Very Strong Day For Small Cap Value
Wednesday was a solid day for all stocks, especially the value small caps. Russell 2000 value index was up 4.18% which outperformed the Russell 2000 which was up 3.5%. It’s nice to own the tech stocks because even when there is sector rotation into the other areas of the market, they don’t fall. Nasdaq was up 0.59%. Amazon underperformed as it was down 2.44%. It has been on a rough run as it down 6% in its 3 day losing streak. This decline is meaningless. Personally, I’m still very bearish on all the big tech names and Tesla.
As you can see from the chart below, even though we have seen rotation out of tech and into the small cap value stocks, the Nasdaq still extended its streak without back to back declines. It’s now at 43 which puts it far above any of the streaks in the late 1990s. Record is 48 days in 1973.
It's highly doubtful that the streak will break the record high even though it is so close. When we run into a weak period, the Nasdaq will underperform as the vaccine data continues to come in strong. It’s amazing that the Nasdaq has stayed the course without Amazon. However, once Tesla corrects in the coming days, the Nasdaq will fall.
Large Cap Tech Bubble
Large cap tech stocks are extremely expensive versus the rest of the market. That’s even though they are mostly seeing slower growth. Obviously, Amazon is getting a bump in online retail sales, but AWS sales growth has been slowing for a few quarters. It won’t power as much profit growth in the next few years.
Furthermore, Facebook won’t be profiting off election ads. That’s symbolic of the long term political issues it faces. People act like the weak consumer doesn’t hurt the FANGs, but Apple still sells expensive smartphones. If the consumer is weak this fall, it won’t sell as many as it hopes.
As you can see from the chart below, the large cap technology median growth premium is high when you look at the most excessive versus least expensive tech stocks. This is based on forward earnings expectations. Top quintile growth premium is higher than ever before as it has a 281% premium.
That’s well over 1 standard deviation above the mean. It’s over 2 standard deviations, but the chart doesn’t detail this. This chart is just versus tech stocks which are themselves overvalued.
Growth Bubble
Obviously, the chart above is only one of the hundreds of ways we can show the large cap tech stocks are in a bubble like the nifty 50 stocks in the 1970s. The chart below adds to the explanation. As you can see, pure growth divided by pure value is at the highest level since the peak of the tech bubble.
We know this is a bubble because stocks such as Shopify and Tesla have such high valuations, they make no sense. FANG investors wish they were different from this mess, but they are at the heart of the bubble.
An explosion in these ancillary stocks in the cloud and EV industries shows the bubble is very frothy. FANG stocks won’t avoid trouble. Frankly, I’m hoping my value stocks avoid it. Amazon is already down 6% and the correction hasn’t even started. Therefore, I am upping my downside expectation for the FANG stocks to over 20%. Amazon, Netflix, and Apple will likely be the worst hit. Shopify can fall over 75% and Tesla can fall over 50%.
Retail Accounts Are Everywhere
Robinhood just raised $320 million more money which brings its latest round to $600 million which gives it an $8.6 billion valuation. We are seeing such a high valuation because of the spike in retail trading activity. It wouldn’t be surprising if the company does an IPO next year. Personally, I probably wouldn’t invest in the stock, but it’s impossible to tell until the financials come out.
Penn National Gaming, which is very popular with retail traders, was up 18% on Wednesday. There is likely extremely high resistance in the high 30s. It hasn’t been able to pass this range since it peaked in July 2018. Dave Portnoy is trying his hardest to pump the stock to a new high. If it does hit a new high, that will be the peak of this retail trading craze.
As you can see from the chart below, all the online retail brokers saw a huge swath of new users this year. This data is as of June 9th. Biggest spike in new retail traders has already happened and is tapering off. An original spike came from people trying to buy the dip and investing their stimulus checks.
Now there is no dip left and there is no more stimulus money. Only thing we have left is FOMO traders. To be clear, there are still plenty of new accounts being opened. We will only see them shuttered when the popular retail stocks crash.
The most owned stock on Robinhood is Ford which is owned by 941,929 users. It will be the first to 1 million. This doesn’t represent much in my opinion because a lot of people got this as their free stock for getting a friend to join. Tesla is in 10th place as 484,319 users own it.
Many of them likely own partial shares. Amazon is in 13th place with 368,019 users. Robinhood traders aren’t only into the hot stocks as Coke and AT&T are in 34th and 35th place. These are value stock laggards I wouldn’t invest in. These are just big names traders know about.
Even though ServiceNow is a momentum cloud stock, it’s in 570th place because it’s not well known. Salesforce.com is in 145th place as it’s more well known.