Go Below the Radar for Post-FAANG Wall Street Leadership

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

The market is buzzing about records again for the first time since September. So, after the best first half since the dot-com boom and the best June since the Eisenhower era, why aren’t investors cheering?

Look to the calendar for answers, since the best rally in decades only feels good if you bought the bottom and didn’t suffer any of the losses that led up to it. Most of us aren’t in that position.

Instead of feeling 20 percent richer, a lot of investors are relieved to be back in the money, but there’s an undertone of weariness after nine months on a zero-sum rollercoaster. Buy-and-hold investors didn’t cash out at the top and buy back in at the bottom. They had to ride every inch down last year and now are wondering when they’ll get back to making real money in the market in return for their perseverance.

Balance the best rally in decades against the deepest correction since the 2008 crash and they’re left with barely 2 percent to show for all the nervous weekends and harrowing market days. That’s why I’m bullish, by the way.

The market seems poised to make up for lost time and rise further. Now that the S&P 500 finally is back in record gear, racing through 3,000 all the way to 3,100, if not 3,200, will be relatively simple.

After all, it’s all about the way the market pendulum swings to both extremes while the long trend in between keeps climbing.

Remember the FAANG crash?

Think back to December, when it felt like the world was falling apart when member after member of the elite “FAANG” group of technology giants revealed that not all was shiny in Silicon Valley. Facebook Inc. (NASDAQ:FB) already was reeling under the self-imposed cost of policing its platform better, effectively reducing expected earnings growth to zero. Amazon.com Inc. (NASDAQ:AMZN) followed up with an announcement that holiday sales weren’t where we wanted them to be, just before bearish sentiment climbed for Netflix Inc. (NASDAQ:NFLX) and Alphabet Inc. (NASDAQ:GOOG) as well, leaving some of the biggest stocks in history hemorrhaging market capital.

And though not formally part of the FAANG, Apple Corp. (NASDAQ:AAPL) remained in the foreground, warning twice that iPhone sales had peaked, adjusting its accounting practices to soften the blow.

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Some market observers blamed China. Others looked to interest rates or simply a sense that the age of easy expansion was behind these gigantic companies and future growth would be much harder to achieve.

Either way, the FAANG had faltered. Since FAANG stocks accounted for half of the Nasdaq Composite, the rest of the market was unable to counter the drag.

Investors who trusted diversified index funds to rotate away from similar shocks found themselves stuck for months. Even now, their patience and discipline hasn’t even earned them what risk-free Treasury bonds would have paid instead.

The FAANG made shareholders trillions of dollars in their heyday. But I’m all about the other hand of the market now, the smaller companies that are at least as innovative as Apple or Amazon or Alphabet in their glory.

They have a lot more room to move before anyone starts fretting about whether they can support a lofty $1 trillion market cap, or even $500 billion. With a lot of these companies, simply getting to $5 billion will make early-stage shareholders extremely happy.

Do the math. For a little stock like Chewy Inc. (NYSE:CHWY) to double, it needs to attract another $13 billion in capital and maybe $3.5 billion in annual revenue to justify it. The company literally needs to sell twice as much dog food.

Apple, on the other hand, can’t find another $900 billion in capital quite so easily. And all $13 billion would do is give the stock room to creep up another 1 percent.

I’d rather be in the small spots that can move a long way than keep riding the giants an inch at a time. Remember, the market as a whole tends to climb about 10 percent a year, averaging across all the dips and surges. That’s our baseline.

For Apple to keep climbing 10 percent a year, it needs to attract $90 billion a year. That’s a lot of cash and a high bar, especially when the world is swimming in iPhones.

That’s why I’m looking to the best recent initial public offerings (IPOs) for real upside. The next generation of market leaders will come from stocks like Roku Inc. (NASDAQ:ROKU), which defies Amazon to bring streaming movies to the wall TV.

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Other high-potential stocks include Chewy and a new wave of biotech hopefuls like Precision BioSciences Inc. (NASDAQ:DTIL) and Kaleido Biosciences Inc. (NASDAQ:KLDO).

Brisk capital appreciation also could come from companies like Beyond Meat Inc. (NASDAQ:BYND), but we’ll just have to see. I’m not completely infatuated with novelty for its own sake. Beyond Meat offers plant-based protein substitutes but a new report found dieticians are not convinced the company’s products are that much healthier than red meat.

Did you know that old-fashioned General Mills Inc. (NYSE:GIS) was a major early-stage investor in Beyond Meat and that unlike the startup, that company pays a 3.6 percent dividend? Indeed, General Mills offers exposure to the vegetarian burger buzz, none of the volatility, plus double what buy-and-hold index funds have earned since September.

Don’t rule out Kellogg Co. (NYSE:K) either. That company owns a huge soy burger operation already. Kellogg is at the heart of the new food revolution and offers a 4 percent dividend yield.

Value suffered in the FAANG’s shadow. Maybe the next six months are when the game changes gain traction from investors who are seeking an alternative to the FAANG favorites. And because I give you the choice of GameChangers for growth and Value Authority for value, you’re covered either way.

CANNABIS CORNER: TILRAY’S SUPPLY SHOCK

Sentiment around the Big Cannabis cultivators remains crowded and even a little confused as investors try to figure out what every headline means for fundamentals and stock valuations.

Yes, even in one of the most dynamic industries since the dot-com revolution, it’s possible to pay too much for a huge growth story. Nobody wants to buy into a bubble right before it pops.

I think that’s in the background of why Tilray Inc. (NASDAQ:TLRY) is down 6 percent since its July 2 announcement that it is paying $30 million to source dried cannabis from another company.

That’s a lot of product. And buried in the press release, we were reminded that this second company (thinly traded over the counter with a market cap of barely $250 million) has enough greenhouse space to grow 131,000 kilograms a year.

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Tilray sold 3,000 kilograms last quarter and it’s a $4.6 billion company. Is there a huge imbalance here? More importantly, can the recreational market grow fast enough to absorb 131,000 kilograms of added supply?

The first question is why Tilray hasn’t found a home in my Marijuana Millionaire Portfolio for Turbo Trader subscribers. While it’s growing fast, the stock has gotten well ahead of current cash flow.

I think the second unanswered question is what really scared people. If a $250 million company can harvest 140 tons of cannabis every 12 months, nobody really talks about what that means for legitimate demand.

So, unlike a lot of people in this space, I crunched the numbers. Let’s take Colorado as our model for how a “mature” recreational state works. Mile High was deregulated in 2012. It’s home to 5.7 million people.

The state keeps careful records of cannabis habits, so we know that about 15 percent of the adult population imbibes and that on average those people use about 1.1 times a day. Call it 0.4 grams per “dose” and six users will buy one kilogram a year.

On that basis, Colorado alone consumes 100,000 kilograms a year. Add Maine and you’ve essentially soaked up the 140 tons that $250 million start-up can produce.

Illinois just added 12 million people to the recreational map, or potentially 1.3 million cannabis consumers. And counting Canada, that brings the total “addressable market” of likely retail buyers to about 13 million.

They’re going to need 2 million kilograms of cannabis a year. That’s six times what Tilray and the other major growers Canopy Growth Corp. (NYSE:CGC), Aurora Cannabis Inc. (NYSE:ACB) and Cronos Group Inc. (NASDAQ:CRON) collectively need to break even.

And with two-thirds of the North American map waiting to turn green, that’s not a demand problem at all. Big Cannabis isn’t broken.

Big Cannabis is just a little crowded right now. When the numbers on a particular company line up right, we’ll pounce.

Until then, there’s a reason my Marijuana Millionaire stocks are up 5 percent over a period when Tilray is down 4 percent. Go with what’s working. The sizzle will come your way.

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