Some of the world’s most high-flying tech stocks have been tumbling lately…
Video calling service Zoom (ZM) has fallen as much as 52%…
Trading app Robinhood (HOOD) has fallen as much as 60%…
And Cathie Wood’s ARK Innovation ETF (ARKK) – another tech sector bellwether – has seen a 40% tumble.
Many in the mainstream media are acting like the sky is falling in.
One story on CNBC even compared what’s going on to the dotcom crash in 2000.
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But our tech expert, Jeff Brown, sees things differently.
The tech apocalypse isn’t upon us, as the mainstream media would have you believe.
Instead, Jeff sees the pullback as a chance to pick up bleeding-edge tech stocks that the market is putting on sale.
It’s all in this week’s update with me and Weekly Pulse host Tom Beal at the top of the page.
Regards,
Chris Lowe
Editor, The Daily Cut and Legacy Inner Circle
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Transcript
Tom Beal: What’s going on with the heavy selloffs in these high-flying tech stocks? My name is Tom Beal, host of The Weekly Pulse, where we break down the biggest wealth-growth story of the week.
I’m here today with the editor of Legacy Inner Circle, Chris Lowe, who’s bringing in our Legacy Research tech expert, Jeff Brown, to answer this question for you. So, Chris, how do we kick off today’s conversation?
Chris Lowe: Tom, today I want to talk about the selloff in some of the more high-flying tech stocks that we’ve seen, particularly in November and December. There’s even talk in the mainstream media that there may be some sort of repeat of the dotcom bust going on in 2021. And, of course, the dotcom bust happened 21 years ago now, in March 2000.
There is some reason to be concerned. There have been some fairly big selloffs in these household names. Peloton (PTON), the exercise bike company, is down 73% from its peak for the year.
Robinhood (HOOD), the commission-free trading app, is down about 60%. And the ARK Innovation ETF (ARKK), which is put together by star fund manager, Cathie Wood, and was one of the highest-performing ETFs of 2020, is down about 40% from its high.
So there’s definitely something going on in tech. Those high-flying names are coming off, fairly hard in many cases.
So what I want to do is turn it over to our tech expert, Jeff Brown. I talked to Jeff at his home earlier on. I started off by asking him, “What the hell is going on with these heavy selloffs in these high-flying tech stocks?”
Jeff Brown: Chris, I’ve been watching this very interesting dynamic play out this year. And I’ve been calling some companies in this sector “toxic” tech stocks.
It’s not necessarily that there’s anything fundamentally flawed with their business or they’re doing anything wrong. It’s just that the market had bid up their share prices so much, to such absurd valuations, that I was of the opinion that many of these would see their share prices fall by as much as 90%.
So that correction that I was expecting is actually happening right now. It’s just a matter of valuations coming back down to Earth.
Some companies were trading at an enterprise value of 100 times sales. 100 years of sales, not profits. It’s absurd, of course. I don’t care how fast you’re growing, those types of valuations are just simply not sustainable.
So what we’re seeing right now is a return back down closer to reasonable valuations. Some of these stocks, even after pulling back 60%, are still very expensive, but a lot less so, after the pullback.
But Chris, one key dynamic – and the reason it’s happening right now – is because it’s the end of the year. What we typically see are a lot of hedge funds and institutional funds rebalancing their portfolios.
When they look around and they’re carrying this stock that’s trading at 80 times annual sales, they’ve got to lighten their positions. They want to do this for their own personal benefit, also, because in most cases, their annual bonuses are calculated based on the profits the fund has brought in.
So this is typically what we see around Thanksgiving and into Christmas time. This is when you want to sell your stocks, lock in the profits, and basically secure your annual bonus.
So we should be seeing this kind of volatility right now. And it does not imply that this is the second dotcom bust.
Chris: Just to quickly recap on that. You’re saying that the valuations in some of these stocks, especially the household names like Zoom and Peloton, they’ve gone up too much and they’re correcting.
But what about the stocks you’ve been recommending and many of the folks at Legacy Research hold? I presume that’s still a hold for those people? You’re not changing your opinion on these. I’m just trying to make sure that folks out there don’t get too flustered and worried by sensational headlines.
Jeff: The approach I’ve taken in the Brownstone Research portfolios has been a bit balanced – in the sense that, on a couple of occasions, we’ve actually recommended selling half of our position.
A perfect example was DocuSign (DOCU), which was a major beneficiary of the pandemic, for obvious reasons. People moved to electronic contracts. The stock just went through the roof. I felt it was getting to the stage where it was overvalued. So a very safe move – close out half your position, take a lot of profit off the table, and reallocate to places that have better values.
On some occasions, I’ve recommended just closing out positions entirely. We closed out one semiconductor stock for a very large triple-digit profit. Fantastic company, amazing products, great growth profile. But it was trading so far ahead of itself.
Expecting this type of seasonal volatility, it’s a great time to take money off the table, hold onto it, and let’s look for places that are much more attractive from a valuation standpoint.
That said, I am absolutely sure a lot of these companies will continue to have a fantastic year in 2022. So there are some that might be richly valued, but they still have tremendous growth profiles as they look into next year.
Chris: Thanks, Jeff. That helps a lot, for people who might be reading those headlines and getting worried. I love the way you recommend people sell some stocks when they get overvalued. And that you’re looking at those valuations. It’s very helpful as a way to think about this.
So thanks for your time, Jeff, and we’ll talk again soon.
Jeff: Great. Thanks, Chris.
Tom: Chris, that’s what I love about having you and the experts of Legacy Research Group in my corner. Jeff just explaining that he’s not surprised by this. He actually saw it coming.
And while you’re here watching The Weekly Pulse, and if you’re in Legacy Inner Circle, gaining the experts’ insights that you bring to them, you, too, are expecting these types of things. So it’s not a shock. It’s not the big hoopla. You now get it from the source, “Yeah, of course, that’s what’s going to happen.”
So it puts me at ease. And I’m appreciative that you and the experts here at Legacy Research Group keep me emotionally stable instead of riding the emotional waves of the mainstream media.
Chris: I think a very interesting insight that Jeff had was that you still have to look out for valuations, even in technology stocks. I think there’s a kind of misunderstanding that all tech stocks are growing so fast and doing such amazing things, that it doesn’t matter what you pay; you can just close your eyes and not think about those valuations.
But as Jeff made very clear in that clip, when something is selling for 100 times sales, that takes 100 years at current sales levels of paying investors all of the sales. It’s just an impossible thing. It would take 100 years to make investors whole, if the company actually pays out all of their revenues to investors, which, of course, they can’t do because companies have costs.
I thought that was a very interesting insight. It’s worth keeping in mind that you want to keep an eye on valuations.
And as he mentioned, Jeff has done some very good work in getting his readers to take some profits off the table when he sees those valuations going to crazy levels. So I found that very interesting from Jeff, that it’s not all about growth. It’s not all about having amazing products. Value matters in technology stocks, too.
Tom: And these are the types of insights we’re excited to bring to you each and every week here at The Weekly Pulse. Once again, Chris, thank you for bringing all the value you bring, along with the experts here at Legacy Research Group.
Chris: Thanks, Tom.
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