If You’re Worried About a Tech Bubble, You’re Focusing on the Wrong Thing
Companies / Tech Stocks Jul 24, 2015 - 12:12 PM GMTBy: ...
MoneyMorning.com
Shah Gilani writes: Google Inc. (Nasdaq: GOOGL) made major headlines Friday when an upbeat “read” of the search giant’s earnings report ignited a 16% surge in the company’s stock price.
That single-session bump added a whopping $65 billion to Google’s market value. And this came just one day after shares of Netflix Inc. (Nasdaq: NFLX) – another tech darling – zoomed 18%.
These two rallies are emblematic of the relentless march we’ve seen in the tech sector during the past year. And that elicited a warning from former Reagan Administration Budget Director David Stockman, an author and columnist who’s as outspoken today as he was during his White House years.
Google’s $65 billion jump was troubling enough. Not only was it a record for one trading session, but the amount of market value Google gained in a single day was greater than the entire $50 billion worth of Caterpillar Inc. (NYSE: CAT) – which the global heavy machinery franchise took a full century to amass.
In a column titled “Take Cover – Wall Street Is Breaking out the Bubblies,” Stockman said that overvaluation is emblematic of the whole tech sector. On Friday, the market value of the “New Tech 16″ was $1.3 trillion – while their net income over the last 12 months was only $21 billion.
“When you take GOOG’s middle-aged profits machine out of the mix, you get something altogether more frisky,” Stockman wrote. “Namely, a collective market cap of $840 billion for the other 15 names in the Morgan Stanley index and LTM [last twelve months] net income of exactly $6.0 billion. That’s a P/E multiple of 140. That’s February 2000 all over again.”
With those words, Stockman is raising the same question that a slew of other pundits are posing: Are we experiencing a ruinous tech bubble?
What I’m telling you here is that all those experts are asking the wrong question – are looking at the market the wrong way.
You see, this is clearly a “momentum” market. And that means you have to make money while you can – while the opportunity is there.
But you also have to be prepared for the day when the music stops.
And today I’m going to show you just how to play the momentum game – without getting disrupted…
Let’s Dissect Tech
What’s happening is that a handful of “momentum stocks” are lifting the major indexes higher, with the Nasdaq Composite Index, home to the hottest of those shares, making new all-time highs on Friday and again on Monday.
Momentum markets – both up and down – are real.
What we’re talking about in this market is the tendency for fast-rising stocks to rise further. Empirical research backs this up. In one study, for instance, researchers found that stocks with strong performance continue to outperform poor performers – with an average excess return of about 1% per month.
That may not sound like much. But take it from me – that’s a meaningful difference.
If academic research isn’t your thing, just look at the stock market, where we’re seeing “momentum” work its power in real time.
Over the last 52 weeks, the 16 stocks in Morgan Stanley’s “New Tech” are up an average of 18.32%, more than double the 7.75% gain of the bellwether Standard & Poor’s 500 Index.
Thirteen of the 16 stocks averaged gains of 32.56% over the past year.
Those 13 are Amazon.com Inc. (Nasdaq: AMZN), Baidu Inc. (Nasdaq ADR: BIDU), Facebook Inc. (Nasdaq: FB), Google, LinkedIn Corp. (NYSE: LNKD), Netflix, Priceline Group Inc. (Nasdaq: PCLN), Qlik Technologies Inc. (Nasdaq: QLIK), Salesforce.com Inc. (Nasdaq: CRM), ServiceNow Inc. (NYSE: NOW), Splunk Inc. (Nasdaq: SPLK), Tesla Motors Inc. (Nasdaq: TSLA) and Workday Inc. (NYSE: WDAY).
Rising Currents
The smart way to play the aging – but momentum-fueled – bull market is to keep riding it.
Just because we had a tech wreck before doesn’t mean it will happen again. The hot momentum tech stocks today aren’t nearly as “expensive” as the hot tech stocks of the dot-com bubble of 2000. And the because we’re in a “convergence economy” – where two or more Disruptor-fueled trends mesh in ways that magnify the growth potential – today’s tech market is very different than the dot-com predecessor that still gives us nightmares.
Even so, because of the emotion- and capital-fueled “momentum” effect that I’ve been describing for you here, investors are chasing the hottest performers and driving them higher.
That’s the nature of momentum.
Just as we saw with Google and Netflix, their surging share prices turn the hottest stocks into the hottest stories. That further stokes investment sentiment and draws in buyers who fear being left behind. And that, in turn, extends the rally… which is why momentum begets momentum.
Momentum, when you’re on the right side of it, is good.
So now that we’ve underscored that point, let me show you the key moves to make – now – to extract the maximum possible profit… and to bulletproof yourself against the inevitable downdrafts.
Moves to Make Now
In a market like this one, the one key to profit maximization is making sure that you consistently lift your stop-loss points as the stocks you hold zoom in price. To me, the biggest mistake an investor can make is giving back the profits you’ve reaped on stocks that have had a great momentum run.
That’s why I always have stop-loss orders (or, as I sometimes refer to them, “ring-the-register orders”) in place to make sure that doesn’t happen. I make sure to raise those stop-loss points as my stocks rally and use them to close out backsliding big winners while they’re still at lofty (and highly profitable) levels.
Me personally, I never cry about taking a profit. Even if the stock turns back around and goes higher after I’m out, I’m not unhappy; I rang the cash register.
As the old market adage says, “You’ll never buy at the very bottom, and you’ll never sell at the very top.”
Just make sure you don’t sell out at the bottom after the stocks you hold have been at the very top.
With my strategy, you’ll never commit such a fatal miscue.
Not even if this momentum market collapses.
Indeed, if that happens – and there is a collapse – the tactics I’ve shared here will ensure that you’ll have a pocketful of cash to buy back in… near the very bottom.
P.S. I hope you’re all “liking” and “following” me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and bank some market-smoking profits.
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