Back to top

Nasdaq Bubble = Disruptive Growth + Demand Premium

Read MoreHide Full Article

This week on the Mind Over Money podcast, I invited Dan Ives, Managing Director of Equity Research for Wedbush, to talk about two of my favorite topics: technology and investing.

Investors who missed the great rallies in Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) in the past year have probably been wondering why, and wishing they listened to Dan Ives instead of second-guessing their long-term strategy.

In 2019, he consistently maintained the Street-high price target on AAPL, all through the "peak iPhone" nonsense and the trade war noise.

And in November and December, he took off the gloves by not only boosting his AAPL price target twice -- to $325 on 11/15 and to $350 on 12/23 -- but also by giving the all clear for the Nasdaq to launch 5-7% on December 16 after a "seminal" moment in the trade war when tariffs were essentially put on hold the Friday before.

I think even Dan was surprised by the force of the rally that just happened, as the Nasdaq 100 (NDX) close of 8570 on Dec 16 up to new all-time highs of 9600 hit this week adds up to a 12% gain in only 9 weeks.

That move may seem extreme, but there is a common dynamic of markets where tension and uncertainty build and coil for some period, and then the pent-up energy, and doubt, explode higher.

In the video that accompanies this article today, I highlight Dan's stellar calls of the past year as well as a couple of my own. In September, in a special members-only video, I showed a chart of the NDX bumping up against resistance at 7,800 and telling my followers that a breakout above 8,000 would target 9,500 to 10,000.

You can see that video on YouTube with an unlisted link -- Zacks Ultimate Strategy Session September, 2019 -- where my Technical Market Overview starts at minute 4:50. The good stuff is only 2 minutes long and it really sets the tone for what we saw in Q4 and why you could continue to ignore tariff tantrums.

Mind Over Money Podcast: Behavioral Economics for Your Wisdom and Wealth

My podcast interview with Dan Ives also has an article version where I detail his exact time-stamped calls on AAPL and his overall thesis. We also go over his Top Tech predictions for 2020, including what's likely to happen for Microsoft, Alphabet (GOOGL - Free Report) and Tesla (TSLA - Free Report) . Here's the link...

Tech Investing 101: Know, Buy, Hold Disruptive Growth

The one thing I didn't mention is how large investors pretty much had to own, and add to, their AAPL positions in 2019 once the story improved. And the herding by big money, of course, drove shares higher. But if we understood this dynamic of the market -- my #1 Secret of Wall Street is "They Have to Buy" -- we should have been prepared to be long AAPL at several points in 2019.

So I'm using Apple as a good example of the behavioral biases which can keep us out of good long-term ideas.

Yes, valuation metrics are extended on AAPL, trading over 23 times this year's expected EPS of $13.75 and 5X sales projections of $300 billion. And Microsoft is even richer at 30X EPS and 9X sales. We won't even talk about Amazon (AMZN - Free Report) .

But they are not wildly over-extended ala "party like it's 1999" Nasdaq bubble territory. And this is what mature bull markets do, especially when the gloves are off and no macro walls of worry can stop professional investors from chasing growth in dominant global franchises. Here, you have to talk about AMZN.

This should put all stock market bears on notice (if they have any money left). At the risk of repeating myself, multiple expansion is what mature bull markets do. I'm calling it "premium demand" in my title today so that you begin to view what large investors are doing in a new light that has more to do with a technology super cycle than Fed QE.

Algorithms and Their Origins

Before my interview with Dan, I dive into a handful of other great topics including a great new book I’m reading on the medieval scholars of the Middle East and Europe who saved some of the most important works of mathematics, astronomy and medicine despite the Great Library at Alexandria being destroyed.

That book also prompts a discussion of "algorithms" as we discover the origin of the word and move on to Jim Simons and his fantastically successful trading firm, Renaissance Technologies. This former math professor is the subject of the new book The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, by Gregory Zuckerman.

And I close the first half of the episode with a salute to the late Clayton Christensen, an early thought leader on all things involving disruption. From the New York Times on January 25...

Clayton M. Christensen, a Harvard professor whose groundbreaking 1997 book, “The Innovator's Dilemma,” outlined his theories about the impact of what he called “disruptive innovation” on leading companies and catapulted him to superstar status as a management guru, died on Thursday in a Boston hospital. He was 67.

Meet Dan Ives: Doing Diligence on Disruption

Dan has been on Wall Street for two decades covering the software and the broader technology sector, focusing on enterprise software/hardware including cyber security, cloud computing, big data technology, and the mobile landscape.

In our discussion, we look at why he remained very bullish on Apple during the growth hiccup of late 2018 and early 2019, always maintaining one of the highest Street price targets (PT).

In fact, Dan raised his AAPL PT to $310 in late October of 2018, then the highest projection, right before the quarterly report that sent investors running for the hills and selling shares into mindless oblivion below $150.

We talk about that shock to the iPhone growth story and why he told his clients and followers in December of 2018 to remain focused on the "installed base" and build-out of the Apple ecosystem and its continuous innovations -- to say nothing of 350 million iPhone users who could be looking to upgrade in the next 12-18 months.

The Price of Panic

To me it's a great behavioral finance lesson in understanding your investment thesis and knowing if one or two quarters of slowing demand -- for the greatest consumer products story of all-time -- really signal "peak iPhone" crossing over into permanent decline and panic.

Picture this scenario: You own AAPL shares from somewhere between $100 and $200 and the waves of selling hysteria to $150 make you take your profit (or loss) because you can't (or won’t) handle the uncertainty. Yet part of your brain is saying "Shouldn't I still own this for the long-term? What changed in my investment thesis?"

And so now you have a new dilemma... when do you get back in? Then the company delivers its holiday quarter results in January 2019 and it's not as bad as the "peak iPhone" crowd was wailing. Are you a "good enough" researcher and decision-maker to jump back in under $175 in February?

In other words, do you have a process to implement your thesis?

For many investors who weren't disciplined with research, process and decisions, they stood by and watched the stock go back above $200 by April. And even when they got another shot under $200 after the March quarter, and into the May stock market pullback, they probably didn't take the correct action based on their long-term thesis.

Be sure to check out the article version of my podcast with Dan Ives for the full details on how he kept his clients in AAPL throughout 2019. When he talks "5G Super Cycle" you can hear why this baby is going to $400 in the next 12-18 months.

We also go over Dan's Top Tech Predictions for 2020, including insights on Microsoft, Alphabet, Disney, Netflix and Tesla.

For Tesla, Dan sees the potential its "Giga 3" factory in China becomes operational fast enough to surprise with 100,000 car deliveries sooner than most expect.

In the podcast, we hear what he thinks Google Cloud Platform (GCP) might do to catch up to AWS and Azure in data services. Maybe it will involve a relationship with my favorite little Big-Data "miner and modeler" Alteryx (AYX - Free Report) .

Dan also has an interesting take on the next battle in the so-called "streaming wars." He believes that Iger-led Disney (DIS - Free Report) is the juggernaut that will help disrupt 10%+ of Netflix's (NFLX - Free Report) installed base.

Getting the Big Trends Right... and Sticking With Them

I also mentioned in this episode that I would link to a special copy of my Tech Super Cycle report. Unlike Dan, I was late to understanding the ramifications and potential of Big-Data.

But I finally woke up and did my homework in June 2016 when I recommended buying MSFT under $50 and GOOGL and AMZN both under $750.

The one thing I forgot to ask Dan Ives about this week was his view of the potential impact on Apple and other Tech companies due to the coronavirus shutting down so much economic activity in China, which hits both production and eventual demand.

But I can almost guess his answer. It might be similar to his take on the US airstrike against Iranian Quds forces that killed General Soleimani...

"It's a complicated question, but ultimately we continue to believe the scarcity of growth assets in the world keeps leading us to a unique combination of transformational secular growth trends in the tech space for 2020 that will drive stocks/valuations higher despite last night's events."

And that sums up one of the biggest behavioral lessons for investors: don't let the short-term news scare you out of good long-term ideas.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click "Follow Author" above to receive his latest stock research and macro analysis.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>