Tech Letter Archives

5 Tips to Help Navigate the Tech Market Correction

The Nasdaq technology index has been on a bull run for the ages.

You didn’t think it was going to last forever, did you?

In the past 10 years, we’ve only had three little blips, one in 2019 from the temper tantrum, then the 2020 pandemic selloff, and now the 2022 inflation problem.

It’s more or less been strong performance aside from those quick corrections where the Nasdaq bounced back even stronger.

The truth is that meaningful corrections don’t happen that often and every time one has occurred, it’s been a great buying opportunity.

I know it sounds scary in the face of red drowning out your screen, but the silver lining is that this will give readers a chance to grab high quality stocks that are rarely, if at all, on sale.

Here are a few tips on how to navigate a tech market correction.

Put Market Corrections in Context

Since 1928, a correction of at least 10% has happened about once every 19 months – not that often. Of the 27 corrections since World War II, the index has experienced an average decline of 13.7%.

This highlights the simple truth that investing is not a contest of who can dump stocks as fast as possible.

If you’re convinced a sell-off is on the horizon, consider making the following changes.

Take Profits

Sell stocks in your portfolio that you think have peaked.

Alternatively, you may want to establish a selling strategy that dictates when you sell stocks and remove any emotion from the decision.

This type of strategy is a method of managing stress and you will avoid misusing that fat finger to get rid of your best assets.

Focus on Asset Allocation

Preside over a healthy mix of different types of investments that will hold their value until you can jump back into tech stocks.

Don’t put all your money into Facebook (FB) and feel wounded after it drops 25% after their business model collapses (which is essentially what just happened.)

Rarely will everything go down all at once.

The tech sector usually experiences more downside in a correction than others due to their high growth nature.

This is when dividend-paying stocks start to outperform and a huge rotation rapidly takes place.

Smarten Up by Placing Limit Orders

It is essential to always place limit orders and not market orders. With a limit order, you specify the price you want to buy or sell at, and the trade is only executed at that price or better.

Meanwhile, opting for a market order means your trade is at the whim of the market. The final filled order could be a few percentage points of where you expected it.

This nasty surprise is easy to avoid.

Don’t Lose Sight of Your Ultimate Goal

Even if you’re a buy-and-hold investor, you’ll eventually want to sell some of your investments.

Minimizing risks is the name of the game and most investors have a number in mind at the end of the day.

This number is complemented by a timeline; don’t lose sight of the path towards that, and the process needed to achieve that final number.

Markets almost never sell off by 20% and many of these market corrections are great chances to get into the best of tech.

Let’s be honest, tech has been very expensive the last few years and to get a great company like Google, Apple, or Microsoft on discount is something that people pray for.

The tech market has always recovered from its short- and longer-term market dips and this correction won’t be any different.

February 23, 2022 - Quote of the Day

Tech Letter

“AI doesn’t have to be evil to destroy humanity – if AI has a goal and humanity just happens to come in the way, it will destroy humanity as a matter of course without even thinking about it, no hard feelings.” – Said Founder and CEO of Tesla Elon Musk

February 18, 2022

Tech Letter

Mad Hedge Technology Letter
February 18, 2022
Fiat Lux

Featured Trade:

(AVOID ARKK)
(ARKK), (ARKG), (ARKX)

Avoid ARKK

Tech Letter

With a reported net worth of a few hundred million dollars, Ark Invests CEO Cathie Wood laid an egg in her interview yesterday defending the company’s lousy recent performance.

It wasn’t so much that tech has sold off and especially growth stocks have bore the brunt of the carnage, but it was her logic behind her answers that raises more questions than answers.

Doing a deep drive into her array of ETFs, there are some headscratchers.

For example, in her ARKX Space Exploration and Innovation ETF (ARKX), why is her 5^th biggest holding a Japanese construction company that specializes in making excavators Komatsu?

Her ETFs are full of these stocks that shouldn’t be there and she continues to bang on the drum about her portfolio possessing superior innovation.

Her second largest holding in this same ETF is a 3D printing ETF (PRNT) which also is illogical and has nothing to do with space exploration.

In her ARK Genomic Fund ETF (ARKG) her second largest position is Teladoc (TDOC) which provides remote doctor services through an app.

TDOC has nothing to do with genomics whatsoever.

Her flagship fund ARK Innovation ETF (ARKK) fund is down 60% in the past 365 years and it appears as if the pain is just starting, with huge drawdowns in many of her core holdings.

In the interview, she also gave some bizarre answers.

She reasoned to the viewer that the reason her team avoided Moderna (MRNA) is because the valuation is too high.

This is at the same time she completely ignores valuation for “innovation” stocks that aren’t interested in turning a profit because they are too “innovative.”

A company like TDOC has an EPS of -$5.5 and many of her key holdings are big loss makers which in the era of Central Bank hawkishness is a death knell.

Some of her other key holdings like Roku (ROKU) are down 25% just today and down 77% in the last 365 days.

TDOC is also down 77% in the last 365 days and 7% just today.

I mean for a net worth of a few hundred million dollars, surely, performance could be a little better, right?

What Cathy Wood misses completely is that being in the stock market is about the right and wrong timing which she behaves like it doesn’t exist because her time horizon is forever.

She likes to say “innovation is on sale,” but I would argue, quality is on sale and readers should migrate to higher ground to the likes of Amazon, Google, Apple, and Microsoft.

Wood's response was that other people “aren’t doing the research” which I find to be a ridiculous claim in itself.

In another absolute shocker, she played down inflation as something that has been more or less contained and will work itself through.

Then she highlighted all the “deflationary forces” as the reasons why inflation will be tamed which seems highly unlikely.

She plain out avoided many of the hard questions because she simply had no good response.

She stuck with the marketing pamphlet as if that was all she knew.

Wood also completely ignored anything related to tactical and active portfolio management and her plan is pretty much to stick with what she has even if there are 99% selloffs or drastic shifts in market conditions.

ROKU and TDOC are down 77% and she repeats the same general phrases as if we are in a bull market.

Readers wants to know what the next step is and how to strategically navigate through this bout of high volatility.

To shame the market and blame others on not “doing the research” is quite tone deaf and I could never recommend Cathy Wood and her ARKK fund to anyone.

To give her credit, she got the Tesla (TSLA) call spot on and crushed that one, but the real stock market people know that this industry is a what have you done for me lately industry and only when the tide goes out, we see who’s swimming naked.

ark

February 18, 2022 - Quote of the Day

Tech Letter

“My goal wasn't to make a ton of money. It was to build good computers.” – Said Co-Founder of Apple Steve Wozniak

February 16, 2022

Tech Letter

Mad Hedge Technology Letter
February 16, 2022
Fiat Lux

Featured Trade:

(AIRBNB SURGES AHEAD)
(ABNB)

Airbnb Surges Ahead

Tech Letter

Better book your summer vacation this year right now as home-sharing rental platform Airbnb (ABNB) revealed growth surpassing pre-pandemic performance and global travel is back with vengeance.

It’s highly likely that travel restrictions continue to fall by the wayside, opening up what could become the most furious travel season in the history of the human race.

This has spurred consumers to book their summer vacation rental many months in advance and it appears that no amount of supply will satisfy the summer travel season of 2022.

People have been dreaming about international travel for the past 2 years.

Airbnb has capitalized from their position as the nimble option, along with not having to provide the hardware to the final product.

They are just an internet platform that owns no houses.

Hotel companies like Marriott and Hilton have had empty hotels sitting idly while consumers choose to stay in a more rural setting for the past 2 years, within driving distances of big cities.

Another positive trend is Airbnb users choosing more expensive accommodations, which I understand with business travel reformatting itself to go straight into an Airbnb-based house or apartment.

The highest cost also relates to bigger unit sizes as home offices need to be absorbed into living situations.

Hotels have the handicap of needing to renovate their existing stock of rooms since the hotel layout is simply not as attractive as it once was.

Airbnb has a massive advantage here that will lead to margin expansion.

Customers need fast Wi-Fi, a kitchen to at least make their morning coffee, and more amenities that a personal home might offer such as a washing machine.

Even if there is another pandemic on the horizon, the work from home narrative will fortify itself for good with no back-to-office plans in sight.

Airbnb would benefit as Airbnb-hosted units are the best choice for remote workers.

I have noticed that Airbnb hosts have really improved the internet connection at their houses to adjust for the change in connectivity demand.

Airbnb has reimagined itself since the beginning of the pandemic when the company cut thousands of jobs and considered delaying its initial public offering as travel crumbled to a halt around the world.

After the initial pain, business boomed as workers no longer had to be in traditional offices five days a week and could work from anywhere.

Almost half of the number of nights booked in the fourth quarter were for stays of a week or longer and one in five were for stays of a month or more.

This validates my thesis of Airbnb being a sticky product, because they have essentially bolstered their product to perform better during a health crisis relative to competition.

Longer and more expensive stays also mean higher commissions for Airbnb.

Taking a small sample of January 2022, bookings were 25% higher than in 2019, which bodes well for the rest of 2022 as everyone I know is itching to not only travel but to spend more and to make visits to far-flung places.

Pointing to margins as another signal of success – Airbnb has increased them from minus 5% back in 2019 to 27% in 2021.

The company has explicitly said that the growth of incremental supply won’t come from institutional investors, but individual retail units that realize inflation is so bad that they need the extra $10,000 per year to supplement their life standard.

With all the positivity, it is no surprise that Airbnb’s stock has responded to this improving sentiment and shares are up 25% in the last three weeks.

I would wait for a pullback to put new capital to work in this company, but Airbnb is poised to roar ahead in 2022 if international travel opens up and mask mandates are dropped, which appear inevitable.

February 16, 2022 - Quote of the Day

Tech Letter

“You may think using Google's great, but I still think it's terrible.” – Said Co-Founder of Google Larry Page

February 14, 2022

Tech Letter

Mad Hedge Technology Letter
February 14, 2022
Fiat Lux

Featured Trade:

(THE STRATEGIC WINNER OF TECH)
(NVDA), (TDOC), (ZM)

The Strategic Winner of Tech

Tech Letter

Nvidia (NVDA) is one of the best buy-the-dip tech candidates after the pullback from around $350.

This is one of the premier tech stocks of our generation and readers shouldn’t be fooled by the recent weakness.

NVDA simply has been dragged down with the rest of the best as technology still tries to find some footing after a rough January that was sideswiped by exogenous shocks out of NVDA’s control.

Tech growth stocks have been pigeonholed as one broad category, and even though NVDA boasts a sterling balance sheet that achieved $4.33 billion in profits in 2021, they are penalized with the general category of growth stock.

The rotation into energy and commodities has been swift, but make no mistake, this company is no Teladoc (TDOC) or Zoom Video (ZM), unequivocally not.

NVDA sits at the heart of every cutting-edge technology today by its production of high-quality CPUs and GPUs that are required for businesses as broad as data centers to the metaverse which includes gaming to automotive driving.

NVDAs stock accelerated too fast too soon which made them vulnerable to significant headline risk.

So headlines like war with Ukraine and Russia don’t really have much bearing over the trajectory of Nvidia’s business at all, but since index funds contain NVDA, NVDA gets heaped into the risk-off moves.

The stock further sold off after news leaked of the dead acquisition between British chip company ARM due to antitrust concerns.

At a broader level, semiconductor chips have possibly never been in such high demand, yet supply is painfully constrained.

The U.S. Commerce Department has recently emphasized the precarious nature of the global semiconductor supply chain in 2022.

However, the agency also expressed the possibility of new manufacturing capacity coming online as early as the second half of 2022, which may help somewhat in reducing the chip shortages.

With Intel, Taiwan Semiconductor Manufacturing, and Samsung having already planned huge investments in capacity expansion, we may see increased pricing pressures in the semiconductor industry in the next few years.

Even with new supply coming to market, the world and the semiconductor industry will fail to satisfy the world’s insatiable demand for chips which has forced many end products to delay finishing products for the foreseeable future.

How well is NVDA really doing?

In one word, fantastic.

Nvidia's revenues and free cash flow have more than doubled while gross margin and operating margin are up big.

This terrific growth has been mainly driven by increasing demand for the company's graphics cards and artificial intelligence (AI) processors in gaming and data center segments.

Nvidia currently accounts for almost 80% of the gaming GPU market. The company's GeForce RTX-powered laptops are being increasingly used not only in gaming but also in areas such as esports, digital content creation, and streaming.

Many of my key employees are using PC-based NVDA GPUs to support and service the company.

Nvidia saw its gaming revenues jump 72% year over year to $9 billion last quarter.

In the first nine months of fiscal 2021, the company's data center revenues soared by 53% year over year to $7.4 billion. Increasing revenue exposure to the data center segment is also helping improve the company's gross margin profile.

The next big business could be the car business.

The company offers a complete platform solution, which includes hardware, software, and infrastructure (servers, computing power, and data centers) required to support autonomous vehicles.

Many car shoppers are quickly realizing that cars are starting to appear like an iPad on wheels.

Lastly, Nvidia is also well placed to secure a big portion of the evolving metaverse opportunity, estimated to be around $30 trillion.

The company's high-throughput GPU chips, data center CPU, and next-generation Bluefield data processing unit will play a major role as the hardware technology needed to support the metaverse.

No matter what anyone says, it is hard to construct a case in which NVDA is one of the losers of future and tech.

Not only do they boast the metrics of a growth company, but their brand recognition almost falls into the top tier of tech companies.

The real tech people will tell you this stock is a long-term keeper and despite the high volatility, don’t let that dissuade you from betting big on NVDA.

nvda