Dave’s note on the markets: Yesterday was another down day on the markets.
Talking to investors I know, many were discouraged. They feel like stocks keep sliding, and there might not be an end in sight.
That, of course, isn’t true. There’s always a bottom. Always.
There’s always a rebound, too. The question is, “Which stocks will bounce, and which will stay subdued?”
In times like these, I go back to the basics.
The resource stocks I focus on are enjoying exceptional business performance. Revenues and profits are historically high.
Yesterday, I recommended a new energy company that’s paying a 9% dividend yield. That’s phenomenal, when you consider the S&P pays just 1.5% right now. (International Speculator subscribers can catch up here.)
That’s not to say these companies are immune to bad days. They’ll likely go down like everything else during panics.
But that’s okay. If you follow me and Casey Research… you know we’ve done the work and the analysis. The businesses we cover are strong and primed for the recovery, whenever it comes.
With that conviction, we can hold or even buy more. That’s a formula great investors have used for centuries to pick up amazing stocks on the cheap.
When people look back on it, it seems so obvious to buy the dip. To buy when there’s blood in the streets. But the tricky part is knowing what to buy.
We’ve done that work. We’re well-positioned.
That means on down days we can relax. There will likely be more down days. But we’re in the right place, with the right companies.
So we just need to keep walking the path.
Below, my colleague Andrey Dashkov is doing just that… and giving a great list of stocks to consider in today’s Dispatch.
By Andrey Dashkov, analyst, Casey Research
Tech sold off hard this year.
The tech-heavy Nasdaq is down about 27% year-to-date.
The mood in the tech space is somber. New capital is hard to raise, which is essentially a death sentence for start-ups following the “growth at all costs” strategy.
In 2022, that business model no longer works.
Venture capital funding is down 13% compared to the fourth quarter of 2021.
The start-ups that rely on external funding may not survive for long… a lot of them have started laying off thousands of employees.
For example, car retailers Carvana and Vroom fired about 13% of their workforce.
I see more trouble ahead for early-stage start-ups with no cash and no revenue. They’re not prepared to handle tough financing conditions and panicked investors.
But there is a group of tech companies that could continue performing well… both in terms of their profitability and their share price…
Picking Tech Stocks Is Better Than Buying an ETF
The Nasdaq includes 3,737 companies as of writing. The Nasdaq’s fall and other indexes’ performances don’t show you how individual index members performed.
If you look at the headline number, you’re led to think that “the whole tech sector is down.”
But that’s not the case.
Some companies soared by 719%, 467%, or 462% over the past 12 months.
Most investors didn’t see gains like that, of course. You can’t achieve them without trying to pick the best stocks within a sector… and having some luck.
Exchange-traded funds (or ETFs) are easy to buy, and they provide diversification. That’s their selling point. If you have an idea, there’s an ETF that tracks an index trying to express that idea.
ETFs slice and dice the market in thousands of ways based on sectors, geography, investment styles, you name it.
From oil stocks to stocks focused on developing countries to “value” or “momentum” ETFs, there are plenty to choose from.
That’s why investors who want to get exposure to “tech” just go ahead and buy an ETF tracking the Nasdaq.
It’s not the worst way to invest. But if you take the ETF route, you’ll get average results at best.
To be better than average, you need to be more selective.
Last Year, We Created a “Cash Kings” Portfolio for Tech
The fact that a company is in “tech” doesn’t tell you anything. You need to know what the product is, what market the company targets, and how well-financed it is.
This applies both to early-stage start-ups and large, profitable companies.
But there’s a quick way of focusing on the less risky stocks.
It’s profitability. And namely, free cash flow.
As a reminder, free cash flow is a profitability metric that shows how much cash a company generates during a period. It’s a stricter measure of profitability than net income, so it’s harder to achieve.
And that’s what makes companies that produce positive free cash flow so valuable.
Free cash flow is all over the news now.
Uber, the ride-hailing start-up that has always struggled to be profitable, is doubling down on its effort to become free cash flow positive.
We saw this “seismic shift” from growth to profitability more than a year ago.
Investors are more sophisticated now than they were at the height of the tech boom in 1999. They want tech stocks to be profitable, too – to generate positive cash flow.
If a company spends less cash than it makes over a year, it has positive cash flow. This is a powerful signal that a company is profitable and efficient… and sustainable.
And overall, tech stocks prove that.
I picked five companies with good growth numbers and positive free cash flow.
And the results didn’t disappoint…
Since January 2021, on average, their share price increased by 13.7%.
One of them, Fortinet, which is an enterprise security company, soared by 82%.
In the meantime, the Nasdaq lost 13%.
A simple profitability requirement helped this small “portfolio” outperform its broad-based index.
So while the market turns sour on tech, I suggest repeating this exercise.
Right now, I’m returning to that portfolio because of the tech selloff.
Good companies are cheaper now than they were in the past. This is exactly a situation you want to be in as an investor.
Our Bread and Butter at Casey Research
It’s our bread and butter at Casey Research… contrarian investing. You need to buy when there’s blood in the streets… when the sector is hated. That’s how you make money.
Listed below are five tech companies that grew their free cash flow fast over the past five years.
|Company Name||5-Year Free Cash Flow Growth Rate||Market Capitalization, Billion USD|
|Shopify, Inc. (SHOP)||253.5%||45.5|
|MongoDB, Inc. (MDB)||184.3%||15.7|
|Okta, Inc. (OKTA)||178.6%||12.4|
|DocuSign, Inc. (DOCU)||103.0%||14.5|
|Advanced Micro Devices, Inc. (AMD)||89.9%||156|
Source: Capital IQ
This table shouldn’t replace your own due diligence, of course.
But I urge you to start looking for bargains now… when everybody is panicked.
Timing the bottom of a selloff is impossible. But there are good companies that have been punished along with the less sustainable ones.
As an investor, I suggest that you focus on these bargains before everybody else catches up.
Analyst, Casey Research