Saltydog: US tech stocks: time to be more discerning?

There is still momentum in American technology stocks but, as Douglas Chadwick points out, the Facebook, Apple, Amazon, Netflix and Alphabet’s Google (FAANG) stocks are probably the wrong place to be.

‘If you want to go fast, go alone; but if you want to go far, go together’ is an appropriate description of investing using momentum as your discipline. You are travelling forward with others in the same direction and with the same ideas for gain, rather than racing ahead alone, only to become isolated in the wrong sector later.

I am finding the present Brexit and trade negotiations extremely unsettling. The performance of the politicians and bureaucrats puts me in mind of a saying by Edmund Burke: ‘Because half-a-dozen grasshoppers under a fern make the field ring with their importunate chink, whilst thousands of great cattle, reposed beneath the shadow of the British oak, chew the cud and are silent, pray do not imagine that those who make the noise are the only inhabitants of the field.’ I wish that our representatives were aware of this saying, and would start to represent us rather than themselves.

Strange things

The strange thing is that through this period of potential financial turmoil, the UK and the American stock markets are maintaining relatively high values, accompanied by some of the lowest levels of unemployment seen since the Second World War.

 

I readily accept that I do not have the skills to work out the reasons why this is the case, but it is not necessary as long as I can regularly track the Investment Association sectors and funds that are gaining from this situation. The Saltydog numbers over the past six months clearly show that technology and dollar-based sectors and funds have given a marvellous return.

Now I am an ardent believer in the benefits that humanity will receive from the new technologies and artificial intelligences currently being developed, but I must be mindful of not falling into the all-too-common trap of only consuming the media news and information that reinforces the views I already hold.

Most of the technology funds shown in the chart are invested heavily into the FAANG information businesses which have matured over the last 20-plus years. We all know these businesses carry enormous price/earnings valuations and are frequently described as being firmly in bubble territory and ripe for a correction. Looking at the recent prices of these companies over the last few months, it is obvious that some have already experienced some volatility, whilst others continue to rise.

Facebook down….Amazon up…. Apple up….Alphabet up….Netflix down….Twitter down….Tesla down….Spotify down.

 

Tax pressure

There is considerable pressure being applied on these companies to pay more taxes in the countries where their profits are being generated. Additionally, the American establishment is now discussing whether they have too much power and should be broken down into smaller units. If either of these two events should come to pass, it is hard to believe that a major downward revaluation would not take place.

With this in mind, on a personal basis I have reduced my holdings in technology funds that are heavily invested in these companies, and we are also doing a similar thing in our Saltydog portfolios. This is far from a complete exit because our numbers still show these as being lucrative fishing grounds. It is more of a question of getting prepared just in case there are storm clouds brewing over the horizon.

This does not mean that I am giving up on technology; rather, I am moving forward to find those funds which are investing mainly into artificial intelligence, robotics, healthcare and medical research. These include funds and trusts such as Smith & Williamson Artificial Intelligence, Syncona (cancer treatments), Pictet Robotics and the Worldwide Healthcare Trust.

Who knows, these may be safer places in the near future. I must stay optimistic, just as long as I don’t get my hopes up! 

Douglas Chadwick is a founder director of Saltydog Investor.

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