Happy July 4th holiday to the United States!
Today is your day.
At Google, our office was decked out in US flags as our very talented in-house chefs made us all hamburgers (amongst other American staples)!
Needless to say they were extremely popular with the staff…
Today the following headline “Speculative Stocks out of Favour” gave me a good belly-laugh.
Interesting I thought… I wonder what the author meant by “speculative”.
For example, my mind immediately thinks of stocks with a market cap of less than a $100M… negative earnings… deeply negative cash flows… however the potential to be a “unicorn” (eg multi-billion valuation)
But no… this author has talking about the FANGs.
That is Facebook, Amazon, Netflix and Google. Allow me to quote:
- Early last month, shares of Wall Street’s favourite growth stocks began falling fast. During this dive over the last two weeks of June, more than $50 billion of investor wealth had been lost!
- In case you’re wondering which of Wall Street’s favourite stocks I’m talking about, I’m referring to the FANG growth stocks, or Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG).
- These four stocks have been trading sharply higher this year and are responsible for a large portion of the market’s gains. So the sudden drop in price for all four of these stocks certainly caught investors off guard.
First up, let’s choose our words more carefully.
There is nothing speculative about these stocks.
In fact, I would encourage every investor to have some exposure to the likes of FB, AMZN and GOOG (I am less convinced about NFLX).
Take a look at their double-digit revenue growth and more importantly – their cash flows.
Second, these stocks are certainly not out of favour.
And third, billions of people continue to use these products every single hour of the week.
How many stocks can say that?
Now yes — if they had perhaps fallen by 20% or more from their highs over the past few weeks — I would agree with his language. They would indeed be out of favour.
But that’s not what we have seen… not even close.
There’s Reason the FANGs are Pulling Back
As a proxy for what we see with the FANGs – let’s update the chart for the QQQs PowerShares ETF
We often call this index the “Q’s” – which contains all leading tech stocks.
And as you will see below – there is a very good reason this index is taking a well-earned pause.
In April of 2013 – the Qs traded for a value of around $66. Today it’s over $136.
If you had bought (and held) you have more than doubled your money.
Not a bad little return for “speculative stocks”
And yet despite this very small pullback – our friend says they are now “falling out of favour” – suggesting there is a large pivot into dividend stocks.
What we are seeing is a perfectly healthy bit of profit taking. Smart traders are taking some well earned chips off the table.
And I expect to see some more – with the 35-week EMA (ie around $130) acting as the next zone of support.
As I say, even if we saw this index drop from $145 to $130… I would not use the language “out of favour”.
For example, our weekly intermediate trend would still be bullish.
For me to shift my sentiment on tech – I need to see this trend pivot.
Bullish trends (of all kinds) will always pause opposite profit taking. And the same thing happens in reverse. As we often remind readers – nothing rises (or falls) in a straight line.
But don’t make the mistake of thinking the trend of over for tech (like this poorly educated author).
That’s far too premature…
Putting it All Together…
The screenshot included above states “tech stocks took a drubbing Thursday as the Nasdaq slid more than 1.4%”
They too are making a similar mistake.
That’s not “14%”. I am talking about 1.4%.
Notice they don’t say “after gains in excess of 100% since 2013… the Nasdaq gave back 1.4%
How would that read?
From mine, stocks like Apple, Google, Amazon, Microsoft and Facebook are your best bet across any index.
However, be sensible about when you time your entry. Patience is needed.
Each of these quality stocks remain in strong bullish trends therefore we look to buy on the dips (eg the 35-week EMA).
You will be hard pressed to find stocks which continue to grow revenue by double-digit year on year – continuing to rapidly innovate in growth areas – whilst generating phenomenal cash flows.
When a product or service is being used almost every hour of every day by billions of people, you know they are in a strong place.
… trade the tape
When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.