It should be obvious from our Covestor portfolio’s name – Crabtree Technology – that we focus on tech stocks.
So what do I make of the remarkable run that tech stocks have seen since the presidential election six months ago?
Some things are explainable. Like the $500 billion in offshore cash on the balance sheets of major American tech firms that under the hoped-for tax reform will possibly be repatriated to the US where it can either be invested in productive capacity or used for dividends and stock repurchases.
But other aspects of the Trump agenda, like increased infrastructure spending, don’t seem likely to benefit tech companies at all.
Bubbly Tech?
This contradiction leads to questions. Will the good times last for tech? Should we be selling in advance of the inevitable downturn? Where are the tech IPOs we were promised? Most pressing of all, are we in a bubble?
All good questions. Let’s find some answers. And maybe some stocks for the next six months.
Will the good times last?
It seems unlikely. But it seemed unlikely in the Spring of 2009 that the S&P 500 would rise over 250% over the next eight plus years. Yet that’s exactly what has happened. I didn’t predict that. You probably didn’t either.
My experience is that it’s best not to focus on predicting the future. Instead, focus on what’s good right now.
Amazon (AMZN) is taking market share like crazy from brick-and-mortar retailers. Google (GOOGL) and Facebook (FB) are dominating digital advertising.
Apple (AAPL) is…well…you know. Focusing on the present is easier because you actually have hard data. And companies like the ones I just mentioned are also gathering a lot of cash. Which is convenient to have if the good times don’t last.
What about sell in May and go away?
The idea that the stock market performs better in the November-to-May period than it does in the balance of the year is, in fact, supported by data. But stock returns don’t exist in a vacuum. They exist in a world that has capital gains taxes. And dividends. And financial crises.
The S&P 500 rose 19% (not including dividends) from May 1, 2009 until November 1, 2009. Would have been a shame to miss that, especially right after so much market pain.
Alan Greenspan coined the phrase “irrational exuberance” at a speech in Japan in December 1996. The stock market continued rising for more than three additional years.
In short: there are more than a few Chief Market Strategists on TV or on the Internet who have predicted eight of the last three recessions. They do this because gloom-and-doom always gets more viewers or clicks than “all-is-well.”
But they invariably forget that stocks reach new highs by…going up past old highs.
Where are all the tech ipos?
There were 21 tech-oriented initial public offerings in 2016, hardly any of which were household names. So far this year, there have been nine. These nine have a couple of things in common.
First, except for Snap Inc. (SNAP) – parent company of social network Snapchat – you probably haven’t heard of any of them. Does Mulesoft (MULE) ring a bell? Didn’t think so.
The other thing the ‘Nondescript Nine’ have in common is that none had positive GAAP earnings in their last 12 months of existence. Maybe it’s a good thing then that we’re not getting the tech IPOs that pundits have been saying are on the way. Uber? Airbnb? Spotify? I can wait.
This leads us straight into our most provocative question:
Are we in a tech bubble?
Notwithstanding the recent arrival of a few money-losing, cash-burning companies (looking at you, Cloudera! (CLDR)), I do not think we are in a technology stock bubble – at least not among public companies.
Valuations are reasonable in my opinion.
Moreover, quite a few companies that weren’t GAAP profitable at the time of their IPOs –like Groupon (GRPN) and Etsy (ETSY) – did have positive operating cash flow and in some cases free cash flow and still do today.
So what to own in this non-bubble environment? In my opinion such stocks as Green Dot (GDOT), Vectrus (VEC), TTM Technologies (TTMI), Care.com (CRCM), Insperity (NSP) or Logitech International (LOGI)?
All six of these companies reported ‘beat-and-raise March quarters. The highest price-to-sales ratio among them is 2.73 (Care.com).
All have generated positive operating cash flow and free cash flow in their most recent fiscal years.
Disclosure: Past performance is no guarantee of future results.
Photo Credit: Jeff Kubina via Flickr Creative Commons
