The five largest tech companies last Fall 2020, Apple, Microsoft, Amazon, Alphabet, and Facebook, accounted for 23.8% of the S&P 500 and now that figure has surpassed 25%.
As much as we like to bring out the champagne and celebrate how well big tech has done, the euphoric times often lay the groundwork for the dramatic downfall.
A few warning signs have started to rear their ugly head.
These business models are rock-solid now, but that doesn’t mean the people who manage these business models are always rock-solid too.
Today, I would like to zone in on one of the architects of big tech that have taken one of these behemoths and juiced it up for shareholders — Alphabet CEO Sundar Pichai.
I am not arguing that returning capital to shareholders is bad, but when other critical elements are ignored, it sets the stage for toxicity to fester from the top down.
Don’t get me wrong, revenue and profits are charting new highs every three months for Alphabet.
They are now worth $1.67 trillion and rising. Google and its array of apps have made themselves indispensable in the lives of everyday Americans.
But an increasingly hostile workplace is taking hold that has been made worse by decisive leadership and improving the company has been shelved for a stultifying mindset of incrementalism and bureaucracy.
This is the 2021 version of Alphabet and attrition rates have soured at the management level.
Many of these key managers blame Pichai for leaving mentioning a bias toward inaction and a fixation on public perception as the real mantra inside Google headquarters.
This has created a workplace that has devolved into culture fights, and Pichai’s attempts to “wait out” the problems have an air of arrogance about it that employees don’t like.
Internal surveys are also hard to analyze as employees are indirectly encouraged not to speak out against positions of authority.
However, recently left employees do admit that Google is a more professionally run company than the one Pichai inherited six years ago.
During Pichai’s leadership, it has doubled its workforce to about 140,000 people, and Alphabet has tripled in value. It is not unusual for a company that has grown so quickly to get cautious.
At least 36 Google vice presidents have left the company since last year, according to profiles from LinkedIn.
Google executives proposed the idea of acquiring e-commerce firm Shopify as a way to challenge Amazon in online commerce a few years ago.
Rumor has it that Pichai was turned off by the high price of the asset even though SPOT has tripled in value since then.
As time goes by, Pichai is becoming known as the steward of what Google built before he got there and just a guy there to squeeze out the numbers.
Google was once known as the scruffy start-up and it’s only natural that it has become more conservative in its approaches. They simply have more to lose now.
The meteoric growth has also led to rising concerns about the U.S. stock market becoming increasingly concentrated in a just a few names.
The total market capitalization of U.S. tech stocks reached over $11 trillion, eclipsing that of the entire European market—including the UK and Switzerland, which is now valued at $9 trillion.
Although there are some flaws popping up in Google’s business model, and management appears to be getting worse, I don’t believe we are even close to any sort of in-house meaningful reckoning that would adversely affect its share price.
The external risks are currently far greater than the risk of Google blowing up from the inside.
And while I do acknowledge, it might not be the workplace it once was and much less than ideal, it still pumps out record earnings and the degree to which it outperforms earnings’ expectations is uncanny.
That’s why I would recommend trading this stock aggressively in the short-term while rumors of broken management model are unfounded, because fundamentally and technically, it’s hard to find a better business model and more beautiful chart.
While the golden goose is feeding you eggs, you eat as many eggs as you can and ride this trade until Google management finally runs into REAL problems and I am not talking about petty anti-trust fines by European regulators.
Simply put, even the best companies run into vanity problems that are storms in teacups. Artificially creating problems sure has to be a first world problem and until there is true evidence that Google’s ad tech is being dismantled, I don’t believe investors have anything to worry about with the ad dollars coming in.
Big tech is on the verge of breaking out after being range-bound, and it would be daft to overthink this move and not participate in the melt-up.
Short-term, I would be inclined to buy on any big or little dip in GOOGL, take profits, and wait for the next dip to get back into the same position.
https://www.madhedgefundtrader.com/wp-content/uploads/2021/06/pichay.png410744Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-06-23 15:02:502021-06-28 14:58:24Ignore the Google Complaints
I often review the portfolios of new concierge subscribers looking for fundamental flaws in their investment approach and it is not unusual for me to find some real disasters.
The Armageddon scenario was quite popular a decade ago. You know, the philosophy that said that the Dow ($INDU) was plunging to 3,000, the US government would default on its debt (TLT), and gold (GLD) was rocketing to $50,000 an ounce?
Those who stuck with the deeply flawed analysis that led to those flawed conclusions saw their retirement funds turn to ashes.
Traditional value investors also fell into a trap. By focusing only on stocks with bargain basement earnings multiples, low price to book values, and high visible cash flows, they shut themselves out of technology stocks, far and away the fastest-growing sector of the economy.
If they are lucky, they picked up shares in Apple a few years ago when the earnings multiple was still down at ten. But even the Giant of Cupertino hasn’t been that cheap for years.
And here is the problem. Tech stocks defy analysis because traditional valuation measures don’t apply to them.
Let’s start with the easiest metric of all, that of sales. How do you measure the value of sales when a company gives away most of its services for free?
Take Google (GOOG) for example. I bet you all use it. How many of you have actually paid money to Google to use their search function? I would venture none.
What would you pay Google for search if you had to? What is it worth to you to have an instant global search function? Probably at least $100 a year. I would pay $10,000 as I use it all day long. With 92.05% of the global search market comprising 2 billion users, that means $200 billion a year of potential Google revenues are invisible.
Yes, the company makes a chunk of this back by charging advertisers access to these search users, generating some $55.31 Billion in revenues and $17.93 billion in net income in the most recent quarter. But much of the increased value of this company is passed on to shareholders not through rising profits or dividend payments but through an ever-rising share price. If you’re looking for dividends, Google doesn’t exist. It is also very convenient that unrealized capital gains are tax-free until the shares are sold, which may be never.
I’ll tell you another valuation measure that investors have completely missed, that of community. The most successful companies don’t have just customers who buy stuff, they have a community of members who actively participate in a common vision, which is then monetized. There are countless communities out there now making fortunes, you just have to know how to spot them.
Facebook (FB) has created the largest community of people who are willing to share personal information. This permits the creation of affinity groups centered around specific interests, from your local kids’ school activities to municipality emergency alerts, to your preferred political party.
This creates a gigantic network effect that increases the value of Facebook. Each person who joins (FB) makes it worth more, raising the value of the shares, even though they haven’t paid it a penny. Again, it’s advertisers who are footing your tab.
Tesla (TSLA) has one million customers willing to lend it $400 billion for free in the form of deposits on future car purchases because they also share in the vision of a carbon-free economy. When you add together the costs of initial purchase, fuel, and maintenance savings, a new Tesla Model 3 is now cheaper than a conventional gasoline-powered car over its entire life.
REI, a privately held company, actively cultivates buyers of outdoor equipment, teaches them how to use it, then organizes trips. It will then pursue you to the ends of the earth with seasonal discount sales. Whole Foods (WFC), now owned by Amazon (AMZN), does the same in the healthy eating field.
If you spend a lot of your free time in these two stores, as I do, The United States is composed entirely of healthy, athletic, good-looking, and long-lived, intelligent people.
There is another company you know well that has grown mightily thanks to the community effect. That would be the Diary of a Mad Hedge Fund Trader, one of the fastest-growing online financial services firms of the past decade. What is the value of our community? To give you a hint, the price of my Global Trading Dispatch has soared from $29 a month to $3,000 a year.
We have succeeded not because we are good at selling newsletters, but because we have built a global community of like-minded investors with a common shared vision around the world, that of making money through astute trading and investment.
We produce daily research services covering global financial markets, like Global Trading Dispatch, the Mad Hedge Technology Letter, and the Mad Hedge Biotech & Healthcare Letter. We teach you how to monetize this information with our books like Stocks to Buy for the Coming Roaring Twenties and the Mad Hedge Options Training Course.
We then urge you to action with our Trade Alerts. If you want more hands-on support, you can upgrade to the Concierge Service. You can also meet me in person to discuss your personal portfolios and my Global Strategy Luncheons.
The luncheons are great because long-term Mad Hedge veterans trade notes on how best to use the service and inform me on where to make improvements. It’s a blast.
The letter is self-correcting. When we make a mistake, readers let us know in 60 seconds and we can shoot out a correction immediately. The services evolve on a daily basis.
It all comes together to enable customers to make up to 20% to 100% a year on their retirement funds. And guess what? The more money they make, the more products and services they buy from me. This is why I have so many followers who have been with me for a decade or more. And some of my best ideas come from my own subscribers.
So, if you missed technology now what should you do about it? Recognize what the new game is and get involved. Microsoft (MSFT) with the fastest-growing cloud business offers good value here. Amazon looks like it will eventually hit my $5,000 target. You want to be buying graphics card and AI company NVIDIA (NVDA) on every 10% dip. It’s going to $1,000.
You can buy the breakouts now to get involved or patiently wait until the 10% selloff that usually follows blowout quarterly earnings.
My guess is that tech stocks still have to double in value before their market capitalization of 26% matches their 50% share of US profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.
I Finally Found Tech Stocks!
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/John-Thomas-Beach-e1416856744606.png400276Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-06-23 10:02:152021-06-23 10:11:07Why You Missed the Technology Boom and What to Do About it Now
Below please find subscribers’ Q&A for the June 16 Mad Hedge Fund TraderGlobal Strategy Webinar broadcast from Lake Tahoe, NV.
Q: Does Copper (FCX) look like a buy now or wait for it to drop?
A: I would buy ⅓ now, ⅓ lower down, ⅓ lower down still. Worst case we get down to $30 in Freeport McMoRan (FCX) from $37 today. A new internal combustion engine requires 40 lbs. of copper for wiring, but new EVs require 200 lbs. per car, and the number of EV cars is about to go from 700,000 last year to 25 million in 10 years. So, you can do the math here. It's basically 24.3 million times 200 lbs., or 1.215 billion tons, and that's the annual increase in demand for copper over the next 10 years. There aren’t enough mines in the world to accommodate that, so the price has to go up. However, (FCX) has gone up 12 times from its 2020 low and was overdue for a major rest. So short term it's a sell, long term it's a double. That's why I put the LEAPS out on it.
Q: Lumber prices are dropping fast, should I bet the ranch that it’ll drop big?
A: No, I think the big drop has happened; we’re down 40% from the highs, the next move is probably up. And that is a commodity that will remain more or less permanently in short supply due to the structural impediments put into the lumber market by the Trump administration. They greatly increased import duties from Canada and all those Canadian mills shut down as a result. It’s going to take a long time to bring those back up to speed and get us the wood we need to build houses. Another interesting thing you’re seeing in the bay area for housing is people switching over to aluminum and steel for framing because it’s cheaper, and of course in an earthquake-prone fire zone, you’d much rather have steel or aluminum for framing than wood.
Q: I didn’t catch the (FCX) LEAP, can you reiterate?
A: With prices at today's level, you can buy the 35 calls in (FCX), sell short the 40 calls, and get nearly a 177% return by January 2022. That's an absolute screamer of a LEAPS.
Q: How do you see the working from home environment in the near future after Morgan Stanley (MS) asked everyone to return?
A: Well that’s just Morgan Stanley and that’s in New York. They have their own unique reasons to be in New York, mostly so they can meet and shake down all their customers in Manhattan—no offense to Morgan Stanley, but I used to work there. For the rest of the country, those in remote places already, a lot of companies prefer that people keep working from home because they are happier, more productive, and it’s cheaper. Who can beat that? That’s why a lot of these productivity gains from the pandemic are permanent.
Q: Is there a recording of the previous webinar?
A: Yes, all of the webinars for the last 13 years are on the website and can be accessed through your account.
Q: What makes Microsoft (MSFT) a perfect-looking chart?
A: Constant higher lows and higher highs. They also have a fabulous business which is trading relatively cheaply to the rest of tech and the rest of the main market. Of course, they were a huge pandemic winner with all the people rushing out to buy PCs and using Microsoft operating software. I expect those gains to improve. The new game now is the “wide moat” strategy, which is buying companies that have near monopolies and can’t be assailed by other companies trying to break into their businesses. The wide moat businesses are of course Microsoft (MSFT), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL). That's the new investment philosophy; that's why money has been pouring back into the FANGs for a month now.
Q: Do you have any concerns about Facebook’s (FB) advertising ability, given the recent reduction of tracking capabilities of IOS 4.5 users?
A: Well first of all, IOS 4.5 users, the Apple operating system, are only 15% of the market in desktops and 24% of mobile phones. Second, every time one of these roadblocks appears, Facebook finds a way around it, and they end up taking in even more advertising revenue. That’s been the 15-year trend and I'm sticking to it.
Q: Is Caterpillar (CAT) a LEAP candidate right now?
A: Not yet, but we’re getting there. Like many of these domestic recovery plays, it is up 200% from the March lows where we recommended it. The best time to do LEAPS is after these big capitulation selloffs, and all we’ve really seen in most sectors this year is a slow grind down because there's just too much money sitting under the market trying to get into these stocks. Let’s see if (CAT) drops to the 50-day moving average at $185 and then ask me again.
Q: If you have the (FCX) LEAPS, should you keep them?
A: I would keep them since I'm looking for the stock to double from here over the next year. If you have the existing $45-$50 LEAPS, I would expect that to expire at its max profit point in January. But you may need to take a little pain in the interim until it turns.
Q: Should I bet the ranch on meme stocks like (AMC) and GameStop GME)?
A: Absolutely not, I’m amazed you haven't lost everything already.
Q: Do you think Exxon-Mobile (XOM) could rise 30% from here?
A: Yes, if we get a 30% rise in oil. We are in a medium-term countertrend rally in oil which will eventually burn out and take us to new lows. Trade against the trend at your own peril.
Q: Disneyland (DIS) in Paris is set to open. Is Disneyland a buy here?
A: Yes, we’re getting simultaneous openings of Disneyland’s worldwide. I’ve been to all of them. So yes, that will be a huge shot in the arm. Their streaming business is also going from strength to strength.
Q: How long will the China (FXI) slowdown last?
A: Not long, the slowdown now is a reaction to the superheated growth they had last year once their epidemic ended. We should get normalized growth in China at around 6% a year, and I expect China to rally once that happens.
Q: Have you changed your outlook on inflation, real or imagined?
A: I don’t think we’re going to have inflation; I buy the Fed's argument that any hot inflation numbers are temporary because we’re coming off of a one-on-one comparisons from when the economy was closed and the prices of many things went to zero. If you look at that inflation number, it had trouble written all over it. Some one third of the increase was from rental cars. One of the hottest components was used cars. You’re not going to get 100% year on year increases next year in rental or used cars.
Q: When you issue a trade alert, it’s always in the form of a call spread like the Microsoft (MSFT) $340-$370 vertical bull call spread. What are the pros and cons of doing this trade on the put side, like shorting a vertical bear put spread?
A: It’s six of one, half a dozen of the other. There are algorithms that arbitrage between the two positions that make sure that they’re never out of line by more than a few cents. I put out call spreads because they’re easier for beginners to understand. People get buying something and watching it go up. They don’t get borrowing something, selling it short, and buying it back cheaper.
Q: Will gold (GLD) prices go up?
A: Yes, when inflation goes up for real.
Q: What is the future of the gig economy? How will that affect Uber (UBER) and Lyft (LYFT)?
A: I like both, because they just got a big exemption from California on part time workers, and that is very positive for their business models.
Q: Do you think the government doesn’t want to cancel student debt because it will unleash inflation?
A: It’s the exact opposite. The government wants to forgive student debt because it will unleash inflation. If you add 10 million new consumers to the economy, that is very positive. As long as former students have tons of debt, horrible credit ratings, and are unable to buy homes or get credit cards, they are shut out of the economy. They can’t participate in the main economy by buying homes, shopping, or getting credit. The fact that the US has so many college grads is why businesses succeed here and fail in every other country. That should be encouraged.
Q: Where is the United States US Treasury Bond Fund (TLT) headed?
A: Short term up, long term down.
Q: Options premiums are not melting away much today; I hope they start decaying after the Fed announcement.
A: In these elevated volatility periods—believe it or not, the (VIX) is still elevated compared to its historic levels—they hang on all the way to the very last day, before expiration, before they really melt the time value on options. It really does pay to run these into expiration now. When the VIX was down at like $9-$10, that was not the case.
Q: I bought a short term expiration going long the (TLT) to hedge my position; was this smart?
A: Yes, but only if you are a professional short-term trader. If you are in front of your screen all day and are able to catch these short term moves in (TLT), that is smart. My experience is that most individual investors don’t have the experience to do that, don’t want to sit in front of a screen all day, and would rather be playing golf. Such hedging strategies end up costing them money. Also, remember that half of the moves these days are at the opening; they’re overnight gap openings and you can’t catch that intraday trading—it’s not possible. So over time, the people who take the most risk make the most money. And that means the people who don’t hedge make the most money. But you have to be able to take the pain to do that. So that’s my philosophy talk on risk taking.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trade
https://www.madhedgefundtrader.com/wp-content/uploads/2019/03/john-beer.png437510Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-06-18 10:02:382021-06-18 14:13:32June 16 Biweekly Strategy Webinar Q&A
No matter how you look at it, the stock market is definitely facing serious volatility these days. How long this uncertainty will last and whether it’s a sign of a looming market crash or correction is anybody’s guess.
On a positive note, the current situation will not cause panic to long-term investors. After all, it’s not right to base stock-buying decisions on the market’s behavior over the course of a few days, weeks, or even months.
Meanwhile, if a major bear market is on the horizon, then this could present a good opportunity to add resilient and recession-proof stocks to your portfolio.
In the biotechnology and healthcare sector, one stock comfortably fits the mold, and that's Johnson & Johnson, JNJ.
In terms of market capitalization, JNJ is one of the biggest—if not the biggest—pharma companies in the world, weighing in at roughly $450 billion.
It also holds an undisputed status as a Dividend King, which is a title granted to those companies that increase their payouts annually and consistently over the course of 50 years.
Actually, JNJ’s dividend-hiking streak has stretched to 59 straight years—and it doesn’t seem to be ending anytime soon.
To date, its quarterly dividend per share jumped by 5% from $1.01 to reach $1.06.
That’s why it comes as no surprise that it’s one of the stocks that investors come running to for safety and stability during periods of volatility.
In its first quarter earnings report in 2021, JNJ showed off by outperforming revenue expectations of $21.98 billion to record $22.32 billion instead.
Its EPS also beat estimates of $2.34 and instead reported $2.59. Despite the less-than-stellar condition of the US economy in the past months, JNJ still managed to boost its sales in the first quarter and increased its sales by 7.9% year-over-year.
All of JNJ’s core business segments also expanded their revenues this quarter.
For instance, its Janssen pharmaceutical arm, which was in charge of its COVID-19 vaccine, saw a 9.6% year over year increase in sales to reach $12.19 billion.
Even its medical devices segment experienced an improved performance with a 7.9% bump to record $6.57 billion for this quarter alone.
Looking at the programs in its pharmaceutical division, it’s clear that JNJ has a strong focus on six areas: cardiovascular, pulmonary hypertension, immunology, neuroscience, metabolism, and, of course, oncology.
In fact, three of JNJ’s pharmaceutical treatments raked in more than $4 billion in sales in 2020.
The list was topped by Stelara, which is a drug for Crohn’s disease, psoriasis, ulcerative colitis, and psoriatic arthritis, at $7.7 billion.
It was followed by multiple myeloma treatment Darzalex at $4.2 billion.
The product of its collaborative work with AbbVie (ABBV), blood cancer drug Imbruvica, rounds up the list at $4.1 billion.
The sheer size and financial power of JNJ offer the company extensive M&A opportunities—and it’s definitely taking advantage of that to continue boosting its revenue streams.
In August 2020, amid the COVID-19 pandemic, JNJ acquired Momenta Pharmaceuticals for $6.5 billion. This all-cash transaction added a slew of drug candidates that enhanced JNJ’s immune-mediated and rare disease pipeline programs.
Jumping into the telehealth bandwagon, JNJ has invested in Madison Thirty around the same time last year as well.
Much like Teladoc (TDOC), this small telehealth company has also attracted attention since it started and thus far raised $70 million in funding.
Boosting its presence in the merging world of technology and medicine, JNJ recently revealed its six-armed robotic surgical assistant, Ottava.
Basically, Ottava will be a high-tech guidance system and assistant to surgeons in operating rooms.
Throughout its history, JnJ has proven itself to be a top biopharmaceutical stock —full stop.
A global leader in the healthcare industry, JNJ is one of only two corporations that hold an AAA credit rating from Standard & Poor. The other company is Microsoft (MSFT).
It has been generating record profits and boosting its dividends. More importantly, investors can expect JNJ stock to serve as a healthy long-term wealth generator.
It prides itself on a strong triad of business segments that continuously drive growth: consumer health, pharmaceuticals, and medical devices.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-05-27 15:00:462021-05-31 15:56:52A Safe Stock for Your Peace of Mind
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