• A short-term change in market sentiment…
  • Will Tesla license its software?
  • How our SPAC warrants will work…

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.

But before we dive in, let me extend an invitation once more to my upcoming investor summit. There, we will be talking about a small area of tech where we can still find venture capital-like returns.

This is especially important because regular investors often miss out on the best returns… After the investment banks, private investors, and insiders take the largest gains, we’re so often left with just the scraps.

That’s why I’m so excited about “Timed Stocks.”

I call the tiny companies in this space “Timed Stocks” because, thanks to a branch of the federal government, they have a “timer” attached to their share prices. Once that timer finishes ticking down, the share price can jump hundreds – even thousands – of percent in weeks or days.

And we’re entering a “final countdown” period, which is why I don’t want any readers to miss out.

2021 has already proven to be a year unlike any other in this sector… and it’s still only March. The gains from these stocks are getting bigger, and they’re happening faster.

I’ll share all the details next Thursday, March 18, at 8 p.m. ET during my Timed Stocks: Final Countdown event. Go right here to make sure your spot is reserved.

I look forward to seeing you all there.

Now let’s turn to our mailbag. If you have a question you’d like answered next week, be sure you submit it right here.

My perspective on the market action…

Let’s begin with a question on market sentiment:

Hello. I’ve been a member going on a year and a half. I’ve certainly done well and am now in over 40 positions, so I consider myself diversified enough. However, from a sector perspective, I’m really not, being mostly in one form of technology or another, and all small cap and lower.

So, this past month, I’ve certainly suffered some pretty serious fallout from what I consider, or hope is, a short-term change in sentiment. I haven’t seen any remarks from Brownstone regarding this rotation away from biotechnology and technology. I’m certainly keeping the faith, but getting your perspectives on things is always beneficial. Thanks.

– Graham L.

Hi, Graham, and thanks for being a member of Brownstone Research. I know you’re not alone in wondering what kind of market action to expect going forward this year.

After all, the equity markets, especially the tech-heavy Nasdaq, have been screaming higher for nearly 12 months now. The Nasdaq Composite Index soared 105% from the fear- and panic-driven lows of March 2020 to February 2021, hitting an all-time high on February 12.

But then the Nasdaq Composite pulled back 10.5% as of Monday’s close, causing a number of positions in our model portfolios to give up some ground as well.

While the Nasdaq has risen again this week, the dip has left a number of investors worried about a more significant pullback.

Many investors can panic when seeing this kind of market volatility. But let me offer some reassurance. As long as there isn’t any systemic change in market conditions, I get excited in these moments. These dips can present great entry points and bring other promising stocks back into range.

In short, the recent market action is a healthy market correction and a fantastic buying opportunity.

My biggest struggle lately has been finding great companies trading at reasonable valuations. Whenever I see this happening in the market, I know a short-term pullback is warranted.

Of course, the financial media will fixate on all the reasons stocks could go lower. This fear is often great for ratings. But much of it is just noise.

I can’t give personal investing advice. But right now, my general sense is that I don’t want fear to shake us out of the great portfolio companies in my research services.

After all, the facts of the current economic and market conditions haven’t changed…

The Federal Reserve has explicitly guaranteed that it will keep interest rates at record low levels for as far out as we can see. Jobs are coming back to the economy quickly.

We have record levels of dry powder that continue to enter the market and the most vibrant initial public offering (IPO) market I’ve seen in at least a decade. Plus, the end is in sight for the pandemic with the rapid rollout of vaccines.

And I can assure you that there has not been any rotation out of, or away from, technology and biotechnology. These are the two sectors that money continues to flow into more than any other sectors.

And with the pipeline of new tech and biotech IPOs waiting to go public this year, there will be an outlet for all of that dry powder. 

And we shouldn’t forget that the rate of technological advancement continues to accelerate. We have a lot to look forward to in 2021.

And I’d like to offer one final point on diversification.

It is true that having a basket of high-potential stocks in a particular sector does provide some diversification, albeit just in the single sector.

For example, we employ this strategy well in Early Stage Trader in order to ensure that we have exposure to the real outliers that drive overall portfolio gains, as well as diversification over time (all early stage stocks won’t go up at the exact same time).

But when we think about diversification, it usually refers to diversification across multiple asset classes. A good financial advisor can work with investors to determine a healthy asset allocation model to provide overall investment portfolio diversification.

Examples would be a portfolio of real estate, income-producing properties, precious metals, fixed income investments, large-cap stocks, small-cap technology stocks, early stage biotechnology stocks, potential digital assets, and private early stage investments.

In time, my plan is to expand Brownstone Research’s own portfolio of investment research products to cover most, if not all, of those asset classes. That way, we’ll be able to provide extremely valuable and timely investment research for subscribers regardless of what point they are in their lives.

And while we’ll never be able to provide individualized investment advice, we will be able to continue to help investors not only grow their wealth, but also help protect their wealth. And in this way, we aim to help our subscribers save up for a happy, healthy, and fulfilling retirement.

Where will Tesla go from here?

Next, a reader wants to know more about competition for Tesla:

Hello, Jeff, I was just reading an article from another investment service that I follow, and they were talking about Tesla having problems in the future because of legacy car companies developing electric vehicles (EVs), but they are not considering Tesla’s advantage because of their AI.

I was wondering if you think Tesla might consider doing something like Google and license its software out to other car companies and allow them to opt in to its SAV network when it goes live? Thank you.

– Synthya G.

Hi, Synthya, and thanks for your question. It’s really a great one. Great job thinking outside of the box.

Tesla is an exciting company that has long suffered from doubters and bad press even as its share price has skyrocketed. So let’s cover where I see it going in the future…

First, let’s look at Tesla’s self-driving tech…

As of the end of last year, Tesla vehicles have driven more than five billion miles on Autopilot. As they drive on Autopilot, these vehicles “learn” to drive better thanks to the billions of miles of data collected. That’s how the company has made so much progress in a short period of time.

I recently “drove” a self-driving Tesla to check in and see how the technology has progressed in recent years. What I experienced was impressive.

(In fact, it helped me identify what Elon Musk’s next big project in this space will be… If anyone would like to watch the demonstration, please go right here.)

And this is why I’m not worried about competition from the legacy carmakers. Unlike other carmakers, Tesla’s EVs are designed around a computing architecture. They are software-oriented. And they can be upgraded as simply as we update the operating systems on our computers, phones, and tablets. It’s a remarkable system for innovating and iterating quickly.

And what makes Tesla’s approach unique in the industry is that its artificial intelligence software used for self-driving is being designed to function in every environment. Tesla is not preprogramming geographic areas or maps like other companies are doing.

Tesla is putting its software out in the wild, leveraging its existing user base to accelerate the learning process, collect more data, and put changes to work quickly. It’s incredibly exciting to watch.

And I am very encouraged by the results. In fact, I’ve predicted that full Level 5 autonomy will enable Tesla’s masterstroke – a fleet of self-driving vehicles in a ride-hailing network similar to Uber or Lyft. Tesla owners will be able to opt in to this network and send out their vehicles to earn money when they aren’t using them.

Imagine what happens if a Tesla can make enough money each month to pay its own lease. At that point, the car essentially becomes “free” from a purchase/lease perspective. How many consumers will rush out to lease a Tesla then?

Which brings me to your question. Why would Tesla give up that competitive advantage to any rivals in the EV space?

It literally has something that no other car company has. And once the SAV network is launched and the income generated from the SAV network literally pays for a car lease, there will be more demand for what will essentially be “no money out of pocket” Tesla cars than Tesla itself will be able to produce. That’s one heck of a good problem to have.

Has Apple licensed its iOS to other smartphone manufacturers? No way. It wouldn’t be able to control the overall user experience if it did that.

A bad implementation would damage Apple’s incredible brand. This is another reason why it is unlikely Tesla would license out its own AI software for self-driving.

And while there is always a small chance that it would do that, the strategy that you’ve suggested is one that Google will most certainly pursue.

Google, through its self-driving division Waymo, has no interest in being a carmaker. Its master plan is really to license its self-driving technology so that it can be used by existing carmakers.

This is exactly the same strategy that Google employed with smartphones and its own Android operating system. It developed and designed what are essentially reference models of smartphones – Google Pixel phones that run Android – in order to empower other smartphone manufacturers to develop their own Android-based models.

Google basically seeded the market to prove the technology, and then it handed over the tech to the industry to build upon.

It is perversely motivated to do so because, with every Android phone sold into the market, Google has been collecting data that it leverages to sell more advertising. This is exactly what Google will do with its automotive operating system.

Do SPAC warrants “carry over”?

Let’s conclude with a question about warrants:

I see this SPAC has warrants… They seem worthless unless they carry over to the new security when the SPAC dissolves. Do you know how this would work? Curious, as it might make sense to purchase if they carry over. Thanks in advance…

– Brian S.

Hi, Brian, and thanks for writing in. Special purpose acquisition corporations (SPACs) are something we’ve been talking a lot about recently with the launch of my research service Blank Check Speculator. And I’m sure you’re not the only one with this question.

But first, let me provide a little background.

SPACs – also known as blank check companies – exist only to help a private company “back in” to the public markets without going the traditional IPO route. This happens when a public company (the SPAC) and a private company complete a reverse merger. The SPAC effectively vanishes, replaced with the name of the newly public company that it acquired.

And in Blank Check Speculator, we invest in SPACs by buying units. Within 52 days of when the SPAC itself goes public, these units can be “split” into shares and warrants. Each unit splits into one share and a fraction of a warrant.

Most investors are probably comfortable investing in shares. But warrants may not be as familiar…

A warrant gives you the right – but not the obligation – to buy a share of the stock at a certain price within a certain time frame (usually five to seven years). When you exercise a warrant, you’re buying another share of stock from the company for a pre-determined price (often $11.50 for SPACs).

And this is one of the reasons SPACs can be exciting to invest in. By purchasing units, we gain two separate securities that we can profit from.

But what happens to our SPAC shares and warrants when the SPAC merges with the private company?

The good news is that we will still have our shares and warrants. But the ticker of each will change to the name of the new company (the warrants will often have a W appended to the ticker). This is the key way we can essentially gain “pre-IPO” shares in exciting companies.

Let’s illustrate this with a quick example.

On August 23, 2017, successful venture capitalist Chamath Palihapitiya filed with the Securities and Exchange Commission (SEC) to create his SPAC. It was called Social Capital Hedosophia Holdings, and it traded under the ticker IPOA.

Then, in October 2019, Palihapitiya announced an exciting merger with Virgin Galactic Holdings, Richard Branson’s Virgin division that is bringing commercial spaceflight to the world. At that stage, IPOA filed to change its ticker to SPCE, and as we can see below, what followed was an incredible ride.

In the months that followed the reverse merger of Virgin Galactic into IPOA, the stock rocketed 260%. And the rise in the warrants was even more spectacular. At their peak, the warrants rose 1,371%.

And this is a prime example of why our warrant coverage is such an important part of our strategy at Blank Check Speculator. (If anyone would like to join us, go right here for all the details.)

That’s all we have time for this week.

If you have a question for a future mailbag, you can send it to me right here.

Have a great weekend.


Jeff Brown
Editor, The Bleeding Edge

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