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Maximising Gains From Leveraging Shares

June 16, 2023

The US Stockmarket is behaving very well, exactly as I would expect if we are at the start of a huge new bull market. This is not the first time but I am very excited.

One way to benefit from a new bull market is to do what we do all the time at Quentinvest which is to focus on finding the best shares to buy. For us the best shares start by being 3G, which stands for great growth, great story, great chart.

But we don’t stop there, like Oliver Twist we want more. We want that special magic that you can’t quantify but it is there, a blend of great leadership, great products, great opportunity, often indefinable things that tell me and you that a share is special.

Now, let us suppose we think we have found all that, then there is another crucial step we can take to give us the chance of making stratospheric, life-changing gains. We need the kicker of using leverage.

What I am beginning to think though is that somehow, very difficult for me, we need to practice moderation. We can maximise our gains using all the techniques available to the 21st century equity investor but without going mad.

Adobe Heads for Mega Cap Status

At the moment I think of a Mega Cap as a share valued at roughly around $1 trillion and a Giga Corporation as valued around $10 trillion. As yet we don’t have any of the latter with Apple and Microsoft on valuations approaching $3 trillion.

Adobe is valued at $225bn which means it is not a mega cap but I am sure would see itself with an excellent opportunity of becoming one. Its products are used by almost everybody who has a computer and play a central role in the creative process.

The is how they describe themselves on their web site.

As one of the largest and most diversified software companies in the world, Adobe empowers everyone — from individuals and small businesses to government agencies and global brands — to design and deliver exceptional digital experiences. Headquartered in San Jose, California, and with a diverse global population of more than 29,000 employees, we achieved revenue of US$17.61bn in fiscal year 2022. 

Adobe website

As with other of the world’s great technology companies there seems to be little sign of any recession.

Adobe had an outstanding quarter, achieving record revenue of $4.82bn, representing 13pc year-over-year growth. GAAP earnings per share for the quarter was $2.82, and non-GAAP earnings per share was $3.91. Our results demonstrate strong demand across Creative Cloud, Document Cloud and Experience Cloud with particular strength in Digital Media ARR.

Q2 2023, 15 June 2023

The company remains extremely innovative.

Adobe’s mission to change the world through personalized digital experiences is more critical than ever as digital continues to rapidly transform work, life and play. Our groundbreaking innovations, including the new Adobe Express, the launch of Firefly, our family of creative generative AI models, co-pilot functionality in our creative applications, including Photoshop and Illustrator, AI-powered advancements in Acrobat; a new product analytics solution and the latest capabilities in real-time CDP are empowering an ever-expanding customer base to imagine, create and deliver standout content and experiences.

Q2 2023, 15 June 2023

Now, like others, they are very excited about the opportunities being presented by generative AI.

Every disruptive technology has presented exciting opportunities for Adobe to innovate and increase our addressable market opportunity. This has been true for cloud computing, mobile and AI. We have delivered hundreds of AI innovations through Adobe Sensei such as Neural Filters in Photoshop, Liquid Mode in Acrobat and Customer AI in Adobe Experience Platform. Our ongoing R&D investments have enabled a rapid development and deployment of Firefly, our generative AI technology. We believe generative AI will drive both further accessibility and adoption of our products.

Our generative AI strategy focuses on data, models and interfaces. Our rich data sets across creativity, documents and customer experiences, enable us to train models on the highest quality assets. We will build foundation models in the categories where we have deep domain expertise, including imaging, vector, video, documents and marketing. We are bringing generative AI to life as a copilot across our incredible array of interfaces to deliver magic and productivity gains for a broader set of customers. Since its launch in March, Firefly has captured the imagination of the world with over 0.5 billion generations and we’re just getting started.

Q2 2023, 15 June 2023

As for other key technology businesses, generative AI is an important ‘something new’ for Adobe and has the potential to drive share price gains well into the future.

If I look at the chart above I see a share in a continuing bull market. In the last upward leg, from January 2012, the shares rose over 20-fold. It seems hard to believe that anything like that could happen again but we are living through a period of accelerating technology revolution and Adobe is one of the leaders so who knows what might happen.

On the basis of both chart and fundamentals the shares look very promising.

Adobe has long had a mission to unleash creativity for all and today, this is more possible than ever through the power of AI. The introduction of the new Adobe Express and Firefly will go down as a seminal moment in our creative history. These innovative products and our generative AI copilot in our flagship applications will extend our leadership in core creative categories such as imaging, design, video, illustration, animation and 3D as well as attract an increasingly expansive global audience.

In Q2, we achieved net new creative ARR [annual recurring revenue] of $354m and revenue of $2.85bn, which grew 14pc year-over-year. We could not be more excited about our generative AI road map that will make Adobe products more accessible to an even larger universe of people, while dramatically enhancing productivity for existing customers.

Q2 2023, 15 June 2023

Strategy – Everything in Moderation

I believe we are at an early stage of this new bull market leg which is why it is being dominated by a handful of mega caps and would-be mega caps. It is literally the old bull market firing off again but that will change. There will be exciting new names, incredible IPOs but that will come later. For the moment, it is the old guard which are offering the best opportunities.

The old school approach is to buy the shares, maybe stick them in a tax wrapper like an ISA or a SIPP, and build a portfolio. This can work well if you choose the right shares which hopefully you will if you are following Quentinvest.

You can also do what I do and use an exciting share like Nvidia as a benchmark and ask yourself the question of any proposed new purchase – is it as exciting as Nvidia. If the answer is maybe, as it would be with Adobe, then that is fine, go ahead and buy the shares.

If the answer is almost certainly not as will be the case with many old-school shares defending indefensible businesses in the face of a tsunami of technological change then it is pointless to buy those shares – buy some more Nvidia instead.

Five Times Leverage is Too Much

When I am considering the potential for shares like Nvidia and Adobe the temptation to buy with five times leverage is almost too much. I think it is permissible to be so aggressive in the early stages but you can’t keep doing it because eventually you are going to get urgent margin calls and be scared into selling.

One of the reasons why it works to buy houses with a mortgage is that as the house rises in value the mortgage becomes less important and over time can fall away almost completely even if you don’t repay it.

I think we need a little bit of that approach with shares. We can start with five times leverage but maybe over time let it fall away to three times. This will mean that when we come to sell it will not be the margin call that makes us sell but our reading of the charts.

Total Leverage Can Also be Reduced with a Share Account

I use my share account for leveraged ETFs, which at the moment, just means QQQ3 when it comes to buying although I also have TECL and SOXL from past purchases. The great thing about holding these in a share account, which you have to with IG, is that there are no margin calls so you cannot be forced to sell.

The combination of leveraged ETFs in a share account and individual shares in CFDs and spread betting accounts with initially high leverage being allowed to fall away over time means (a) you will do very well in a rising market and (b) you should be able to decide when to sell on the base of the technical indicators which were so successful in helping me exit the stockmarket in December 2021 and January 2022, before the sharp stock market correction that took place that year.

QQQ3 in Buying Territory

Just to recap, QQQ3 is a leveraged ETF which, on any given day, moves by three times the move in QQQ, which tracks the Nasdaq 100, which is an index which plots the performance of the 100 largest companies quoted on the NASDAQ, excluding financial shares. This index is weighted so heavily influenced by the performance of mega caps.

The effect of daily rebalancing is that as well as the three times leverage there is a powerful compounding effect in the way QQQ3 rises (and falls). It falls less than you would expect from the leverage and rises more, which can be much more, over time.

Coppock gave a valid buy signal in March 2023 and since then the shares have been moving sharply higher but still look to be early days in a new bull run.

I am impressed by the explosive nature of the rise. You never know what shares are going to do next as they oscillate between overbought and oversold but I think that QQQ3 is limbering up for a big move, maybe a very big move.

As always you can either just buy them or invest a certain amount every month, week, quarter whatever and build a holding that way.

What a Way to Invest in the Technology Revolution

Think about it this way. The world is in an incredible technology revolution. There has just been a huge new development in the form of generative AI. And here we have an ETF, which not only tracks that revolution but multiplies the value being created dramatically over time. How could that not be an incredibly exciting investment.

Share Recommendations

Adobe Inc. ADBE. Buy @ $490.90

Wisdomtree Nasdaq 100 3x Daily Leveraged QQQ3. Buy @ $124.43

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