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Analysis & Learning

Three sectors driving the next bull market

August 27, 2020

In the last issue of Chart Breakout, as the full fury of the Covid-19 pandemic and its likely consequences for the world economy were becoming apparent I wrote “that it would be crazy to make any share recommendations when there are no chart buy signals and we are facing a global pandemic”. 

I was almost right. There was just one crucial word missing. What I should have written is that ”it would be crazy NOT to make any share recommendations”. 

Virtually every share I wrote about in that issue has subsequently gone through the roof. Apple was $242, it is now $282; Alphabet was $1073, it is now $1279; Amazon was $1689, it is now $2375 and so on.

I tell you this not just as an alternative to beating my head repeatedly against the wall but as a spectacular example of how to use market psychology. 

As Buffet puts it, ‘when all around are fearful, be greedy’ or, as others have said, ‘when plunging share prices make the front pages, it’s time to buy’ or a rule I have often use myself, ‘by the time everybody and his dog knows we are in a bear market it has probably almost finished’.

The list goes on. Almost the best rule of all I have found out is when I feel most like selling, when all my emotions are screaming that it’s time to panic, that is always a time to buy.

I stopped reading newspapers in 2009 because I didn’t want to be influenced by all the media gloom. Financial journalists, like economists, seem to live in a world where disaster lurks around every corner.

In fairness to myself I didn’t get it completely wrong. Firstly, I was often quite bullish in my comments on the stocks. I just didn’t suggest actually buying them.

More importantly, In my online publication, Quentinvest, four days later, on 23 March, the very day the US market hit bottom, I changed my mind and turned bullish. 

I wrote the following: “I am beginning to think this virus may kick the technology revolution into an even higher gear” and later in the piece, I said that I had a strong feeling “that technology stocks, after this interruption, will go on to make new peaks”.

I even recommended six technology stocks led by Amazon at $1900 and including Adobe at $307, Atlassian at $128, at $37, Crowdstrike @ $51 and Docusign @ $83. 

If you are not familiar with these names they are all US technology shares, growing so fast that Amazon may be the slowest growing name on the list.

Or it may not, given that the company is hiring at a furious rate to cope with the unprecedented demand for home delivery hitting its global fulfilment network. 

Even more dramatic on the bullish front was the recent issue of Quentinvest where I recommended 58 shares to be bought now. Most but not all of those were technology shares. 

I am becoming ever more convinced of the case for technology shares, hence my headline about technology, technology, technology, reworking the estate agent’s mantra that the only things that matter when valuing properties are location, location and location.

Even before Covid-19 became a global threat I had been arguing that we are living in the era of a technology revolution more important than any previous period of change in human history. 

Forget such trivial events as the Renaissance or the Industrial Revolution, this is a big one on a par with the invention of farming, 10,000 years ago, which ended the hunter gatherer lifestyle forever.

Google co-founder, Larry Page, said a few years ago that he thought humanity was about one per cent along the journey on this process of technological change. Where are we now, maybe 1.5pc of the way along the path.

My contention is that not only is this tech revolution huge, not only is the rate at which it is progressing accelerating but the rate of that acceleration is itself accelerating. 

This breakneck ride by which our children and their children have abilities in using the latest devices that we older generations can only dream about is speeding up at an accelerating rate! 

These are truly amazing times to which Covid-19 is but a sideshow, a passing interruption and very probably yet another facilitator of the technology revolution.

So one of my recent suggestions is that not only should the bulk of your portfolio be invested in American shares because of America’s role as the epicentre of this revolution but also that there is a respectable case for only having technology shares in your portfolio. 

In my own portfolio there are only three non-technology shares and if I tell you that they are Domino’s Pizza Inc., Boohoo Group and HelloFresh I think you will agree with me that these are three businesses built around technology that would not exist without it. Domino’s has even been described as a technology company that happens to deliver food.

This brave new world can be baffling to those brought up in earlier times. 

One of the share selections in this issue, Five9, makes software to replace legacy call centres with virtual versions built in the cloud. The business is growing rapidly and disrupting a huge market but by some measures it is still a tiny business. 

Last year it had sales of $328m and lost money. It has 1,200 employees. Despite this, Five9 is valued at over twice Britain’s Marks & Spencers, which is valued at just £1.9bn with over 78,000 employees.

Even to me that seems a bit strange but I have shares in Five9; not in this lifetime am I ever going to buy shares in Marks & Spencer. I eat their food and even occasionally wear their clothes but as a business opportunity Marks & Spencer is about as dead as the parrot in the famous Monty Python sketch. 

Their business model consists of asking people to go to them and pay higher prices than they would have to pay to people who bring similar goods to their home. 

They are like a cartoon character that is still running furiously but they have already gone over the cliff edge. They simply don’t have a future unless Amazon or somebody decides to buy them and use them for some weird purpose of their own. The brand may have some value.

In a way what Covid-19 has done is expose a huge number of global businesses that are running on empty. High street retailers, banks (what are they for?), airlines or planet destruction machines as they could easily be known, manufacturers of fossil fuel cars (it is bliss to be in London without streets packed with machines for pumping poisonous gases into the atmosphere). They may come back for a while but now we have, literally, tasted life without them it won’t be for long.

One observer expressed surprise that Tesla, with 48,000 employees was worth more than General Motors with 164,000 employees and a vastly greater production of cars. 

Another American commentator, highly rated for his stock picking skills and with a keener eye for a fast-changing world, took a very different line. He thought the right value for Tesla was double General Motors and Ford put together and that was when these two noted manufacturers of fossil fuel cars were enjoying higher pre-pandemic share prices.

The world is changing and this is having a brutal and exciting effect in the stock market. When a meteor struck the earth 68m years ago, dinosaurs the size of tank transporters disappeared to be replaced by mammals the size of mice. Something similar is happening in stock markets and people need to adjust their portfolios accordingly.

I am amazed when I talk to people and find them holding shares in companies that joined the ranks of the living dead years, even decades, ago. Nostalgia is fine in many areas but not for shares.

Evolution works in the stock market rather as it does in nature. Businesses that were perfectly adapted for a past world struggle, when a very different world starts to emerge.

Even if they try to change they find it hard to compete with businesses that were born in the new environment. 

This can be a problem for whole stock markets. Europe and even the UK seem to me to have become a giant elephant’s graveyard, where many formerly great businesses are shuffling towards their final resting place. 

We keep hearing about all the high tech energy in the UK but not much of it is finding its way to the stock market and the rest of Europe is even worse.

Poor old Marks & Spencer is such a stock market has-been it is not in the FTSE 100 any more but many of the ones still there are hardly setting the world on fire. 

The FTSE 100 first reached its current level in 1998. The same is true of the EuroStoxx 50 share index. This means that these indices have made zero progress for the best part of a quarter of a century.

Over that same period shares in Amazon, one of the companies responsible for creating this new online world, have risen 1,656 times.

Amazon is currently valued at around $1.2 trillion. In January 2018 the FTSE 100 was valued at £2 trillion (£2.5 trillion) and it has lost around a third of its value since then.

Who would want to bet against the possibility that at some future date Amazon alone will be worth more than all the companies in the FTSE 100? 

Yet I still have subscribers, who complain because I recommend so many US-quoted shares. Time to wake up and smell the coffee guys!

While the FTSE 100 and the EuroStoxx 50 have gone sideways, over the same period my favourite index, the Nasdaq 100, stuffed with high performing US technology shares, has climbed from 1,151 to 8,832, it’s level at last Friday’s close. 

There are ETFs that track the Nasdaq 100; a popular one has the code QQQ. If you have a portfolio loaded with shares in the FTSE 100, I suggest you sell the lot and buy shares in QQQ. You will do so much better unless you prefer patriotism to making money.

Another sign of strength by the Nasdaq 100 is that although it fell heavily in the initial panic it has already rallied to the point where it is only 9.3pc below the all-time peak reached in February. 

The less tech heavy S&P 500 is down 15.3pc from the peak and the Dow Jones Industrials is down 18.2pc. 

The clear message is that technology stocks continue to outperform and this divergence may become even more marked in future.

In this issue I am recommending 42 shares. I think it is good timing though there are still plenty of bears out there. Shares across the board have been depressed by the feared economic impact of the pandemic. 

It obviously is going to be a tough period but I think it may be more a question of sorting the men from the boys, with shares in technology companies the men in this metaphor.

Shares in some companies like Amazon, Netflix, Domino’s Pizza Inc., and Fisher & Paykel (which makes respiratory equipment) are actually benefiting from the stay-home economy but the overwhelming emphasis is on companies which are using technology and the massive shift to the cloud to disrupt industries and traditional ways of doing things. 

Health care is also going to see a boost as we need to step up our game to protect an increasingly crowded planet from more health scares. 

The world’s medical care system has been tested as never before in recent months and many inadequacies have been revealed.

We also need to engage with the damage being done to our environment by so many of our past ways of doing things. Stuff which worked for my generation is regarded with growing horror by the new generations coming through. This is something we need to learn to respect.

Trump may have his head firmly buried in his nether regions but something has to be done before the damage (a) becomes irreversible and (b) hits some terrifying tipping point like runaway glacial melting in the poles, frozen methane being released from the Siberian permafrost or homo sapiens becoming the only apex predator left on the planet. 

Many of my generation don’t seem to get it yet but they will when it comes up and hits them over the head with a sledgehammer or when a fast-melting iceberg appears off the Isle of Wight. 

Wherever you look technology is the key and needs to be the bedrock of your portfolio. There are a whole swathe of exciting, fast-growing businesses out there, which can really make your fortune.

This changing of the guard in the stock market is presenting another problem for old timers because many of the new breed of technology companies are persistently unprofitable and look very expensive.

These companies are about growth as much as profits. They have high gross profit margins but spend all their money and sometimes more on research and development and sales and marketing. Adjust for that and they offer value & excitement.

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