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Why You Missed the Technology Boom and What to Do About It Now

I often review the portfolios of new 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 U.S. 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 justified those 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 10. 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 (GOOGL) for example. I bet you all use it. How many of you have actually paid money to Google to use its 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. With 70% of the global search market comprising 2 billion users that means $140 billion 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 $26.26 billion in revenues and $3.2 billion in net income in the most recent quarter. It would have been an $8.2 billion profit without the outrageous $5 billion fine from the European Community.

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.

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 actively participating 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 400,000 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 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. 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 a daily research service covering global financial markets, such as Global Trading Dispatch and the Mad Hedge Technology Letter. We teach you how to monetize this information with our books such as 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 at 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 50% to 60% 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 hit my $2,000 target early. You want to be buying graphics card and A.I. company NVIDIA (NVDA) on every 10% dip.

You can buy the breakouts now to get involved, or patiently wait until the 10% sell-off 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 U.S. profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.

 

 

 

 

 

May I Show You to Your Table?

Cyber Security is Only Just Getting Started

It looks like the cyber security sector is about to take off like a rocket once again. There could be another 25%-50% in it this year.

The near destruction of Sony (SNE) by North Korean hackers last November has certainly put the fear of God into corporate America. Apparently, they have no sense of humor whatsoever north of the 38th parallel.

As a result, there is a generational upgrade in cyber security underway, with many potential targets boosting spending by multiples.

It?s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three star about the long-term implications of the Iran peace deal.

He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been, silently and invisibly, over the past 15 years.

All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.

The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.

The problem is that when wars become cheaper, you fight more of them, as is the case with online combat.

You probably don?t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon?s mainframe computers at least seven times.

This was a neat trick because these computers were in stand alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.

In the process, they obtained the designs of all of out most advanced weapons systems, including our best nukes. What have they done with this top-secret information?

Absolutely nothing.

Like many in senior levels of the US military, the Chinese have concluded that these weapons are a useless waste of valuable resources. Far better value for money are more hackers, coders and servers, which the Chinese have pursued with a vengeance.

You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.

Try sending an email to someone in the middle Kingdom with a gmail address. It is almost impossible. This is why Google (GOOG) closed their offices there years ago.

I know about these things because several Chinese readers are complaining that they are unable to open my Trade Alerts, or access their foreign online brokerage accounts.

As a member of the Joint Chiefs of Staff recently told me, ?The greatest threat to national defense is wasting money on national defense.?

Although my brass-hatted friend didn?t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.

Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California just across the water from my Bay Area office. The company?s core products are advanced firewalls designed to provide network security, visibility and granular control of network activity based on application, user, and content identification.

Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.

The really interesting thing about this industry is that there are no real losers. That?s because companies are taking a layered approach to cyber security, parceling out contracts to many of the leading firms at once, looking to hedge their bets.

To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.

This makes a basket approach to the industry more feasible than usual. You can do this through buying the $435 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts Cyberark Software (CYBR), Infoblox (BLOX) and FireEye (FEYE) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.

For more information about (HACK), please click here: http://www.pureetfs.com/etfs/hack.html.

And don?t forget to change your password.

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