ISI Research: Epic profits ahead!

Since I contributed my first article as Money and Markets’ technology stock specialist in February, readers have asked me hundreds of questions in emails and on our blog.

And for good reason: After trouncing the averages in 2013, the average technology stock is beating the average S&P 500 stock by a whopping six to one this year.

More importantly, a whopping 93% of the new technology superstars in my model portfolio are up — with gains of 114% … 178% … 156% … 234% … as much as 305%.

Nevertheless, more than a few readers are still wary. For instance, one reader says,

“I’m hesitant to invest in technology stocks now because I’m worried that the stock market could crash or we could have another major recession.”

I certainly understand this concern. But to put this concern into perspective, let’s look at the past 114 years of U.S. history, back to 1900 just to pick a round number:

We’ve been through two world wars in Europe and one in Asia, two nuclear blasts, countless smaller wars, countless plagues, countless genocides, countless super-destructive hurricanes, tsunamis, and earthquakes, some of the worst political leadership imaginable, at least five serious bear markets, several market crashes, numerous recessions, a global depression, and yet, hey — we are still standing.

… And stocks are up 10,000% from where they were in 1900 before all these terrible things happened.

The plain truth is …

It is part of the human condition to stumble,
but also to get up with a smile and move on even faster.

Without doubt I worry about the potential for trouble ahead at all times, but there are numerous ways to prepare, such as having a diversified set of investments, some cash on hand to take advantage of big dips in value, and the conviction to know you are on the right path even when the road ahead seems dark.

At times like those, I am always reminded of a quote from one of my favorite portfolio managers, Peter Lynch, who managed the famed Magellan Fund for Fidelity during its heyday. He said:

“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.
“It isn’t the head but the stomach that determines the fate of the stock picker.”

The immediate outlook:

Partly cloudy with a chance of epic profits.

Are there clouds on the horizon today? Of course. But there are always clouds on the horizon.

But to be frank, I am not terribly worried about the U.S. economy right now. The data has been uneven of late, but that’s par for the course. It’s never going to be perfect; don’t expect that.

Here are some important bullet points to keep in mind as we steam toward the second quarter, with help from the analysts at International Strategy & Investment (ISI) — the prestigious investment research firm in New York:

— The Wilshire 5000, the broadest measure of U.S. stocks, is now above 20,000 despite Russia, the China bond default and tapering. People just want to buy stocks, and they are largely ignoring news developments that, in choppy or negative markets, would lead to persistent selling.

— The key takeaway from the February payrolls data was that the U.S. economy is alright, and can survive a bad winter. Payroll employment was reported up 200,000 with revisions, and is on track to move above its 2007 level in just four months. From the low four years ago, it is up 8 million, or an average of 167,000 per month.

— U.S. consumer net worth has hit a new high at $82.2 trillion, up $8.1 trillion year over year and roughly $13 trillion over its 2007 peak. This is a big positive for consumer spending over the rest of the year.

— Real GDP (i.e. GDP minus inflation) is on track to increase 2.7% year/year and $1 trillion over its 2007 peak despite the government sequester, shutdown, Fed taper and bad weather.

— Corporate cash surged to almost $2 trillion in the fourth quarter, which is nearly a third above its 2007 peak. This is a positive for capital expenditures, and employment in the months ahead.

— And more: Lately there have been positive readings for unemployment claims, hotel revenues, railcar loadings, the rig count, construction spending and ECRI’s leading index.

Bottom line? The U.S. economy is not taking off like a rocket, but is expanding at a reasonable pace. Maybe not as fast as some would like, but a pace that probably makes the advance more sustainable.

This bull market may have
five more years to run!

ISI observes that we are in the middle of a business cycle; not the beginning, and not the end.

That means some of the best is yet to come.

You will recognize the start of the end game, which itself can last years, when inflation accelerates and the Fed starts tightening — events not expected to begin until the middle of next year at the earliest.

What’s more, the warning signs of an impending correction tend to be fairly obvious if you know how to look for them — and they can help you get your cash to safety in plenty of time.

While I was one of America’s greatest cheerleaders for technology stocks throughout the late 1980s and most of the 1990s, I also have the distinction of being one of the few in Silicon Valley to publicly warn that a correction was coming.

If you had heeded that warning, you could have taken much of your profits off of the table intact. You wouldn’t have had to lose a dime in the major correction that followed.

In addition, I publicly warned of the housing bust, Great Recession and stock market collapse of 2008-2009 many months in advance — and you have my word that I’ll continue to keep a wary eye out for danger even as I help you go for substantial profits.

Also: Please recognize that many technology stocks seem to be virtually impervious to overall market corrections.

Even in the worst of the financial crisis of 2007-2009, many of the top biotech companies, such as Gilead Sciences (GILD) and Alexion Pharmaceuticals (ALXN), held steady while the broad market fell by as much as 56 percent.

In summary, even if you have a small portfolio, and even if you don’t know much about computer code or chips, or do not have time to devote to learning more, this can still be the right time to try investing in tech stocks.

Because once you take a shot at it, however small at first, and start to have some success, then you will realize you are a lot better at it than you thought, and that will lead to more confidence, more interest, a reinforced desire to learn more, and in turn even better results.

Like any journey of discovery, there will be some potholes, mudslides, detours and stumbles along the way, to be sure, but the path is long and the skies are bright and you have an experienced companion at your side. Take the first step, and the rest will follow.

Best wishes,

Jon Markman

P.S. Let’s talk tech stocks! Here’s your chance to ask me anything you like about technology stocks: Simply click this link to jump over to the Money and Markets blog. I’ll check in during the day and give you my best answers to your questions.

I won’t be able to do this forever, so be sure to join the conversation right away: Just click this link and let’s get the conversation going!