Netflix (NFLX) has given up its gains since 2020. Shares are now off more than 63% for the year. The problems are mounting for Facebook – sorry, Meta Platforms (FB)- as it tries to transition from a social media giant into the dystopian hellscape known as the Metaverse. Its stock is now off 45% to start the year – and the pain is getting worse.
Cathie Wood’s ARK Innovation ETF (ARKK) has become a wealthy disintegration fund. It, too, is off 45%. The tech sector is done. Done. Done.
We’ll probably look back in a few months and ask – why didn’t we short it when we could? The reality is that shorting is expensive… and short-covering threatens every short-term attempt to profit from downturns. It’s all part of Wall Street’s game with us.
As I noted yesterday, Wall Street still recommends stocks trading at nosebleed levels while institutions have been net sellers for the last four months. I’m trying to save you money… not lose it. So, I want to give you the first of many strategies that I expect will make investors wealthy as capital continues to rotate out of tech. Let’s discuss.
There’s Plenty of Pain Left in Tech
Listen… It’s been a great decade for social media stocks. Everyone loves cloud technology, but it’s time to pull the plug. Consumer tech? Software as a service? How about gig economy plays?
Well, it’s time to say goodnight – unless the insiders are buying or the multiples have collapsed into dust. If you’re planning on buying the Dip right now on some of these big names… Good luck. You’ll be happy if you make 4% a year.
We are in the middle of a valuation compression period. I know that many fund managers and media outlets are suggesting that “This time is different…”
The Nasdaq 100 (QQQ) has been off about 18.45% since the start of the year. As I’ve noted, institutions have been large, net sellers of tech stocks every time a short-term pop happens. And there are still plenty of people holding lots of stocks that can trade at nosebleed levels when valuations don’t matter.
Here’s the problem. Valuation doesn’t matter when the Fed pumps trillions of dollars into the market and expands its balance sheet.
Valuations matter on the way down. And we’re on the way down. Did you notice anyone talking about GDP numbers or inflation reports during the 2020-2021 rally? Of course not. No one cares about economics and fundamentals when there’s cheap money flying around.
But now we’re on the other side. Investors are terrified of GDP numbers, inflation numbers, interest rate hikes, and the Fed’s tapering plans. There is still an untold amount of stocks out there that still must experience “price discovery,” that problematic process where everyone in the market gets together and asks: “What is this crap worth?” We’re about to find out.
Value Strategy No. 1
If you’re the buy-and-hold type, then you need to wait until the insiders at these giant technology firms start buying their stocks. If they aren’t buying… Why are you? Ask that question at least five times before you try to buy the dip on Netflix or Meta Platforms.
If you’re interested in value, I’m your guy. Take a look at the community banking sector.
Despite all the concerns about a recession, banks still operate in the business of lending. And because deposits are so critical to their expansion plans, companies buy smaller ones to takeover their balance sheets and customer bases.
That’s why we like to buy banks that are trading under a price to tangible book value of 1 or less. (TB/V of under 1). This means that the bank effectively trades for less than its liquidation value.
Think of it this way. A bank might be worth $1 million. But the market – for some reason – trades it at a valuation of $800,000. That would be a price to tangible book value of 0.8.
And there are many of these banks for reasons that make little sense if you dig too deep. For example, sometimes, the banks have market capitalizations that can’t attract institutional investors. Sometimes, bigger names suck up capital. Sometimes there is bias against a specific region.
The banking space has experienced consolidation of 3% to 5% annually since 1987. As banks attempt to compete in a rising interest rate environment, they will continue buying up smaller banks, their associated deposits, and their customer lists. Nowhere is that more likely to happen than at the community banking level.
Looking to Banking Stocks
According to my backtesting of small-bank investment from January 2000 to December 2021, a solid community bank investment strategy has delivered annualized returns of more than 25%. And I expect that will continue, even in the face of rising rates.
If you’re looking for a few companies to get you started, consider these companies trading under a price-to-tangible book value of 1 or less. All of them are potential takeover targets in the years ahead.