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It’s Time to Take Some Hard Swings at Big Tech

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This is a little weird.

Two of the best market calls I’ve made recently have involved suggesting the purchase of mediocre companies and the sale of some of the best companies on the planet.

Call No. 1: Buy Oil Producers

First off, near the end of 2020, I started beating the drum for owning oil producers.

To be clear, I love the value of Chevron (NYSE: CVX) – which Chief Income Strategist Marc Lichtenfeld’s recommends in The Oxford Income Letter – but I don’t love the oil businesses writ large.

In fact, I’ve learned the hard way that oil companies are often mediocre at best.

Oil producers sell a volatile, unpredictable commodity.

They are price-takers, not price-makers.

Furthermore, these businesses are extremely capital-intensive.

Oil producers must reinvest almost all of their cash flow into drilling new wells just to maintain their levels of oil production.

They have to spend even more to grow.

That means oil producers don’t generate much free cash flow, and a business that doesn’t generate much free cash flow is not a good business.

Call No. 2: Avoid Big Tech Stocks

Big Tech companies, unlike the oil producers I just described, are incredible businesses.

Big Tech firms are the opposite of capital-intensive.

They have almost no capital expenditures, which means the cash flow they generate doesn’t have to be reinvested. Instead, Big Tech companies can use cash to create growth, return cash to shareholders or strengthen corporate balance sheets.

Think of it this way…

Oil producers grow slowly and don’t generate much cash for shareholders.

Big Tech companies grow quickly and generate boatloads of cash flow.

Yet for almost all of 2021, I was recommending owning oil producers and avoiding Big Tech.

As I said, it was weird, but both calls have worked out incredibly well.

Chart: Performance of Big Tech Stocks

While Big Tech leaders like Netflix (Nasdaq: NFLX), Amazon (Nasdaq: AMZN), Meta Platforms (Nasdaq: META) and PayPal (Nasdaq: PYPL) are down between 27% and 64% since November 2020, the Energy Select Sector SPDR Fund (NYSE: XLE) is up 132% – a great success for us.

Great Businesses Win Over the Long Term

So why did I want oil stocks and avoid tech stocks?

It’s simple. The valuations of both groups had gotten far too extreme.

Oil producers were priced as if oil prices would be lousy forever, when I foresaw a massive turn in the oil market coming.

Meanwhile, technology stocks were valued for beyond perfection.

Rising rates have since popped the tech bubble, and the market has corrected the industry’s valuations.

Since then, oil prices have improved and so have oil producer valuations.

That has sent their stock prices flying.

Meanwhile, coming out of COVID-19, growth rates of tech companies have slowed and their valuations have collapsed.

I have to say that I love it.

What that now means for us as investors is that we currently have a rare chance to buy shares of great tech companies at compelling valuations.

Over the long term, it’s always the great businesses that outperform in the stock market. They can generate massive amounts of free cash flow and can grow without using that cash flow.

For proof, let’s overlay the performance of energy sector stocks with the performance of some Big Tech stocks.

Chart: Energy Stocks vs. Big Tech Stocks Over the Long Term
Even after the recent great performance by energy stocks and the collapse of those four tech companies, the tech group has massively outperformed.

And all four collapsed tech stocks I mentioned have still provided excellent returns dating back to 2015.

On the other hand, over that same period, the energy sector has actually lost money for investors, despite an incredible 18-month run.

That’s why I’m so excited about the current valuations of Big Tech companies.

As an investor, this is what I’m always dreaming of – buying great companies at attractive costs.

Today, Big Tech stocks are affordable.

The worst first half of a year for stocks in 50 years has served us up a fat pitch, straight from the pitching mound of Silicon Valley.

It is time to start taking some good, hard swings.

Good investing,

Jody

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