Trading Desk: Growing Ahead Of The Fear Factors

A lot of my favorite stocks have a secret. The charts look terrible after last year’s rout. But the companies are a lot stronger than their stock prices.

It’s called “innovation.” Maybe you’ve heard of it. Companies aren’t frozen in the macro headlights. They have highly compensated and motivated management teams looking for solutions to the problems life throws in their way.

Any stock trading at pre-COVID levels needs to show real deterioration in its fundamentals. Otherwise, a bigger company doesn’t deserve a smaller stock price.

We’re using the pre-COVID comparison for a simple reason. Back in 2019, the Fed hadn’t flooded the market with zero-rate cash yet and multiples hadn’t gotten stretched to the breaking point.

Stocks were roughly fairly valued then, right? So why would a stronger company be worth less now? Don’t blame the Fed. We didn’t live in a zero-rate world in 2019. If inflation had raised its head, we would have been rolling with rate hikes then, too.

The Renaissance IPO index, comprised of the best stocks to go public in the last 36 months, is down a terrifying 64% from its peak. The companies haven’t shrunk that much.

Just look at Block (SQ) last night. Look at Hubspot (HUBS) and The Trade Desk (TTD). Look at Roku (ROKU).

The companies are bigger and stronger than ever. They haven’t run out of cash. They aren’t going away. They’ve innovated through everything the world has thrown at them and are now hardened . . . coming back for more.

This is just the business cycle as usual. Yes, inflation continues and yes, the economy remains too hot for the Fed’s comfort.

But behind the headline numbers, we’ve been watching investors rediscover the logic of owning the companies that really have the vision and the disruptive business models to race ahead of interest rates.

A year ago, the prevailing theory was that small stocks would crash first under the Fed’s weight . . . and they did. But the companies behind them weren’t passive victims. They’ve used the past year to flip from losses to sustainable profitability, adding customers, expanding just as fast as Wall Street predicted before the pandemic was even a rumor.

Those are the companies I focus on. They’re not flimsy “meme stocks” but something a lot more substantial. They were around before the Fed drove markets crazy and they’ll be around after inflation is finally defeated . . . and they’re getting bigger all the time, quarter to quarter.

The S&P 500 as a whole can’t say that. Earnings for the big stocks have hit a wall and are now going backward. Our companies are still going forward.

This is where the heat is. When you’re worried about a recession on the horizon, you want heat.

And the stocks already corrected hard, so there’s plenty of room for shareholders to end up ahead here. All you need is a little vision and a little discipline.  That’s how I came through the dot-com boom and bust with more money than when I started!