What did I tell you? The hottest tech stocks rallied too hard and yesterday they took a big step back. Looking at the charts, Silicon Valley giants have another 15-30% to fall before finding support.
Big names like Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) will recover, of course. They just need a little time for the corporate reality to catch up with their stock prices.
But until then, Wall Street has a real problem. While the Fed’s free money is still flowing, it’s hard to put it to work when the stocks that led the rally are now on the defensive.
I warned you that the market leaders had feet of clay. And in the absence of decisive leadership in the stock market, cash ends up pouring into precious metals, inflating asset prices along the way.
Inflation Hiding in Plain Sight
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Precious metals shield wealth from a deterioration in purchasing power. As paper money loses value, hard assets hold up a lot better.
At least, that’s the theory. Some investors just don’t see a reason for gold to rally as hard as it is in a world when the Fed has admitted inflation rates are too low for comfort.
I’ve argued that even a little inflation is a dangerous thing when you’re earning minimal interest on Treasury bonds. But inflation has been far from dormant in the stock market.
Look at Alphabet Inc. (NASDAQ:GOOG), which swelled from 27X earnings before the virus hit to a rich 34X multiple at its recent peak. Think of these numbers as exchange rates that reflect how many “Google Dollars” our money can buy.
Profit expectations have come down. But even so, every Google Dollar of profit coming into the company is worth 26% more than it was going into the lockdowns. Everyday currency simply doesn’t stretch as far.
And that’s the Fed’s inflationary strategy at work. Dollars still buy roughly as much on Main Street as they did last year, but on Wall Street our purchasing power is eroding fast.
After all, the Fed can print dollars, but it can’t print profit. It can’t print metal either. Until the Fed’s printing press stops, smart money can shelter in profitable companies or hard assets.
Fed Can’t Print Metal; Combine Precious Metals with Profit
Normally, I’d rather remain open to profitable companies because human innovation is infinite. Metal, by comparison, is dead.
Gold keeps up with ambient inflation in the long term. The absolute downside is minimal, and you’re protected from the gyrations of government policy, but that’s as far as it goes.
The companies that find the metal and dig it out of the ground, on the other hand, can generate infinite value for shareholders over time. One of my favorites right now is Newmont Corp. (NYSE:NEM), which is obviously riding high as demand for gold boosts revenue and widens profit margins.
NEM looked good before the pandemic, with every “Newmont Dollar” of anticipated earnings worth $22 at the end of 2019. Since then, I’ve had to raise my profit sights 10% just to keep up with bullion prices.
Even with more cash coming in, NEM now commands a 30X multiple. But unlike a company like Alphabet, it can justify that premium price with the prospect of growth ahead.
I currently expect this company to generate almost twice as many Newmont Dollars a year from now. That’s real dynamism.
And as a bonus, NEM pays a dividend while it grows. The yield here is above what Apple and Microsoft pay combined, and well above 30-year Treasury rates as well.
That’s better than just buying metal and paying a bank to keep it safe for you. Until the Fed stops printing, I’d rather be in the mining stocks than Silicon Valley.
As always, we talk yield and wealth preservation in my Value Authority newsletter. In volatile market cycles, 2-Day Trader squeezes cash out of the swings.
As always, you can hear my latest thoughts on my Millionaire Makers radio show. (Click here for recorded episodes and local stations.)
Cannabis Corner: New Green Leadership
The more I crunch the numbers on the ongoing rotation of money through the cannabis industry, the better the middle-term view looks. We might finally be seeing the green light at the end of a long tunnel.
Admittedly, it has been a miserable year. Across the stocks I track, close to $900 million in investor capital has evaporated in the last eight months.
But the group as a whole is now up 6% so far this year as money flows out of the established giants like Canopy Growth Corp. (NYSE:CGC) and Aurora Cannabis Inc. (NYSE:ACB). In fact, ACB has now lost its No. 2 cannabis stock status.
Aphria Corp (NASDAQ:APHA) is now a larger company by market capitalization, as befits its more defensive medicinal orientation. And once-tiny retail distributor Green Thumb Industries Inc. (OTCMKTS:GTBIF) is now bigger than both APHA and ACB put together.
If GTBIF is the future, I think the industry as a whole has turned the corner and will reward investors again. I’m looking forward to that.
We clearly needed a breath of fresh air here. As it is, GTBIF has created almost as much wealth so far this year as leading cultivator CGC has hemorrhaged over the same period.
And if GrowGeneration Corp. (NASDAQ:GRWG) can keep expanding, we’ll have a new giant to contend with one of these days. Reading between the lines, the initial “green gold rush” is over. It is time for a new generation of companies to step up.