They Ain't Comin' Back, Folks
Editor's note: Don't hold your breath waiting on a return to pandemic-era peaks...
Last year, tech stocks soared to new heights as speculators piled into the sector. But with rising inflation, ongoing geopolitical tensions, and global supply-chain disruptions throwing us into a bear market, folks have been fleeing tech stocks en masse.
This has led to the downfall of pandemic-era darlings like Peloton Interactive and many more. And Income Intelligence editor Dr. David "Doc" Eifrig believes these tech stocks are unlikely to return to last year's levels...
In today's Masters Series, adapted from the May issue of Income Intelligence, Doc warns against the dangers of extreme valuations... details how those outlandish expectations led to the downtrend in tech stocks... and explains why a recovery to peak pandemic levels is far-fetched...
They Ain't Comin' Back, Folks
When a popular stock has fallen 60%, it's easy to make two assumptions...
- If a stock is down 60%, that means it's a great deal.
- This stock may be down 60%, but it will come back eventually.
If you find yourself saying either of those things, be extremely careful.
It's tempting to try to buy a dip before a quick bounce-back, or to expect you'll hold for the long term as a stock recovers more slowly. But in today's environment, those are simplistic ideas that will not serve you well...
These ideas rely on a psychological bias called "anchoring." Our brains hook on to numbers from the past – even if they're completely irrelevant – and anchor to those numbers some sort of expectations.
For example, a price negotiation is shaped by the first amount someone proposes. Our last salary helps determine what employers will offer us at the next job. And past prices stick in our head as some sort of fair value to measure things against.
But the markets don't work like that.
You need to forget where tech stocks were in November 2021. Get it out of your head. That number has no relevance to the world we live in today.
After all, valuation really does matter. It's not simple enough to say that this is a good company with a bright future, so it will trade at an absurd valuation again.
Consider Cisco...
In 2000, Cisco Systems (CSCO) traded for $77. It fell more than 85% in the dot-com crash. And it took nearly two decades to get back just half of that previous share price.
The problem wasn't that Cisco was a bad company. Unlike many short-term winners in the dot-com bubble, it had a real business with huge cash flows. But it traded for 60 times sales in 2000, and even a great business can't sustain that.
Today, Cisco trades at a mere 4 times sales.
Or say you bought Citigroup (C) in 2007...
Citigroup shares can and likely will rise from today's level. But in 2007, Citigroup looked like the biggest and most profitable bank ever to exist. Now it's trying twice as hard to establish the narrative that it's even OK...
But the dot-com boom, the housing market in 2008, and tech stocks again in 2021 were periods of excess, frenzy, and a big story about what the future would look like. And everyone thought these were safe bets because it was "different this time."
If you buy into the big story – when it's too expensive – a stock simply can't get back there.
That's where we find ourselves today: the aftermath of the big stories collapsing under their own unattainable expectations. Some examples...
Netflix (NFLX) was supposed to be a global entertainment powerhouse that dominated with exclusive content all over the world. But investors finally figured out that Netflix pays more to create or license content than its subscribers are willing to pay for.
Instead of a tech pioneer, they're treating it like a cable TV company with an expensive habit for making TV shows, just one that delivers service over the Internet. And its plummeting valuation reflects that sentiment shift.
Or consider Carvana (CVNA). The used-car seller has fallen from $370 to $38 – a decline of 90%. The company sells cars quickly and conveniently online, but it runs at a huge loss of $3 billion in cash flow on $12 billion in sales. At its peak, Carvana was valued at $60 billion.
The only way the valuation made sense was if Carvana could take over the market and then use that power to ramp up its profits. (Never mind that it was already America's No. 2 seller of used cars at the time of that valuation – there wasn't that much room to grow.)
Then there's Zoom Video Communications (ZM) – the pandemic-darling video-conferencing service – which has declined 84% from a $160 billion valuation in 2020 to around $30 billion today.
Like Cisco in 2000, Zoom's fundamentals are fine... It's profitable and growing. But the story for Zoom... well, I don't even know what the story was. But at $160 billion, Zoom was almost as valuable as Nike (NKE) or Salesforce (CRM), trading for an unheard-of 120 times sales.
That story simply isn't coming back... and it's the same for a lot of these tech names. They may rise, just not back to extreme valuations. Investors aren't interested anymore in the big stories that sold them in 2021.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Doc doesn't expect tech stocks to explode higher, but that doesn't mean he thinks you should be sitting on your hands...
You see, he says right now we're on the verge of the biggest shock to the U.S. retirement system that he has ever seen.
That's why on July 19, he's coming forward to show you exactly what's going on... how to prepare for it... and how this development could help you compound your wealth by 20% per year or more in some of the lowest-risk assets on the market. Get the full details here.