From Bearish to Bullish – Why High Tech is Back, Baby
"Just when I thought I was out, they pull me back in!"
Michael Corleone, the famous fictional gangster played by Al Pacino, uttered that line in "The Godfather: Part III." And today, I'm echoing its sentiment.
Only I'm not talking about joining a life of crime. I'm referring to investing in a particular sector...
One I believe is ready for a serious rebound.
For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.
From Bearish to Bullish – Why High Tech is Back, Baby
Let's rewind the clocks back a year.
In the high-tech sector, fundamentals were lousy, labor data was discouraging, and companies in this space were pulling back on hiring.
As a result, I was incredibly bearish on high tech. This was not the place I wanted (you or myself) to be.
But now, I'm shifting gears. I'm changing my tune. I'm going from bearish to bullish when it comes to high tech. Today, I'll tell you why...
And I'll even reveal the right time to jump back in.
High Tech Is in Rough Shape
To be fair, my bearish stance on high tech was right on the money. A lot of tech stocks fell 20% or 30% last year. And even as of the latest quarter, the pain for this sector is still happening.
Google's parent company Alphabet (GOOGL) saw its earnings per share ("EPS") drop 15% year over year. Intel (INTC) went from $1.50 EPS last year to a dime this year. And Facebook parent company Meta Platforms (META) saw a 40% drop in EPS.
The situation in high tech is still perilous. So why has my outlook changed so significantly?
Where It Hurts for High Tech
To answer that, you need to understand this industry's source of pain.
Investors might speculate that it involves rising interest rates – the "kiss of death" for high tech. Or companies want dividends and realize that high-tech companies often don't issue them in any substantial amount.
But the heart of the issue for high tech is global sales exposure. Let me explain...
A Global Industry
This shows various sectors and the degree to which revenues are exposed to the U.S. market (domestic) and international markets (global).
As you can see, sectors like utilities and real estate have nearly 100% domestic exposure. (Makes sense – the U.S. real estate market generally isn't impacted too much by happenings halfway around the world.)
But look at the right side of this chart. The sector most exposed to global markets is tech. What does that mean?
To start, it means that if global business is trending down, this sector takes a beating. And that's exactly what happened in 2022.
Last year was a terrible year for the global economy. And that's why there was a significant impact on the technology sector.
Interestingly, though, it's also why this sector is poised for a massive rebound...
The Return of the Dragon
You see, 2023 will feature what I call "the return of the dragon." In other words, China is coming back.
This country matters so much to overseas business and global sales, particularly with respect to high tech. And a return to normalcy for China means huge growth for this sector.
Here's some context:
- In 2022, smartphone sales fell 11% worldwide. And that was partly due to a 13% drop in sales in China – 43 million fewer units were sold.
- Last year, global auto sales fell 2%, partly because China only recorded a measly 2% increase.
- And PC sales in 2022 were down 16%, thanks to a 30% drop in sales in China.
You get the picture. The underlying problem for high tech was sluggish global sales, particularly in China. But China is back. Covid restrictions are over, and business is ready to start.
However, a boost in global sales isn't the only reason why my perspective on high tech has shifted...
A Look at the Dollar
The second reason has to do with the dollar. To understand what I mean, look at this chart:
This is how the U.S. dollar has compared to the euro over the past five years. You can see that, for a while, the dollar bounced around in value, then got weak during Covid, but surged in 2022.
Last year, the dollar was 17% more expensive than it was in 2021. And when you're selling stuff in dollars, that's a big problem. It makes you less competitive, and your sales go down.
Furthermore, when you take the profits and revenue, they're coming in 17% cheaper. You're making less money.
The ripple effect of a stronger dollar is costly. But notice what's happening now: The dollar is getting weaker.
Anyone who is exposed to global sales is going to benefit from this weakening dollar. And which is the most exposed sector to international trade right now? You guessed it: high tech!
When to Get In
We're looking at a phenomenal tailwind forming in the high-tech sector. The question is: When is a good time to get in?
Mark next week on your calendars. That's because I see more rate hikes from the Fed coming up, which will cause the stock market to take a dive.
That will give us an opportunity to get in at a discount and position ourselves while everyone else notices that high tech is moving up.
If you're a "Pro" subscriber, I'll share a high-tech opportunity that could translate to gains of at least 50% in the near term.
In the meantime, we're in it to win it. Zatlin out.
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