Before I get into the meat of my column today about my top investment theme for 2018, I want to touch on the BIG NEWS of the past two weeks—the likelihood of steel (25%) and aluminum (10%) tariffs in the U.S., as well as the possibility of some sort of trade war if other countries retaliate.
A Dynamic Look at the Tariff News
Most people believe the tariffs would be a mistake, pointing to higher prices for consumers and/or lower profits for steel and aluminum users (auto and beer makers, for instance), not to mention even lower sales on other products if Europe or Canada imposes their own tariffs.
And they could very well be right. I’m not an economist (thankfully).
That said, as an investor, two things came to mind after the story broke and as the market declined late last week. The first was that everyone was talking in static terms—for example, a car will cost $175 more because of the tariffs, which means $3 billion of higher prices.
But nobody talked in dynamic terms, about how corporations will adapt. For example, a foreign corporation might open up a steel shop in the U.S. to avoid the tariffs (and take advantage of the lower corporate tax rate and full expensing recently implemented). I’m not predicting that, but it is a possibility down the road.
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The second and more important thing that popped into my mind was the unanimity of the opinions. Every investor thought the tariffs were bad, and that the market was completely justified in tanking after the report. To me, it’s possible the tariff news could become the crystallizing piece of news that convinced everyone the market was going lower—something that often happens near a low.
Of course, I’m not going to trade off that possibility—I take my cues from the market and leading growth stocks. But my point is that it’s useful to keep an open mind when it comes to obvious news in the market. When everyone agrees on a big piece of news, quite often you’ll see the market react the opposite of what’s expected.
My Top Investment Theme for 2018: Business Investment
Looking at the general market, my market indicators say the intermediate-term correction and consolidation in the major indexes is still ongoing—while the indexes are above their early-February lows, they’re not in uptrends and doing a lot more chopping than advancing.
However, to me, the big story of the past couple of weeks has been the action of leading growth stocks. Simply put, they’ve been acting amazingly! And while they come from a variety of sectors, I think the leaders have one broad thing in common: They’re all, to one degree or another, what I call CapEx stocks, benefiting from a potential surge of business investment.
From a macro perspective, there are already signs that business investment—which was one of the weaker parts of the economy during the past handful of years—is picking up. And there are many reasons to believe the uptrend will continue, whether it’s corporate tax cuts (leaving firms with more cash flow this year), immediate expensing (you can write off the cost of these investments in year one) or good old pent-up demand (many companies have kept the lock on the wallet in recent years).
Thus, the stock market is sniffing out a corporate America investment spending spree, and a ton of software, networking, security, data and IT infrastructure stocks have been surging despite the lackluster overall market.
Want some examples? One is Nutanix (NTNX), which has the industry’s most popular hyperconverged infrastructure technology, allowing firms to manage and integrate their various IT applications (storage, computing, networking, etc.) from a single piece of software. It’s a bit of an ice cream headache to understand, but big clients are stampeding to the company’s door—in the quarter ending in February, the firm inked 57 deals worth $1 million or more, up 104% from a year ago. Total revenues soared 44%, and the stock has exploded to new highs on big volume.
Then there’s Palo Alto Networks (PANW), which has become the blue chip of the cybersecurity industry during the past few years. Last week’s quarterly report (sales up 28%, earnings up 37%) was outstanding, with many sub-metrics (deferred revenue up 33%, billings up 20%, and free cash flow of around $2.30 per share, well ahead of 86 cents of earnings) blowing away estimates. The stock is the institutional way to play the cybersecurity sector, and the buyers have been active, driving PANW straight up since its early-February low.
And lastly, we have what I think is the #1 growth sector in the entire market: cloud software stocks. There are literally a dozen or more stocks in this sector that look excellent and have solid growth prospects, including MuleSoft (MULE), a firm with a funny name but a big story. The company’s Anypoint software platform solves the technology integration puzzle, which has become way more complex in recent years with the cloud, apps, software-as-a-service offerings and the use of mobile devices. At year-end, nearly 1,300 enterprises were MuleSoft clients (including McDonalds, Unilever, MasterCard, Walmart, Target, Coca Cola and Netflix), and business is growing rapidly (revenues rose 60% in the fourth quarter). Management thinks the top line can grow 35% annually through 2021, and the stock just catapulted out of an eight-month IPO base. Note the three straight weeks of giant volume, a powerful sign.
My top investment theme for 2018 should impact many tech-related sectors of the stock market. But just to reiterate, the overall market is still iffy, so it’s certainly possible some of these or other leaders will pull back or build some new launching pads. But the broad-based strength of many technology stocks is telling me the market sees even better times ahead—small positions on dips makes sense to me.
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