Even Now, Investors Can't Ignore Stocks; 'Old' Tech May Be A Good Place To Be
At times like this, when the risks to the economy and stocks are obvious, it is hard to pick individual investments. With 10-Year Treasury Note yields now well below those of 2-Year bills, a conventional reading of the bond market suggests that the question is not if the U.S. will fall into recession, it is when it will.
That question of timing, though, is why you cannot give up on stocks completely.
It is still possible that this inversion is not a warning but is a result of the extraordinary policies adopted by central banks around the world over the last decade. Even if that isn’t the case, it could be well over a year before the economy turns, and the market could show significant gains in that time.
The risks, then, are in the medium term, several months or even a year or two out. As we have seen over the last couple of days, any hint of good news, believable or not, is seized on by traders, so short-term jumps are always possible, and in the long-term, stocks are always the place to be. There has never been a rolling twenty-year period when stocks lost money.
What you should be looking for, therefore, are stocks with a potential short-term catalyst but that are also part of a long-term, secular economic trend. There are a couple of candidates that fit that description in a sector that I refer to as “old tech.”
These are tech companies that have been around a while and have solid balance sheets and good cash flow. That gives them a cushion should things take a turn for the worse, but they are still often at the center of major shifts in the economy.
Cloud computing would be one of those shifts.
It is something we all heard a lot about a few years ago, but there are trendier areas today. The chatter now is about pot stocks, or stocks that reflect the gig economy, and in a few months it will be something else. The cloud is just so 2018!
The fact is, as that excitement over this trend has died down, profits have started to rise. Giants such as Amazon (AMZN) and Microsoft (MSFT) have quickly turned a focus on enterprise cloud projects into real earnings, and it is starting to look as if even what seemed a couple of years ago like hyperbolic estimates of the potential of the cloud were, in fact, pessimistic.
There’s money in them there servers.
Both the desire for short-term potential and my natural contrarian nature, however, make me eschew the two names mentioned above and look instead for stocks that have taken a bit of a beating recently. That brings in Cisco Systems (CSCO) and Oracle (ORCL).
As you can see from the comparative chart above, both have significantly underperformed the S&P 500 over the last month. In Cisco’s case, that seems to be largely down to them performing worse than expected in terms of market share, while there is a very specific reason for Oracle’s drop.
They missed out on a big defense contract known as JEDI, and are suing the government on the basis that the bidding process was unfair. Alleging in court that a Pentagon procurement process is unfair is a bit like suing to establish that the sky is blue, so a positive outcome seems unlikely at first glance.
The market certainly seems to be working on that assumption. However, given Donald Trump’s opposition to both Bezos and Gates and the nature of this Justice Department, anything is possible.
Cisco’s problems also look to be exaggerated by traders. Even if they continue to disappoint in terms of the size of their slice of the cloud pie, the pie itself is bigger than anticipated at this point and is still growing rapidly. Cisco can still grow with it but is being sold off as if the future were bleak.
If we do see significant slowing of economic growth some time over the next year or so, there is nothing much that can be done. With defensive stocks already overbought after the long, drawn out trade war and bonds offering negative real returns, there is nowhere to hide, so looking at stocks with decent prospects in the periods that will bracket that possibility looks like a good strategy. Cisco and Oracle would be a good place to start.