By any measure, we've experienced an extraordinary bull run, with the S&P 500 soaring as high as 2,134.72 since it bottomed out at 676.53 on March 9, 2009.
But the real story is in the catalysts that led the markets to better than triple over that relatively short time – the story beyond quantitative easing, cheap-as-free money, and tax breaks.
Rather, these extraordinary gains have come from a group of "hot spots" that have given rise to the creation of an entirely new economy.
Many so-called "experts" haven't even realized that this phenomenon exists yet, but our position – on its leading edge – has given us gain after triple-digit gain since 2012, with profits of more than 130% on Avago Technologies Ltd. (Nasdaq: AVGO) and more than 612% on Ambarella Inc. (Nasdaq: AMBA).
We've done well already, but – as you're about to see during this interview with our tech expert, Michael A. Robinson – this radical new economy has trillions in upside remaining.
Let's look at where those profits will come from in the weeks ahead…
The Bull Market… with a Big Difference
Bill Patalon: Michael, this has been a curious bull-market run. When you look at the depths stocks crashed to after the whole credit-default-swap mess – and then see where we are now – the distance stocks have traveled is breathtaking by itself.
But as we often discuss, it's the fuel… the catalysts… for this historic bull-market run that are just as intriguing.
Michael A. Robinson: That's absolutely correct, Bill. Let's run through them… and let's start with the more traditional stuff.
BP: Right. First, we had the usual central bank and inside-the-Beltway tools… the monetary and fiscal policies that are somewhat traditional… namely slashed interest rates, tax breaks, and other incentives for companies and banks.
Then, there were more unique triggers – the debt buyback we know as "quantitative easing."
BP: That's right… QE – in all of its permutations.
What's really fueled this market, though – and this is your bailiwick, Michael – is technology. We've been in – and continue to be in – a revolutionary "convergence economy" with opportunities for unparalleled growth.
Finally, there have been some interesting catalysts that are bull-market "extenders" – things like mergers and acquisitions (M&A) and initial public offerings (IPOs).
Let's break this down and educate our subscribers about each of the tech-related catalysts we're talking about here – because each one represents an investable opportunity for investors.
BP: Then we can cap this off by talking about an area that almost none of the so-called "experts" are telling investors about…
MR: … even though that area represents one of the biggest profit opportunities of all.
BP: That's right, Michael.
"We're looking at 50 billion interconnected devices…"
So let's start with a concept we talk a lot about here: The "convergence economy" in technology. Michael, just what is this, why does it make this bull market in stocks different than those of the past, and how can investors cash in?
MR: Simply stated, the convergence economy refers to the growing interrelationships between various sectors of the economy that are now completely dependent on high tech.
We've passed what I call the "tech tipping point" in which various technologies are overlapping and are enveloping the world around us.
Just look at how smartphones and tablets…
BP: Like the revolutionary Apple iPhone and iPad…
MR: Exactly, Bill – like the iPhone and iPad…
Well, these devices have changed the way we shop, book doctor's appointments, track our health and fitness, and much more. Capabilities like these demand advanced sensors, semiconductors… and substances like "rare earths" – or what I refer to as "Miracle Materials."
BP: Tell us about the looming "smart home era."
MR: That, too, Bill, is revolutionary. And is part of that same "convergence economy." I say that because that same "blending" of technologies that we see in mobile, or at work, is reaching a "critical mass" in our homes… whether we're talking about "smart devices" like the Nest thermostat or IP surveillance systems, both of which I have in my home.
There's also the "connected car" – which you've written extensively about, Bill. Those vehicles have advanced radar, sensors, software, Bluetooth, and Wi-Fi.
That's just on the consumer side. The Wall Street Journal recently said that today "every business is a technology business." Companies are adopting cloud computing for things like payroll management and accounting. They're also using smart-data analytics to understand what their customers want and need.
Bear in mind that – over the next few years – we're looking at 50 billion interconnected devices for the Internet of Everything (IoE). And on top of all that, we will also see something like 7 trillion advanced sensors, known as microelectromechanical systems (MEMS), deployed all over the globe.
Add it all up and you have a multiyear tech buildout working its way through a global tech "ecosystem" that affects every consumer and every business throughout the world.
BP: In other words, these days, everyone's a "techie."
MR: That's the bottom line here… and a bullish bottom line it is.
"A peak gain of better than 600%…"
BP: Perhaps you could highlight one or two "convergence-economy" companies that are benefitting from this …
MR: I'm glad you asked that because there are actually two companies in particular that exemplify just what we're talking about here… and that I believe have plenty of upside.
Let's start with the small-cap firm Ambarella Inc. (Nasdaq: AMBA), which makes video-processing chips used in everything from wearable tech to the connected car.
BP: It's been a big winner for us – with a peak gain of better than 600%.
MR: The long-term outlook for this company is still terrific. Ambarella is best known as the enabler behind the enormous popularity of the Hero-branded, helmet-mounted action cameras from GoPro Inc. (Nasdaq: GPRO). But Ambarella also makes chips for IP surveillance – as well as for the professional broadcast gear needed for the next big thing in television… ultra-high-definition TV (UHDTV), also known as 4K TV.
Not only that, but the company's processors work well for backup cameras. That's important because, starting in July 2018, every car and light-duty truck sold in the U.S. market must come equipped with this technology. We're talking an average of more than 15 million cars sold a year just in the United States and a run-rate for 2015 of 17 million vehicles.
My big-cap favorite remains Apple Inc. (Nasdaq: AAPL). This company is all about convergence – from the Apple Watch to the MacBook to the iPhone and iPad, all these devices literally are interconnected and talk to each other.
When I browse the web on my iPad, the history shows up on my Safari browser on my MacBook. When I add notes on my iPhone, they show up on my iPad automatically. I can use either my Watch or my iPhone to control my music or online content streamed to me through my Apple TV.
"Tech stocks are bargain-priced…"
BP: Staying with the "convergence-economy" concept… how do you respond to folks whoo say we're in a tech bubble?
MR: Having worked with startups in Silicon Valley during the "dot-bomb" implosion, I know what a real tech bubble looks like. We're talking about companies going public in just six months from their founding and stocks traded at insane multiples to their earnings… and many that didn't even have any sales.
Today, it's just the reverse of that. Startups are opting to stay private far longer. They're taking seven to 10 years before their initial public offering, meaning they become "real" companies with meaningful sales and strong earnings growth before they even consider selling shares to public investors.
This is one thing that just about no one is talking about these days: Tech stocks are bargain-priced. The Nasdaq 100 trades at 19.9 times forward earnings, while the Standard & Poor's 500 Index trades at 17.8 times forward earnings.
Why is this relevant? Because the tech-centric Nasdaq costs only 12% more than the S&P – but has more than doubled the overall market's performance in the last six months, 5% versus 2%. For just 12% more in cost, you get 150% better performance.
BP: Okay, so let's move onto the "transaction triggers" of tech – IPOs and M&A. Perhaps you could describe each one of these… tell folks what we're talking about… and then tell us how these are affecting tech – extending the bull market?
"57% of all new stock offerings are focused on tech…"
MR: Well, the untold story of IPOs is the huge number we're seeing coming out of biotech and healthcare. This is important because these small firms are setting up the next waves of drug, biotech, and medical devices breakthroughs and profit cycles.
Noted IPO researcher Renaissance Capital says that healthcare alone accounted for 42% of the 70 new offerings we saw in the second quarter. Add in high tech and you'll see that roughly 57% of all new stock offerings are companies focused on tech-related markets.
BP: IPOs can be tough for retail investors to play, though, correct?
MR: That's right. But there is a way… one that I've recommended to your folks before. There's an exchange-traded fund that plays the IPO market, and it's a really superb play. I'm talking about the First Trust IPOX-100 Index Fund (ETF) (NYSE Arca: FPX). The IPOX fund isn't completely devoted to tech. But a big slice is dedicated to technology. The fund has a great methodology and a great track record. It's a way for anyone to play IPOs and to walk away with the cash that these racy stock offerings throw off.
BP: Then there's M&A.
MR: Right. The tech-transaction boom you referenced has reached its tendrils into deal-making – or M&A activity.
BP: The catalyst there, obviously, being the desire to add scale, market share, revenue, and profits – and to enter new markets… either by adding new product lines or by adding new geographic markets.
MR: That's it… Thomson Reuters says that, as of May 31, the last period for full data, the United States had seen an aggregate 4,654 M&A deals worth about $875 billion, up 9% from the year-ago period. Data compiled by Dealogic and Forbes shows that seven of the top 10 were related to technology, which includes biotech and medical devices.
BP: A couple examples?
MR: In June, for instance, Intel Corp. (Nasdaq: INTC) said it's buying chip firm Altera Corp. (Nasdaq: ALTR) for $17 billion in cash. The deal was driven by what we talked about earlier – the tech convergence. Altera makes chips used for cloud computing, for the IoE, and for smart cars.
Remember, we still have five months left in 2015. So, there's still plenty of time to see even more IPOs and M&A deals that will continue to propel the tech sector forward.
"This is a unique time for technology investors…"
BP: What about the correction so many pundits are predicting?
Isn't there a difference between a "correction," a "bear market," and a "bursting bubble"?
MR: That's extremely well said. And it's also correct.
The fact is… there are differences among those three things. They're all forms of market retrenchment.
BP: The differences are degree and duration.
MR: That's right. A correction is a drop of 10% or so. They're typically not long lasting. Corrections occur on a regular basis. And they're healthy. They shake the "froth" out of a hot market and allow the market to "consolidate" or strengthen itself. I wouldn't mind seeing a correction here. It would do the market good.
A bear market is a drop of at least 20%.
BP: As we've seen with crude oil.
MR: Good example. That should give subscribers a "feel" for what a bear market looks like. Bear markets are serious, can be very long in duration, and can have big impacts on investor psychology.
Bubble implosions are the most damaging of all. They are long lasting, and their impact is long lasting as well. We saw that with the "dot-bomb" debacle of 2000. It took years for the Nasdaq Composite Index to regain the highs it reached in early 2000.
BP: You don't see a bear market or a bubble implosion, though, do you?
MR: I don't, Bill. I can see a correction. And perhaps a small chance of a temporary bear market – probably one touched off by external factors. But this isn't a bubble. The "convergence economy" we've talked about makes this a unique time in technology. And a unique time for technology investors.
"This wealth is here for the taking…"
BP: As someone who loves history, I can tell you that the record shows that folks usually don't perceive the historical moments they're living through. They only recognize it after the fact.
MR: Agreed. And I believe that here… that most investors just don't realize the raw power of what we're experiencing now – meaning they don't understand the potential for profit and wealth that's been laid right at their feet.
I mean… this wealth is there for the taking. Even a correction would work to their advantage with the "split entry" strategy that we often advocate. That strategy, coupled with a correction, would let folks pick up additional shares of promising companies at even cheaper prices.
BP: You paint a picture of a historic and powerful profit opportunity in technology.
And I know you'll keep guiding us.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.