Download now: The Downfall of Cable, and the Rise of 5G!

$4 Trillion Blinders?

Written by Briton Ryle
Posted June 1, 2020

The S&P 500 continues to march higher. It left that 2,950 support/resistance point in the dust. And last week, the index took out the 50-day moving average (blue line), and it is also working on a pivotal support/resistance point at ~3,050 (purple line). 


wd chart june 1

This 3,050 level stopped the S&P 500 twice in 2019 — in July and again in September...

So now we're gonna just blow through it because... things are so much better than they were a year ago??

You know when they put blinders on horses so they can only see what's straight ahead? Yeah, that. The Fed, Treasury, and Congress bought $4 trillion worth of blinders for this market. And it’s on a full-on rampage...

All-time highs are now 10% away. 10%! Dividends have been hacked, 36 million people are out of work, cities are on fire — so of course, new highs make total sense!

Forgive my sarcasm. But think of it like this: There are 660,000 restaurants in the U.S. Restaurants are the second-biggest employer after the U.S. government. What circumstances do we need for restaurants to go back to normal, operate at more than 50% capacity, and more importantly, rehire staff? 

There is only one conclusion that makes any sense: Investors are pushing stocks toward record highs because they expect a vaccine. 

And really, I'm not going to bet against all the smart humans working on a COVID-19 vaccine. When humanity gets properly motivated and focused, we tend to find a way.

Margin for Error?

Still, you'd think maybe a little margin for error would be reasonable. But, as I like to say, "reason" and "stock market" haven't been on speaking terms in a while…

A couple weeks back, I ran through a bunch of the high-flying tech stocks just to get a feel for valuations and see if tech stocks really are as overvalued as some people say…

What I found was a bit surprising. There are some really, really high valuations for some tech stocks — ones that you may know. Shopify (NYSE: SHOP) did about $2 billion in revenue over the last year. Investors have bid the stock up to where the company is worth $90 billion. Yeah... 50 times revenue is pretty high. 

Even a stock like Amazon.com (NASDAQ: AMZN) that, like many of these tech/cloud stocks, is obviously benefitting from the current environment looks kind of expensive. The forward P/E is just under 100, the market cap is 1.2 trillion — with a “T”; it’s not cheap.

One of my favorite stocks is Twilio (NYSE: TWLO). It makes many of today’s most important mobile phone apps work. I recommended it a few years ago to Wealth Advisory subscribers at around $30 a share...

Today, Twilio is hitting $200. That’s 20 times revenue....

Back on March 16, I suggested right here in Wealth Daily that Twilio looked like a good buy. Shares were about $80 then…

A Look Back and a Look Ahead

In that article, titled "Some Thoughts on What’s Next," I wrote: 

This is not the time to buy speculative stocks. And frankly, I'm leery of buying index funds, too. This is a time to buy quality. Starbucks (NASDAQ: SBUX) is trading for $60 a share. A little patience and you might catch it at $50 — seems like a pretty good deal. Apple (NASDAQ: AAPL) is down $75, at $250. 

Target (NYSE: TGT) is nearly at $90, down from $130. I wouldn't fool with many retailers. Kohl's (NYSE: KSS) might not survive this. Same for Macy's and Nordstrom (NYSE: JWN). But Target has already made the turn to the new retail reality. And if a couple of its competitors go down, it will be that much stronger when this virus is in the rearview mirror….

Twilio (NYSE: TWLO) is one of the best tech companies out there. It provides a platform for companies to do their online customer service. It's been cut in half and currently selling for nine times revenue. Sure it might get cheaper. But it just started turning a profit. And revenue was expected to grow about 40% this year. That probably won't happen now — that's why it's on sale. 

Teleconferencing company Zoom Video (NASDAQ: ZM) has been on fire. And my Wealth Advisory subscribers have had the good fortune to see online health care stock Teladoc (NYSE: TDOC) roll higher (recommended in Wealth Advisory at $59.78). 

Those data center REITs will benefit. Google (NASDAQ: GOOG) will, too, as 5G becomes all the more critical — and useful. 

Like many companies, Angel Publishing uses Slack (NYSE: WORK) for our office communications. It will benefit from more people telecommuting. The stock is $17, down from a high of $42.

So, some of these stocks have just launched higher. The techs mostly — Teladoc, Slack, Twilio…

It’s easy to look at these stocks and see they are expensive. And the S&P 500, too... it has run more than I would have expected. Will it be a surprise if it pulls back?

Let me ask you this: If you bought Twilio back in March at $80, were you thinking, “I’ll just hold this for a couple months?” Maybe. And that’s fine. You wanna take a 125% profit in less than three months, I’m not going to tell you that you are wrong…

Twilio is expensive — 20 times revenue. The market cap is $25 billion on $1.4 billion in revenue. And as I expected back in March, its earnings situation has deteriorated a bit.

But I will tell you that many who have bought this stock didn’t buy it for where it would be in six months or a year. 

Twilio has been growing revenue at a pretty steady 40% annual clip. Next year’s revenue should be right around $2 billion. Suddenly, that lofty 20 times sales gets a lot more reasonable, falling to 12 times sales. And if Twilio keeps that 40% revenue growth coming, then the stock is currently trading for around eight times 2022 revenue. 

Of course, there’s a lot that could happen between now and then. Twilio revenue growth could slow down, and the stock could get creamed. 

But ya know, Twilio’s growth could also accelerate…

Bottom line for me: I’m not buying anything right now... today…. this week... I need to see this rally pause, pull back, consolidate — however you want to say it. I’m also not going to tell you that current stock prices are a complete joke, either. 

In fact, another of my favorite stocks is up 50% since late April. It’s still under $10, and Angel’s head IT guy just thanked me for getting him in it….

Until next time,

brit''s sig

Briton Ryle

follow basic@BritonRyle on Twitter

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

Buffett's Envy: 50% Annual Returns, Guaranteed