I’m becoming concerned about tech stocks in general as we move to the later stages of this economic cycle. We’ve seen a deterioration in market breadth with money continuing to chase fewer and fewer stocks (namely tech). Tech stocks were some of the biggest winners in 2017 and the recent bounce after the late January selloff has pushed tech to new highs while the rest of the market has lagged (narrowing of leadership). What makes me most concerned though is that most of the big tech stocks and the Nasdaq 100 Index as a proxy are putting in negative divergences – something that shouldn’t be ignored. Last week I sold Red Hat (RHT) and trimmed Intuit (INTU).
Nasdaq 100 (QQQ)
Red Hat is a classic case of a company and a stock being two different things. The company is doing very well and I expect that to continue. The stock, however, is priced beyond perfection, in my opinion. The stock is up over 115% in the last 15 months and is pretty expensive relative to its own history. This is usually the valuation where we see the stock top-out and consolidate for a while. Now, just because a stock becomes expensive doesn’t necessarily mean you have to sell it. If your investment time horizon is long-term, there’s nothing wrong with sitting through the ebbs and flows of the short-term, especially if there are tax consequences. However, if you can better invest the money somewhere else, I have no issue with selling an expensive investment and rotating the money into something that’s more attractive. My process is two-fold: first is the fundamental story and valuation of the stock, second comes the technicals on the charts to determine good entry and exit points. I’ve resisted selling for a while because the company is doing well but the negative divergence on this recent push to new highs was enough for me to lock in the gains and move on. If RHT trades lower over the next year or so, I’d be happy to buy it back at a more attractive valuation, but for the time being I’m happy to call it a win.
Red Hat (RHT)
I also trimmed Intuit on similar concerns but still hold a smaller core position. I still like the fundamental story (the tax bill should be very helpful for small businesses) and the chart isn’t as concerning right now.
New Buy – JD
There are a few stocks I’ve been researching and looking to buy, one of which I finally pulled the trigger on this week. The others I’m still hoping get knocked down a little more before I’m willing to buy them. The newest stock we own as a long-term Growth investment is JD.com (JD). JD is a Chinese-based online B2C retailer (think Amazon of China). They compete with Alibaba and are expanding globally (mainly Asia and Europe right now) which means they’ll be competing with Amazon too, but in many ways is different from both. With the rising middle class in Asia, I believe that JD will eventually be the largest online retailer in the world, surpassing both Alibaba and Amazon.
Here are their current market caps:
- JD.com: $62 billion
- Alibaba: $483 billion
- Amazon: $768 billion
That means I think JD has the potential to grow by 10x over the coming decade. There are a few key reasons for this but the primary one is their founder & CEO, Liu Qiandong (who goes by Richard). He’s a visionary that came from nothing and is known for a relentless work ethic, a focus on long-term success, and is a stickler about profitability. Richard rarely does interviews or road shows because he’s so focused on building the company but you can find a few interviews on youtube that are worth watching.
One of the key differences between JD and other online retailers is that they have invested heavily in building the foundation for long-term success. They own and operate the entire logistics chain down to “last mile” delivery. Amazon is just starting to look into this. If you think next-day delivery is impressive, JD has 6-hour delivery in major metro areas! They’re often ranked as the most trusted e-commerce site in China and have some key partnerships, including Tencent (owner of the most popular social media platforms in China), Walmart and Baidu (China’s leading search engine). As part of the partnerships, Tencent and Walmart both bought stakes in the company, with Tencent owning 20% of JD and Walmart owning 10%. These are some serious backers that put JD in a great position to fuel continued, long-term growth.
Here’s the best part:
- Alibaba sells for 14x sales (and has some questionable accounting)
- Amazon sells for 4.4x sales (all of their profitability comes from AWS because they continue to pay $1.00 to buy 90 cents in their quest for retail expansion – something that will most likely be bringing anti-trust issues their way).
- JD sells for less than 1.2x sales, 17x Free Cash Flow, is growing faster than both BABA and AMZN, and has the infrastructure to be far more profitable.
I think it’s only a matter of time before investors start to recognize the value here. This is an incredible growth story that appears to be very undervalued. I also sold May 40 put options under JD a few weeks ago which will average-down on the position (buy more stock at 40) if JD is trading under $40 on the May expiration. I’m really hoping this happens.
JD.com (JD)
Thanks for following!
-Nick