It’s not every day I get to sit down with my good friend William Patalon III to chat about my passion: tech stocks.
So I jumped at the chance to talk with the Executive Editor of Money Morning to lay out my thesis for why tech stocks are headed for a huge rebound.
Now, you may be thinking the opposite if you’ve been tuning into the talking heads on cable, who’ve been talking like the sky is falling.
Sure, tech stocks took a tough turn toward the end of the 2018.
But as I mentioned on New Year’s Day here, it’s far too premature to worry about the massive disconnect between fright-inducing headlines and rock-solid economic fundamentals. Those fundamentals are particularly bullish for high-margin tech leaders seeing solid earnings in the third quarter.
In this wide-ranging interview, I spell out exactly what’s been impacting tech stocks lately – despite those fundamentals.
Plus, I reveal my top investment strategy for 2019.
Conditions on the Ground
William Patalon III: Michael, we haven’t had a chance to do one of these formal sit-downs for a while. So we’re going to pack a lot into this one. And we’re going to hit the ground running here – starting immediately with the two questions I know investors would want to pose if they were sitting here asking the questions.
And here they are:
- What the heck is going on with tech stocks?
- And will they recover… in the New Year or some point down the road?
Michael A. Robinson: Bill, the answer is simple. Tech has led stocks sharply higher since the bull market began in March of 2009. That period will go down as probably the best and most stable tech rally ever.
Over the last five years, as we speak, the tech-centric Nasdaq Composite has gained 55.3%, even accounting for the recent sell-off. That compares with 36.2% for the S&P 500.
For the year ahead, I’m forecasting a strong rebound in tech stocks. Wall Street will wake up to the fact that the economy is in great shape and will grow by at least 2.5% in 2019. You can’t have a thriving economy without tech like e-commerce, the cloud, data analytics, artificial intelligence, and more.
The Big Catalysts
WPIII: In our talk “off line,” you mentioned that there are a number of catalysts behind this sell-off. Let’s address them one at a time.
MAR: As you know, Bill, I’ve been saying for years now that tech has led the market up and would lead the market down in a sell-off. Tech stocks have been hit harder as a group because this is where investors made the most money for nearly a decade. So, catalyst Number 1 is straight-up profit taking after a huge run-up.
Catalyst Number 2 is fear of slowing global growth. That’s partly a reaction to the fact we haven’t had a recession for nine years, a historically long period. So, some on Wall Street simply believe that if there is no recession, then growth will still slow significantly, especially in foreign markets that are big consumers of U.S. tech.
For catalyst Number 3, there’s a sense on Wall Street that earnings growth has peaked and that tech stocks will slump as a result. So, any time a big tech stock like Amazon.com Inc. (Nasdaq:AMZN) or Apple Inc. (Nasdaq:AAPL) had soft guidance for the next quarter, we saw those stocks get dumped in droves.
I’d have to say fears of a full-blown trade war with China was a fourth catalyst. There’s no getting around the fact that China is key for U.S. tech, both as a buyer and a builder of our products.
WPIII: Good stuff… and as you explained, there’s a “flip side” to each of these… and that they lead directly to your “Reasons for a Rebound.”
MAR: That’s right, Bill. Here’s why… Wall Street will wake up to the fact that the U.S. economy is in great shape. Our GDP grew 4.2% in the second quarter and 3.5% in the third. That’s the best back-to-back growth in four years, fueled in no small measure by mass adoption of technology.
We have the best employment picture we’ve seen since back when the Beatles put out Abbey Road in September 1969. Wages also have been rising for the first time in a decade. And the U.S. economy is now ranked as the most competitive in the world by the World Economic Forum.
Earnings are still very strong. S&P 500 earnings are up 25.7% from the same period last year on 8.4% higher revenues. And it looks like the Fed isn’t going to move aggressively to raise interest rates this year, easing fears of both inflation and a Fed-caused recession.
As for tech, I see a growing realization that the sector offers investors both excellent growth and income. Tech firms throw off so much cash they can pay a dividend, buy back shares, and still grow their R&D budgets to add more growth. That’s a very powerful combination.
The Big Calls
WPIII: So that leads us to one of your big predictions… one of your big “calls.” And that prediction is that “2019 Will Be the Year of Big Tech.” Tell me why you like Big Tech so much.
MAR: This slice of the tech-stock realm offers that rare combination of high returns and lowered risk in a volatile market as interest rates look to rise maybe three times in 2019. Big Tech still offers plenty of growth, and as a group, it is shareholder friendly, with plenty of buybacks and dividends.
Just to be clear, we’ve made a lot of money over the past four years at Nova-X Report on small- and mid-cap leaders. And I still intend to fish like crazy from that bountiful river. (Editor’s Note: To learn how to join Michael’s fellow anglers at Nova-X, click here.)
However, I see a nice rebound setting up for Big Tech this year because the sector is grossly oversold. That means we have the chance to pick up some beaten-down leaders at nice discounts.
Just look at Apple. It now trades at just 12 times next year’s earnings. That’s a 27% discount from the S&P. Intel Corp (Nasdaq:INTC) is an even bigger bargain, trading at just 10.5 times forward earnings. It touches most of the tech ecosystem, has operating margins of more than 32%, and pays a 2.6% dividend.
WPIII: Given this general view, what’s the investment strategy you’d advocate folks using in the New Year?
MAR: In terms of strategy, it will really pay to look for stocks that are best of the breed. I wouldn’t be taking a lot of fliers this year with trading so choppy, which I think will continue in the early part of the year.
In terms of investing tools, I think we already have the ones we need. We’ll continue using our Cowboy Split staggered-entry system to take advantage of any sell-offs. We’ll for sure continue to take Free Trades when a stock has doubled. But this year, we may take gains sooner as a hedge against volatility. We’ll also be using trailing stops to protect our profits along the way.
Taking It to the Next Level
Michael here again. Just wanted to let you know I’ve published the entire, unedited version of my Q&A with Bill over at Nova-X Report. This is a must-read as we talk in more depth about some of the tech trends you’ll be seeing a lot more of in the days and weeks to come, including a few recommendations whose shares I foresee skyrocketing in 2019.
You can find out how to get the full transcript by clicking here.
One of trends Bill and I discuss that you can take advantage of right now is about to garner billions and billions of dollars’ worth of government contracts. And here’s the kicker – sitting right in the center of this contract money is a tiny defense tech company that most people haven’t even heard of.
The engines this firm makes are unlike anything we’ve ever seen.
And you can learn every detail about this firm – its history, its leadership, and the unique product it’s making that is poised to change the world order as we know it.
It’s that big.
Next week, I’m showing you my best “Buys” for 2019 – and the stinkers you must avoid.
These ideas alone could lead to your most joyous – and prosperous – year ever.
So I know I’ll see you back here for that.