A number of factors in the U.S. stock market are at historical extremes. We like to look for what we call “well known facts” in the marketplace, also thought of as areas of extreme optimism and pessimism. In this way, we can avoid euphoric situations and/or buy into abnormal bargains on solid long-duration companies which fit our eight criteria for common stock selection.
A “well known fact” is a body of economic information which is not only known to almost every market participant, but appears to have been acted upon with almost every dollar at their disposal. It is, in effect, a very crowded trade—usually capped with borrowed money and derivative leverage attached. The following are “well known facts” we believe exist in the current U.S. stock market:
1. Technology is the best place to invest.
In late 2010, I was on CNBC’s “Squawk on the Street” with Erin Burnett and Mark Haines. It was the public offering day of Dangdang and Youku, two Chinese internet darlings. We wrote back then that the soaring first day prices of these glamorous Chinese companies would be looked back on with humor. “Dang, I paid too much for these stocks” is what we expected and ultimately heard. Dangdang trades at a fraction of its first day average trading price!
Snap could be the perfect compliment in the U.S. to Dangdang in today’s market. The thing which will snap the hot streak of technology stocks is over-valuation and over-ownership. Snap hit a $35 billion market cap during its first trading session with $500 million in sales and red ink everywhere.
The “well known fact” is that as capital spending goes up, technology only gets better and technology stocks only go up. In my 37 years in the investment business, the only time tech stocks were a higher percentage of the S&P 500 Index than they are today was in 1998-1999. Tech stock ownership in the S&P 500 Index bottomed in 1990 at 7% of the index, even though Microsoft (MSFT) had been public for four years and was going to be spectacularly profitable. My guess is that most of today’s darlings won’t ever become highly profitable and those who bet on them in the face of the index overweight will end up unhappy (while muttering ‘dang’)!
