Maximizing Qualcomm’s future role in the industry, the company announced in 2018 that it would be developing a chipset specifically for AR and VR applications.
This broad-based solution will make it easier for other developers to bring new glasses to the marketplace.
Autodesk (ADSK) is one of my favorite software stocks and a best of breed of industry design.
They sell 3D rendering software to designers and creators by offering a platform in which they can transform 2D designs into digital models that are both interactive and immersive, creating compelling experiences for end-users.
Autodesk has an array of powerful software suites to augment virtually any application, such as 3ds Max, a 3D modeling program; Maya LT game development software; its automotive modeling program VRED; and Forge, a development platform for cloud-based design.
Facebook (FB) has been piling capital into AR for years.
CEO Mark Zuckerberg wants to create an alternative profit-driver and is desperate to wean his brainchild from the digital ad circus.
One example is Facebook’s Portal TV and its Spark AR which is the platform responsible for mobile augmented reality experiences on Facebook, Messenger, and Instagram.
It supplies the virtual effects for consumers to play around with, but it is yet to be seen if consumers gravitate towards this product.
Lumentum (LITE) is the leader in 3D-sensing markets developing cloud and 5G wireless network deployments.
They manufacture 3D sensor lasers that can be used with smartphones to turn handsets into a sort of radar. Sensors are clearly a huge input in how AR functions along with the chips.
CEO of Apple (AAPL) Tim Cook put it best when he earlier said, “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.”
He said that in 2016 and AR has yet to mushroom into the game-changing sector initially thought partly because the roll-out of 5G is taking longer than first expected.
Apple consumers will need to then adopt a 5G device or phone to really get the AR party started and that won’t happen until the backend of next year.
My initial channel checks hint that the Cupertino firm is planning a 5.4-inch model, two 6.1-inch devices, and one 6.7-inch phone, all of which will support 5G connectivity.
I surmise that Apple’s two premium devices will feature “world-facing” 3D sensing, a technology that could help Apple boost its augmented-reality capabilities and support other feature improvements on its priciest devices.
Apple has had a big hand in Lumentum's growth and will continue to buy their sensors, but other key component suppliers will get contracts such as Finisar, a manufacturer of optical communication components and subsystems.
Apple planned to debut AR glasses by 2020, but the rollout is now delayed until 2022.
They are clearly on the back foot with Microsoft (MSFT) further along in the process.
Microsoft already has a second iteration of its AR headset, HoloLens, and is compatible with several apps and has integration with Azure as well.
The head start of 2 years could really make a meaningful impact and might be hard for Apple to recover.
Facebook isn’t the only social media company going full steam into AR, Snap (SNAP) recently unveiled its newest spectacles, which feature AR elements.
Another application of AR is autonomous driving with Nvidia working on improving the driving experience by fusing AR with artificial intelligence.
Nvidia (NVDA) is already thinking about the next generation of AR technologies with varifocal displays, which improve the clarity of an object for a user.
It will take time to transform our relationship with AR, the infrastructure is still getting built out and many people just don’t have a device that will allow us to tap into the technology.
Investors must know that AR-related stocks will start to appreciate from the anticipation of full sale adoption and there could be a killer app that forces the mainstream user to take notice.
Until then, companies jockey for position and hope to be the ones that take the lion’s share of the revenue once the technology goes into overdrive.
Mad Hedge Technology Letter
November 25, 2019
Fiat Lux
Featured Trade:
(AI HAS REACHED FARTHER THAN YOU THINK),
(AMZN), (MSFT), (AAPL)
I was lucky enough to get my hands on the Deloitte Private Technology Trends report named, “Seizing Opportunity.”
I’ll break down some of the gems I took away that will give us insight into the current state of technology.
This might not be necessarily a new idea because artificial intelligence has been around for a while, but it certainly is gaining steam with respondents placing greater value on artificial intelligence to drive business results.
Firms are using AI for analysis automation 48% of the time in 2019 versus 30% in 2018, putting the responsibility on this technology to super-drive profits.
It’s not a surprise that big data analysts have become one of the most sought-after commodities in Silicon Valley.
It’s appropriate to say that the FANGs have pulled away from any resemblance of competition in 2019 and this if forcing many mid-market and private companies to view talent and emerging technologies as the x-factors to stay competitive.
Behemoth tech companies have the luxury of cheap access to capital to buy out competition or break it by throwing money at problems until they can copy the technology and scale it applying force multiplier ecosystems to cross-pollinate and intertwine services with each other.
These same companies buy back their own stock with cheap capital enriching stakeholders and management.
In fact, Apple (AAPL) is buying back so much stock that it will have bought out its entire trove of stock by 2030 to effectively go private.
Deloitte found that 43% say they are spending more than 5% of their firm’s revenue on technology, a 15-point increase since 2016.
More than half of respondents forecast annual growth rates of 11% or higher and 68% plan to hire to harness the emerging technology.
Another trend that will pick up steam that I have noted before is the predictive analytics and legacy system modernization, and this is topping private companies’ investment priorities list.
In fact, the number of private companies surveyed using predictive analytics to diagnose business results skyrocketed 65% over the past five years.
Firms are prioritizing information security risks, the adoption of 5G technology, and business innovation over the next 365 days.
Digital disruption is the norm du jour.
Firms expect shifts in sales (55%), marketing (50%), and supply chain roles (49%) in the next 3-5 years.
In preparation, 54% of mid-market and private companies are re-skilling employees and 52% are reconfiguring jobs to accommodate this shift.
Also, 72% believe internal development and reskilling is a method to enhance employees’ potential because of the exorbitant costs of talent acquisition.
Over two-thirds (69%) will construct new talent acquisition strategies to marry it up with the trend of hiring in data analytics, AI and other emerging technologies.
In a major reversal, respondents are less likely to seek out crowdsourcing and gig economy workers because these types of workers are less effective than full-time workers and have high turnover rates.
More than 32% of private companies acknowledge that embedded value is trending towards machine learning, robotic process automation and other cognitive capabilities, a 12% increase from 2018’s survey results.
Although executives are experiencing greater benefits from AI technologies, more than one-half of respondents (55%) are worried about the use of AI, particularly when it comes to HR decision-making.
Personally, I believe using AI in HR is mostly flawed.
In short, firms are doubling down on “emerging technologies” and to combat the superior business models of big tech companies.
They almost have no choice.
These conditions favor the status quo of behemoth tech titans who can invest in machine learning and artificial intelligence because of their cheap sources of capital.
From the data, smaller companies are desperate to hang on to their talent because of a shrinking talent pool and high talent acquisition cost.
The belief that leveraging foundational technologies to springboard revenue is only getting stronger. This favors the goliaths at the top because they have the resources to integrate these levers unlike companies further down the food chain.
This article could almost signal why investors can’t be short Apple (AAPL), Microsoft (MSFT), and Google (GOOGL).
They are at the vanguard of every major technology trend and they have demonstrated that they are definitely “seizing opportunity.”
Global Market Comments
November 18, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MELT UP IS ON)
(SPY), (AAPL), (UBER), (SCHW), (BA), (TSLA), (DIS), (NFLX), (TLT)
All of a sudden, and without warning, a buying panic has ensued in the stock market, breaking it out of a tedious two-year range.
The many concerns that kept investors out of stocks, like the trade war, interest rates, and a global economic slowdown, were shaken off like water off the back of a wet dog.
I could see all this coming. Even with my Mad Hedge Market Timing Index at 86, and trading as high as 91, screaming “SELL” I have been ignoring it. It usually has to spend 2-4 weeks at these elevated levels to make a real top anyway. Hedge fund compatriots who were sucked into selling too early by their own inferior in-house algorithms have been stopping out in great pain.
I’ll tell you the people who are really screwed by this move. Those who watched the economic data deteriorate all year, cut their equity allocations to the bone, and only started chasing the market upward once it broke new ground. It is a strategy that can only end in tears.
We here at Mad Hedge Fund Trader did a lot better. Followers of Global Trading Dispatch missed the breakout but bought every major dive of 2019. With double a good year’s performance in hand, we have no need to chase.
The newer Mad Hedge Technology Letter and Mad Hedge Biotech and Healthcare Letter have continued to go long pedal to the metal bringing in double-digit gains for all. Above all, we took profit on no less than four positions on Friday.
Can the market grind higher? Absolutely, yes. The world is awash in cash looking for any kind of return, and US stocks, with a (SPY) 1.81% dividend, are among the world’s highest yielding. In fact, the move could continue until the end of the year.
When will I come back in? After we get a substantial dip. Disciplines are useless unless you stick to them. In the meantime, while stocks are going crazy, there is fertile ground to harvest in other asset classes. I bought bonds (TLT) at the bottom last week and they are already performing nicely.
If you remember, I sold short, and then bought oil (USO) in September, taking advantage of a spate of volatility there. Such is the advantage of an all-asset class strategy I have been preaching and teaching for the past 12 years.
There will be no interest rate cuts in 2020, says Fed chairman Jay Powell, reading in between the lines. To do so would undermine our ability to get out of the next recession. We are still way below the 2.0% inflation target in this deflationary world.
The de-inversion of the yield curve is clearly driving stocks, with long term interest rates at last higher than short term ones. The markets are backing the recession out of the forecast. “Fear of missing out” is replacing just fear.
Consumer Prices rose faster than expected as tariffs feed into prices, up 0.4% in October. It’s going to take a lot more than that to move the needle on inflation. The YOY rate climbed to 1.8%. Also, US Producer Prices jumped, up 0.4% in October, a six-month high. It’s going to take a lot more than this to start ringing the inflation bell.
Weekly Jobless Claims soared by 14,000 to 225,000. It’s the first big jump in many months. Is the employment top in? Is this the end of the beginning or the beginning of the end?
Charles Schwab (SCHW) trading accounts soared 31%, in the wake of the commission cut to zero. What happens when you lower the price? You sell more of them. It’s a classic law of supply and demand.
Uber founder dumped stocks, as Travis Kalanick unloads $700 million worth of shares. He’s not selling because he can’t think of new ways to spend the money. It’s not exactly a “BUY” recommendation, is it? Avoid (UBER) like the plague.
Apple hit a new all-time high at $264, on three broker upgrades, with the high end reaching $290. The market capitalization tops $1.2 trillion, making it the world’s largest publicly-traded company. It looks like I’m going to have to increase my own target from a conservative $200. I made this prediction when the newsletter started a decade ago and the share traded under $20. People said I was nuts, except Steve Jobs.
The Tesla Model 3 returns to “reliable” list, from Consumer Reports. They had been taken off due to pieces falling off new cars and failing transmissions exactly at the 44,000-mile mark. It was all covered by warranty, of course. Looks like Elon is figuring out how to put these things together and stay that way. It follows an onslaught of good news about the company that has wiped out the shorts. Who is last on the quality list now? Cadillac. Buy (TSLA) on dips.
US short interest falls 1.6%, to 16.8 billion shares, as hedge funds scramble to limit losses. It’s got to be at least half the current net buying.
Disney launched its streaming service, Disney Plus, at $6.99 a month. The site crashed from overwhelming demand. It’s a problem I wish I had. Netflix (NFLX) won’t go under but their growth will be clearly impaired. Let the streaming wars begin! Buy (DIS) on dips.
US Productivity plunged sharply, down 0.3% in Q3. It’s completely a result of the trade war-induced freeze on capital spending by US businesses this year. It means we’re eating out seed corn to grow.
This was a week for the Mad Hedge Trader Alert Service to stay level. With only one position left, a bargain long in (TLT), not much else was going to happen. My long position in Boeing (BA) expired on Friday at its maximum profit point.
By the way, running out of positions at a market top is a good thing.
My Global Trading Dispatch performance held steady at +349.38% for the past ten years, pennies short of an all-time high. My 2019 year-to-date leveled out at +48.68%. So far in November, we are down a miniscule -0.31%. My ten-year average annualized profit held steady at +35.17%.
With my Mad Hedge Market Timing Index sitting around the sky-high 86 level, it is firmly in “SELL” territory and at a three-year high. The markets have been up in a straight line for 2 ½ months.
The coming week is pretty non-eventful of the data front after last week’s fireworks. Maybe the stock market will be non-eventful as well.
On Monday, November 18 at 11:00 AM, the US NAHB Housing Market Index for November is out.
On Tuesday, November 19 at 9:30 AM, US Housing Starts for October are released.
On Wednesday, November 20 at 2:00 PM, the Fed’s FOMC Minutes for their October meeting are published.
On Thursday, November 7, at 8:30 AM, Weekly Jobless Claims come out. At 11:00 AM the October Existing Home Sales are announced.
On Friday, November 8 at 11:00 AM, the University of Michigan Consumer Sentiment is out.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I am going to see the latest Harry Potter play on Saturday, Harry Potter and the Cursed Child. It’s a reward for two kids who got straight A’s on their report cards. They seem to be strangely good at math. Maybe the apple doesn’t fall far from the tree.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 15, 2019
Fiat Lux
Featured Trade:
(NOVEMBER 13 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (TSLA), (FXI), (SPY), (AAPL), (M), (BA), (TLT)
