The Recovery Is More Than Day Traders Trading Hot Tech

Hilary Kramer

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

People who think the economy lurched to a halt when the coronavirus hit are having a mighty hard time explaining why the S&P 500 is down only 2% so far this year, while the NASDAQ is hitting records.

After all, this isn’t how markets normally behave, right? Corporate profits are on track to drop 25% this year, leaving stocks at a precarious and unsustainable 22X earnings multiple.

With fundamentals like that, even the Fed’s support feels a little unreal, which forces the doomsday contingent to do a lot of logical gymnastics to figure out why investors are putting money to work. They blame “day traders” swarming the market with government checks, buying hot NASDAQ shares like they were Las Vegas casino chips. But here on Wall Street, the truth is a lot more interesting.

The economy took a big shock in the quarantine, it’s true. A lot of companies are reeling and have no good reason to be chasing records.

However, a lot of the stocks that are doing well this year have solid fundamental reasons to rally. Don’t blame their good fortune on novice traders throwing free cash around.

Smart investors are buying, too. You just have to know what they’re buying behind the “hot stocks” that make the headlines.

Tales of Two Markets

Here on Wall Street, it’s rapidly becoming clear that the pandemic didn’t change the world in itself. The outbreak is more of a catalyst, accelerating economic trends that were already playing out.

Companies that had a weak or outdated competitive position last year now look worse. But more innovative disruptors are capturing more business than ever.

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Whether you think the economy is in good or bad shape depends largely on where you work and where you invest. Some see a return to greatness already underway. Others are still mired in a deep recession.

We explore this “double-track recovery” every week on my Millionaire Makers radio show, embracing the highlights while steering clear of persistent weakness. (Click here for recorded episodes and local stations.)

Because we’re open to the good news as well as the bad, I like to think my listeners and people who subscribe to my newsletters are aware that the day traders aren’t necessarily “irrationally” exuberant.

It all depends on the sectors you’re watching. Here’s the simple truth: for about 10% of the S&P 500, life looks really good right now. Those stocks are up 20% or more YTD.

A few of those stocks are the Big Tech behemoths that beckon inexperienced investors looking for a casino-style experience. Amazon.com Inc. (NASDAQ:AMZN), Microsoft Corp. (NASDAQ:MSFT) and Apple Corp. (NASDAQ:AAPL) are all in that titanic 10% category.

Other strong spots have an obvious coronavirus appeal. Bio-Rad Laboratories Inc. (NYSE:BIO) makes medical diagnostic kits. Vertex Pharmaceuticals (NASDAQ:VRTX), Incyte Corp. (NASDAQ:INCY) and others are working on new vaccines to prevent future outbreaks.

There’s going to be strong demand for vaccines and medical tests in the new economy. Likewise, Clorox Co. (NYSE:CLX) is selling all the disinfectant it can manufacture. That once-sleepy stock has turned into a growth machine worth a premium price.

And then there are the classic Wall Street darlings that embrace hot money. NVIDIA Corp. (NASDAQ:NVDA), Advanced Micro Devices Inc. (NYSE:AMD) and Chipotle Mexican Grill Inc. (NYSE:CMG) are the kinds of stocks novice traders dream about.

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All three are also crowded trades now. While I think the technology companies are interesting, earnings are collapsing at CMG along with other aspects of the traditional consumer economy.

Chipotle currently commands a 119X earnings multiple even though profit will probably fall as much as 40% from last year. That’s not a narrative long-term investors cheer if we can avoid it.

And we can avoid it. Even if you only focus on casino-style instant gratification, I see 40-50 stocks trading in the S&P 500 with comparable momentum and much more attractive fundamentals.

If the casino lights go dark this summer, CMG looks vulnerable. Investors who pick any of these other names can at least ride out the season with better fundamentals on their side.

These companies are legitimately dynamic and deserve high multiples. On average, an S&P 500 stock that’s up 20% this year probably has at least 7% earnings growth.

MSFT has that. So do NVDA and AMD, not to mention Netflix Inc. (NASDAQ:NFLX), PayPal Holdings Inc. (NASDAQ:PYPL) and other high-flying technology stocks.

AAPL and AMZN, on the other hand, are looking at a stagnant year at best. AAPL at least carries “only” a 30X earnings multiple. Here above $3,000 a share, AMZN requires investors to pay 119X earnings — true nosebleed territory.

Clorox looks a lot better. I could name a dozen obscure stocks that don’t make a lot of headlines but have stronger numbers than mighty Amazon.

These are companies that are doing well in the post-pandemic world and deserve investor attention. When hot money goes cold, they’ll still have what it takes to make shareholders happy.

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We’ll talk about them next week. If you can’t wait, Turbo Trader subscribers know where I’m allocating hot money to exploit short-term market trends.

And for real growth, there are always GameChangers.

Upcoming Appearance:

Join me at the MoneyShow in Las Vegas on Tuesday, August 16, for my special presentation Building Wealth with Stocks and the Master Class Value Investing with a Growth-&-Income Twist. Register at Kramer.MoneyShow.com. The event will take place at Bally’s and the Paris right on the Strip. I hope to see you there!

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