Do This Now, Thank Me Later

When I was working on Wall Street, I used to put money away for my three kids every paycheck. It wasn’t much, maybe $50 or so each.

It went into a savings account for each boy. This started around 2005, and it accumulated over time. But when I left my job, I just plain forgot about the accounts.

Recently, I remembered the accounts. And low and behold, they each had a few thousand dollars in their savings accounts.

But through the dark magic of inflation, those dollars are worth less today than when I put them in. It takes $1.47 today to buy $1.00 worth of 2005 goods.

So last month, I took their money and put it in their brokerage accounts. I set up a Uniform Gift to Minors Act (UGMA) account, which allows minors to invest with some tax benefits.

The cash has been sitting in there waiting for the right moment to put to work… And now it’s time.

Here’s what I’m doing: I am buying tech shares with high conviction, and I’m not going to look for at least a few years.

Readers may think that’s crazy given the recent action in the tech sector. But today, let me show you why this is the smartest thing for long-term investors to do…

I’m Not Worried About Tech’s Pullback

The fear of war and inflation has clearly and not-so-politely shoved COVID out of the spotlight. And these new fears have absolutely wrecked the tech sector.

Let’s look at the Nasdaq-tracking index Invesco QQQ Trust Series 1 (QQQ):

At the close of April 26, the ETF was down 21% year to date and exhibiting bear market nastiness.

But that’s the thing…

I started hoarding cash for my boys around 2005 when I moved to New York from London. And since then, the ETF is up 282% – including this year’s ugliness.

Yet that cash I worked so hard to save for them is worth way less. Not investing that money was a huge, missed opportunity.

And keep in mind that during that time, we endured the Great Financial Crisis, the Flash Crash, the U.S. credit downgrade, the Taper Tantrum, the 2014 Russia-Ukraine war, Ebola, China’s slowdown, fears of negative rates, a trade war, government shutdowns, and COVID-19!

That’s before all this we’re experiencing now!

The point is, there will always be something to fear.

But the thing you should most fear is hanging on to cash and “waiting it out.” As I just showed you above, in 17 years, the value of cash went down nearly half.

And if the value is what you want, then you should buy tech stocks.

Let me explain…

Tech Isn’t Going Away

Imagine the future…

Now ask yourself the following questions:

• Will you be less reliant on Siri or Alexa?

• Will you be going back to cable tv?

• Will you be using a word processor (if you even know what it is) instead of a laptop?

• Will our computers be less powerful?

• Will chips become slower?

• Will our networking needs wane?

• Will we need fewer communications?

The answer, of course, is No.

Since November, some tech stocks have fallen between 50%–80%. But when we look at the long-term prospects of tech, it’s clear where the future is headed.

As scary and unpleasant as the recent tech pullback has been, bailing and going to cash is guaranteed to perform worse over the long term.

Of course, I’m not talking about every tech stock. I only care about stocks that have superior fundamentals and the vote of confidence from big professional investors.

Yet in this environment, even good stocks are getting mauled.

They are throwing the baby out with the bathwater. Many great tech stocks have reached silly cheap levels while ironically, many “safe” stocks have reached obscenely expensive levels.

Let’s take a quick look at what I mean…

The Real Value Stocks

As regular readers know, I’ve built my own proprietary system that helps me dig deep into stock data to find opportunities.

It scores stocks according to the strength of their fundamentals and helps me track institutional money flows into and out of companies, among other things. [To learn more about my system and how it can help us find which stocks are primed to succeed over the long term, click here.]

So I went into my data and looked for tech stocks that have superior fundamentals: companies growing sales and earnings, that are profitable, with solid balance sheets. Then I screened for stocks with a price-to-earnings (P/E) ratio of 20 or less.

The P/E ratio is an indication of the premium that shares are trading relative to the money the companies earn.

Tech stocks historically trade at higher P/Es because they grow like weeds. Yet I found 95 tech stocks with an average fundamental score of 75 out of 100 and an average P/E of 14.

The companies on this list get me excited. There are phenomenal businesses here. Some are biggies you likely already know… Facebook (14 P/E) and Netflix (17 P/E). Some smaller companies are way cheaper.

In contrast, some of the traditional “value” stocks have reached nosebleed levels.

A company like Clorox has a fundamental score of 50. It has ho-hum sales and earnings growth and is loaded with debt. But it is trading at a present P/E of 74. Even its forward P/E (looking into the future) is 36.5. That’s still expensive.

And it’s not just Clorox. Many household names that are typically cheap are now expensive. Companies like Kraft Heinz, Walmart, Colgate-Palmolive, PepsiCo, and Hershey all have P/Es of 30 or more!

The world has flip-flopped. Investors are paying through the nose for “value” and are stepping on great tech companies to do so.

But don’t be fooled: this won’t last forever. I bet that it doesn’t even last through the end of the year.

Here’s why…

On Tuesday, April 26, the QQQ closed down 3.77%. Ugly indeed.

In my system’s data, I saw 209 sell signals and zero buys. Now that’s rare. Since 2003, it’s happened only 113 times out of 4,863 possible trading days, including last Tuesday.

On those days with 200 sells or more, here are the forward average returns of QQQ:

Source: MAP Signals, FactSet

In simple terms, after such a down day, we’ve seen an average return of 25% over the next year… and roughly 74% over the next three years.

And just try to remember… your cash is guaranteed to fall in value over those time frames.

History strongly suggests American businesses will rise in value. And if I can think of one area that is being undervalued right now, it’s technology.

If you do nothing else with your cash other than just buy the QQQ, you’ll be glad you did in years to come.

It’ll certainly be better than letting the cash rot in a savings account… like I did.

Don’t make that mistake.

I certainly won’t make the same one twice.

Talk soon,

Jason Bodner
Editor, Outlier Investor

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