By David Forest, editor, Strategic Trader
You know something’s wrong when even corporate CEOs say their share prices are too high.
That’s what happened during the massive Airbnb initial public offering (IPO) last December. Airbnb’s CEO Brian Chesky said simply, “I don’t know what else to say.”
Chesky was speechless after Airbnb’s share price more than doubled the day of the IPO. That gave the tech darling an improbable $100 billion market capitalization – for a company that makes zero profits, and doesn’t return a dime to shareholders.
The “price-to-book ratio” is a common metric used to determine whether a stock is overvalued or undervalued. In Airbnb’s case, the stock had a price-to-book ratio of 232x at the time of its IPO.
For comparison, stocks in the S&P 500 have a price-to-book ratio of 4x. Just four. Airbnb was 58 times more expensive.
You can see why a CEO might be speechless.
Some tech leaders try to put a better spin on these out-of-whack valuations.
“Everyone is entitled to their opinion,” said DoorDash CEO Tony Xu, suggesting that valuations are just in the eye of the beholder.
But in the back of everyone’s minds – CEOs, analysts, and investors – they’re worried.
Because this is exactly what happened before the dot-com crash, one of the greatest stock wipeouts of our time.
We’re Nearing Dangerous “Sky-High” Valuations
In March 2000, the tech-heavy Nasdaq 100 saw its price-to-book ratio spike to an all-time high. Warning signs were flashing of an impending crash.
The ratio for tech stocks then was 14x. (Remember, at the time of its IPO, Airbnb was 232x. Tesla was 37.5x.)
We all know what happened next. The tech rout started in March 2000, and eventually dropped stock prices nearly 80%. Investors lost a combined $5 trillion.
Many individuals saw their savings wiped out. Headlines like “I lost my pension in the dot-com crash” are a grim legacy.
I’m extra concerned this time around. In 2000, at least demographics were on our side.
Back in 2000, the average baby boomer – born in the middle of the boom, in 1955 – was 45 years old. Losing your savings at that age, you still had time to rebuild. Not pleasant, but doable.
Today however, the average baby boomer is 65 years old. Losing your savings in a crash isn’t an option. For a retiree, it would be devastating – almost impossible to come back from.
But selling out of tech stocks right now is tricky. They’ve delivered some of the best gains on the market recently. Tesla’s stock jumped 718% in 2020.
Those big returns are important. With Treasurys yielding almost nothing, investors are desperate for a way to grow their savings.
Investors today need a middle ground: a way to get tech-like returns… without braving the devastating risk of a collapse.
I’ve searched for an answer that helps investors reduce risk… without sacrificing upside. And I believe I’ve found it – with a class of investments called warrants.
Tech-Like Returns… Without the Risk of Collapse
Warrants are a relatively simple type of investment.
They trade on major exchanges with ticker symbols just like regular stocks. And you can buy and sell them with a few clicks through almost any brokerage account.
But few investors take advantage of warrants. Most finance pros know about these investments, but many individual investors have never heard of them.
That’s a massive opportunity. Because warrants have much bigger upside than stocks.
Two warrants I recently recommended to readers of my Strategic Trader advisory returned 4,942% and 2,805% in 2020. They beat Tesla’s incredible performance by a wide margin.
Four other warrants in my portfolio are up between 263% and 1,252%.
Those are phenomenal returns. But there’s another reason I’m really excited about warrants…
How to Get Outsized Gains From “Boring” Stocks
These unique investments allow investors to get outsized returns even from “boring” sectors. The kind that aren’t overvalued like tech… or at risk of a crash.
Here’s a chart showing the average valuation for the major sectors of the stock market.
While tech is running hot, sectors like energy, utilities, and industrials are selling cheap. If you buy the average energy stock today, it’s 80% cheaper than tech companies, on a price-to-book basis.
That low valuation insulates us against losses in the event of a crash. In fact, sectors like utilities are widely viewed as defensive investments. They can weather the storm, and even profit during down markets.
The problem with these sectors is the stocks don’t deliver big returns.
In 2019, the Select Sector Index of utilities stocks gained 26%. Not bad. But it’s far from the hundreds of percent tech stocks like Tesla are delivering.
But with warrants, you can supercharge your gains even in boring sectors. The 4,942% gain I mentioned above was on a mattress company. It doesn’t get much more basic than that.
Warrants allow us to make huge returns… on neglected sectors of the economy.
And at the same time, they allow us to reduce our risk of being wiped out by a crash.
Now, I’m not suggesting you sell out of tech investments completely. Far from it. Almost everyone today has a portion of their portfolio in big names like Facebook, Google, and the like.
But I am concerned about the future for these stocks.
If you are as well, I urge you to look at my research on warrants. Moving even a small portion of your portfolio into these unique investments could protect you against financial devastation in a crash… while delivering gains just as good as, or even better than, high-flying tech stocks.
Keep walking the path,
Editor, Strategic Trader