The market bounced back strongly last Thursday and Friday. Can you trust the bounce? Yes, we believe this bounce is trustworthy and indeed a good buying opportunity. The bullish fundamentals (monetary and fiscal polices) have not changed. Yes, there are scary talks about inflation, but the real inflation is not here yet.
Real inflation will impact earnings. So far we haven’t seen any evidence of inflation caused earnings slow down. The digitization secular trend started from the March 2020 low is intact. The correction in high growth stocks is a correction in the digitization secular trend, not a reversal of trend. High P/E stocks will be more volatile, particularly if they are in high tech area. The price of a high P/E stock can also temporarily get ahead of itself.
High volatility is the price to pay for performance. Investing in growth is the key to performance. Cyclical stocks in the US are often those in older, less-efficient industries. Some of these companies weren’t competitive until the demand for steel, copper, chemicals and oil surged as a result of the re-opening. Rallies in cyclical stocks may tend to be more short-lived and prone to falter at the first hint of a recession or an earnings slowdown. That’s why we tend to stay with growth stocks. We didn’t participate in the rotation into value/cyclical stocks.
That’s exactly what happened to high growth stock like PLTR. PLTR traded at 45 briefly at the end of January. That was a very high valuation, price/sale was at 70. Now the price/sale in PLTR is 31.02, still high, but significantly lower after the 62% correction from the January top. PLTR is expensive for a reason. It grew revenue 49% year over year in Q1 and its adjusted operating margin is 34%. The stock price at 45 shows how it got ahead of itself, but we are not worried. Eventually the earnings will catch up to justify the price at 45 and more.
PLTR is in the right sector in the digitization secular trend. PLTR will become a monster when the company shows it can scale to mid-sized companies. PLTR has the smartest people in the industry, there is no doubt in our mind that PLTR will scale significantly in the future.
Technically, PLTR made a bottom at 17.06 after earning report on May 11. 203 million shares traded that day. The heavy volume with positive price action is a bullish statement from the market participants. When the NASDAQ made a lower low on May 12, PLTR refused to make a lower low. That’s a bullish divergence. Still, PLTR needs to trade above 20.18 to get on the bullish trend on a solid footing. Because the NASDAQ just came out a bottom and not in a break out position, we suspect PLTR will spend some time trading in 20-30 price range.
Below is the NASDAQ daily chart. The double top selloff in May produced a higher low at 13002.54. It is only two days from the bottom. It needs a follow through day that has a heavy volume in the next 4-7 days with at least 1.2% price gain to declare the correction is over. Even when the correction is over, the market could still be trading sideways because it is summer time and the rallies in 2020 is hard to replicate. In other words, 2021 could be taking a little break from the 2020-styled furious rally.
Speaking of furious rally, we have to talk about cryptocurrencies. The cryptocurrencies are very much in a bubble, similar to the 2000 DOTCOM bubble. Anything has a coin to the name, just like the stocks in 2000 when anything had a DOTCOM in the name, rallied regardless of any fundamentals. Anything goes in the cryptocurrencies. Elon Musk is tweeting like a crazy maniac. One day he was for bitcoin, another day he is against bitcoin. The entire cryptocurrency market is subject to one person’s mood change. That’s not a way to build wealth.
We believe eventually the cryptocurrency market will crash and that will take down the stock market as well. But it is healthy to have a crash in the cryptocurrency to clear the excessive speculations.