- How we weather fear-induced selling
- Want to buy a 5G smartphone? I recommend this one…
- Is 5G a “safe haven” sector?
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here. But before we get to our questions, let’s finish the week on a positive note.
Trade talks between the U.S. and China this week in Hawaii appear to indicate that both countries intend to get the Phase 1 trade agreement back on track.
In light of the pandemic, this is certainly encouraging.
And the European Union is negotiating a proposed €750 billion stimulus plan to support an economic rebound in the region. There’s nothing like throwing around billions of dollars (about $840 billion) to get the equity markets excited.
Now let’s turn to our questions…
Can we expect another fear-induced bout of selling?
First up is a good question about the market’s knee-jerk reactions and how we as investors can be prepared…
Hi, Jeff, I’ve been with you for a few months now and deeply respect your outlook on things. While COVID-19 has clearly changed the world we live in, it was nice to read your intelligent, calm emails amid all of the panic that I chose not to engage in.
My thought/question is this: While I completely agree with your analysis that things weren’t as bad as the media portrayed and that we are recovering better than the media reports, does it matter when we talk about the market?
I watch the market react and panic because of the news while I sit back and think how silly many of those reactions are. But those people who are reactive have a significant impact on the market.
I suspect that tomorrow I’ll watch my portfolio crash pre-market because COVID-19 cases leapt as a result of the recent protesting, and no level-headedness on my part or yours changes that. I sincerely hope to hear from you on this topic since I know you’ll have some fabulous feedback on it. Thanks for your awesomeness,
– Dan D.
Hi, Dan. Thanks for being a reader. And thanks for your thoughtful feedback. I agree with you. COVID-19 is a real virus that is having an impact on our society, both real and perceived.
But the mainstream press is incentivized to run sensational headlines that paint a dark picture that is often not representative of the real story. My team and I go to great lengths to dig for real insights for our readers. I’m glad you found it helpful.
But you have a good question. Whether the headlines are accurate or not, uncertainty around the virus can move markets. We saw this most clearly in late February and early March.
The market panicked. And even the best companies were punished. It was a window in which the world knew the least about COVID-19 and the perceived threat was the highest (i.e., through rapid spread and fear of future lockdowns).
That was a harrowing period. But I encouraged my readers not to panic sell. There were simply too many great companies at ridiculously low valuations.
And as you likely know, we’re invested in companies involved in the 5G wireless rollout, cloud-based applications, and biotechnology. When it became clear in March that the world was going to institute lockdowns, I knew that these companies’ products and services would be in high demand.
And that’s precisely what happened. The market came to its senses and our portfolio, especially our 5G, cloud-based, and biotechnology companies, more than recovered their losses.
I’ll give just one example…
I recommended a company called DocuSign (DOCU) in June of last year. This is a great company that enables electronic contracts and signatures. And I knew that DocuSign’s services would be in high demand due to more and more business transactions being conducted electronically.
But the market still punished DocuSign. It fell 16% with the rest of the market. But look at what happened to DocuSign after the market “digested” the implications for this company. The stock rallied 136% from its March low. And we’re now sitting on a gain of 206% with this technology company.
So to answer your question: Yes, it’s true that knee-jerk reactions can punish our portfolio companies. But I’ve purposely positioned my readers in companies that will thrive in the environment we’re living in right now.
We’re clearly seeing signs of economic recovery. Weekly jobless claims continue to drop. Continuing unemployment claims are also dropping. New jobs are increasing. Retail sales are recovering quickly, and lockdown restrictions continue to lift state by state.
On top of that, we are seeing incredible progress toward successful therapies and vaccines for COVID-19. To me, this is the real wildcard.
Gilead’s remdesivir has already proven to be effective, but if Moderna’s mRNA vaccine or Regeneron’s antibody cocktail prove to be effective by the end of this summer, then there would be a vaccine available for emergency use in time for the expected increase of the virus in the fall.
Having this would likely mean avoiding another round of lockdowns – and the market would certainly like that.
And that’s our biggest risk right now… a period where there is no vaccine, the spread of COVID-19 returns to March levels, and we have to shut down the economy again. That’s my biggest concern about the market right now.
But there is one dynamic that we haven’t considered yet… the Federal Reserve.
During the last couple of months, the Fed has backstopped corporate debt by buying ETFs. By doing so, it supported the corporate debt markets, which would have normally collapsed in this environment.
And this month, it will be going out to prop up individual company debt offerings. This is highly unusual. But my point is this. The Fed appears willing to do whatever it takes to avoid complete chaos in the financial markets. If the Fed had to step in and buy equity ETFs, it wouldn’t surprise me a bit.
But a 10–15% pullback would be healthy and warranted given the current valuations I’m seeing in the market.
And I actually hope that it happens so that my subscribers can get shares in great companies at a good valuation. I’m confident that the market’s recovery after that will be as strong as what we’ve seen over the last three months.
Panic is temporary. Logic eventually wins out. And that’s why our Near Future portfolio is showing positive returns on 18 of our current 21 holdings. And our three laggards are only down by 16%, 4%, and 2%.
Thanks for your question.
Here’s the 5G phone I recommend you buy…
Next up is a very common question: Which 5G phone should we buy?
When the new phones become more available, which company’s phone would you advise purchasing? T-Mobile/Sprint or one of the other sources?
– Marie F.
Hi, Marie. Thanks for your question. Let’s talk about both wireless network operators and 5G-enabled phones. First, the networks.
At a national level in the U.S., Verizon has the best-quality 4G and 5G wireless networks. Verizon is building out its 5G networks in a way that maximizes the performance of what 5G technology is capable of.
AT&T, however, got its hands slapped for marketing 4G services as “5GE.” That was just a marketing ploy. AT&T is building out its 5G network as well, but I prefer Verizon’s engineering over AT&T.
T-Mobile is marketing a nationwide 5G network by the end of 2020, but it is really what I consider a “light” version of 5G – we won’t see 1 gigabit per second (Gbps) speeds over that network. T-Mobile is also going through a large merger right now with Sprint, and it will take years to complete the combination.
But as for your question, which 5G phone should we buy?
We may be surprised to learn that as of May, there are already 32 5G phones available to consumers. Major handset manufacturers like Samsung and LG are among the companies that offer 5G devices.
But if you’re looking for my recommendation on my favorite phone, then I’d suggest we steer clear of all these smartphones. I have a strong preference for Apple’s 5G-enabled iPhone, which is due out later this year.
And there’s one big reason why I prefer Apple’s products: privacy. Here’s what I mean by that…
The software on our smartphones is known as an operating system (OS). Google’s Android operating system is installed in about 87% of the world’s smartphones. Apple’s iOS is installed in the remaining 13%. Essentially, we have only two choices for operating systems: Google’s Android OS or Apple’s iOS.
And Google’s Android is notorious for mining our personal data. A 2018 study found that Google’s Android collects 10 times the amount of personal data as Apple’s iOS.
And we might be surprised to learn that Google’s Android operating system sent data to Google even when users were not interacting with their phones.
Researchers found that a dormant Android phone, with Google’s Chrome web browser running in the background, sent location data to Google 340 times in one day.
The dormant iPhone, without Chrome running, didn’t send “any appreciable data (location or otherwise)” back to Google.
This is a very smart move by Apple. By prioritizing user privacy, it set itself apart from Google. And that’s why I strongly prefer to use Apple’s products.
And there is one more thing.
Apple has complete control over its operating system. When it needs to send out a security update, we receive a notification on our phones. It can push out the new software quickly.
With Android, it is completely different. Google makes the operating system update available to the wireless operator, and then the wireless operator has to test the new update on all Android-enabled phones.
This typically takes months to do. It means that users’ phones are exposed to security holes for months before the software gets updated.
Marie, if you’re interested in a 5G phone, I suggest waiting a few months to see if Apple’s new iPhone is a good fit for you.
And I would also mention that Apple’s 5G iPhone has important implications for investors. When the new iPhone launches, hundreds of millions of people will be eager to upgrade. And that has important implications for key Apple suppliers.
I’ve identified one Apple supplier that I expect to do very well once the 5G iPhone hits the shelves. Without this company’s product, the 5G iPhone won’t work. That’s why this company is my No. 1 large-cap 5G stock of 2020. The details right here.
Is 5G a “safe haven” sector?
Our final question was originally directed to my colleague Chris Lowe, editor of The Daily Cut. Chris and I keep in touch. He occasionally asks me to weigh in on reader questions about the technology sector.
Hello, Chris Lowe: Please tell me what sectors are safe during a depression? I understand from your writings that gold, gold stocks (precious metals), and cash are the best. But what about FAANG, biotech, and 5G stocks? Thank you.
– Ravi M.
Hi, Ravi.
I can help answer your question. I’ll give you my opinion on each of the groups you mentioned.
The FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have been on an incredible run since the fear-induced selling in late February and early March.
Four of the five stocks are up double digits for the year. Amazon is up an impressive 41%. Compare that to the S&P 500, which is down 3.8% year-to-date.
This is very logical.
In the wake of the COVID-19 lockdowns, the world turned to a variety of technologies to carry on with daily tasks.
Can’t go to the grocery store? Order groceries or everyday products on Amazon’s e-commerce platform.
A company’s workforce can’t go into the office? They must rely on cloud-based applications supported by Amazon’s AWS.
Stuck at home? Turn on Netflix or browse the web, where Google can serve us more ads.
Need to stay in touch with friends and family? Scroll through Facebook or Instagram to communicate.
That’s a very high-level explanation. But it demonstrates how these companies have been supplying the essential technology for a world on lockdown.
As for biotech…
Thanks to COVID-19, the biotech industry is progressing at a pace I have never seen in all my years as an analyst. Breakthroughs that would typically take years are happening in months or weeks.
Suddenly, the world is aware how quickly we can sequence a virus and develop potential vaccines… use AI to find compounds that might bind to COVID-19 and render it ineffective… and how we can create antibodies that can fight a virus in a matter of weeks.
Every venture capitalist and private equity house has just woken up to how powerful these technologies are and how quickly biotech can move. We’re going to see an acceleration in biotech investment, early stage companies, and IPOs (initial public offerings) as a result.
And many biotech companies are not impacted by supply chain problems. They don’t care if the market is volatile. And when they make progress with their research and development, the stocks run higher.
And finally, 5G…
My readers already know this, but the COVID-19 lockdowns caused data traffic to spike dramatically.
In the weeks after lockdowns were initiated, videoconferencing traffic – for both work and socializing – spiked 300%. Gaming traffic exploded 400%… probably because the kids are staying home from school.
Our current network infrastructure just can’t handle this volume of data traffic effectively. The world needs 5G more than ever. For companies that provide 5G technology, business is booming. And that’s shown up in a number of 5G stocks.
Take SBA Communications (SBAC). This is a company that erects and maintains wireless infrastructure, including 5G wireless architecture. I recommended this company to readers of my large-cap investing service, The Near Future Report, in June 2018.
As you can see, SBAC sold off with the rest of the market earlier this year. But once the market realized how essential 5G technology would be for a world in quarantine, the stock rallied.
It regained all of its losses and even made a new 52 week high. We sold SBAC for a 90% gain in less than two years. Outstanding.
We must remember that 5G is not a “nice to have” technology. It’s an essential piece of national architecture on par with roads, bridges, and tunnels.
5G is coming no matter what the economy is doing. In the event of a depression – which I don’t expect – quality 5G companies will weather the storm better than the broader market.
For readers interested in which 5G companies I’m recommending right now, go right here.
One final thought.
It can be useful to analyze where money is being invested. That can show us where to invest. For example, where have venture capitalists, private equity firms, corporations, and even governments been investing during the last six months?
The answer? 5G wireless technology and infrastructure, biotechnology, cloud-based services, artificial intelligence, and semiconductor technology.
We can find great investment opportunities regardless of the economic environment by following where the money flows.
That’s all the time we have this week. If you’d like me to answer your question next Friday, submit it right here. I’ll do my best to get to it.
Have a great weekend.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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