Tech And Growth Stocks: NASDAQ Up 14% From March Lows, This Is Where It Gets Harder

Summary

  • The Invesco QQQ ETF has recovered remarkably from its recent bottom.
  • However, we think the NASDAQ would begin consolidating at the current levels for a while.
  • We discuss how investors should think about allocating exposure between predictable growth and speculative growth stocks.
  • I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
The NASDAQ building on Times Square in New York, USA

lucky-photographer/iStock Editorial via Getty Images

Investment Thesis

We saw a swift recovery from the recent February/March lows in the Invesco QQQ ETF (QQQ). Notably, the QQQ was up 14% (as of April 5) from its recent bottom. Dip buyers have been frantically trying to catch the bottom as momentum surged.

Consequently, we noticed that the short-term breadth indicators mostly went into overbought zones last week. Nonetheless, this week's retracement has absorbed some near-term bullishness from these buyers. In addition, we also noticed that the price action on the QQQ also seems to be consolidating at its current levels. Therefore, we believe that it suggested that the rapid upward momentum should be over for now, and investors need to refocus on quality buys. Still, the robust recovery from the recent bottom should bode well for a medium-term recovery based on historical backtests.

Therefore, we remain bullish on the prognosis of tech and growth stocks moving forward. However, given the current macro and geopolitical environment, investors should abstain from adding heavy exposure to unprofitable growth stocks. We believe the risk-on mentality should return selectively to profitable growth stocks first. Moving forward, when the macro environment improves, we can add more exposure to the more speculative, high-growth stocks.

It's Essential To Focus On The Price Action

As growth investors, we believe it's critical to design a diversified portfolio that can leverage profitable and speculative high-growth stocks. These profitable growth stocks have predictable business models with robust free cash flows. In contrast, speculative, high-growth stocks might not be calibrated for near-term profitability. However, they could be colossal winners moving forward if successful.

Invesco QQQ ETF price chart

Invesco QQQ ETF price chart (TradingView)

The QQQ seems to be at a cross-road now, given its remarkable recovery. Also, retaking the critical 50-week moving average (blue line) is fundamental to recovering its long-term uptrend. Therefore, it's reasonable to expect the battle between the bulls and the bears to intensify at the current levels.

However, despite the macroeconomic uncertainties, we expect the current levels to hold. The speech on Tuesday by Federal Reserve Governor Lael Brainard seemed to spook the bulls as it appeared to telegraph a "more hawkish" tone. She articulated (edited):

It is of paramount importance to get inflation down. The central bank will start to reduce the size of its balance sheet at a rapid pace as soon as its May meeting. We expect the balance sheet to shrink considerably more rapidly than in the previous recovery. - Barron's

Bearish investors suggest that the verbiage indicates continued headwinds for stocks. These investors have also been concerned whether the Fed's rate hikes could tip the US economy into a recession. But, investors are encouraged to focus on the price action instead. We believe that markets have an uncanny ability to price in events.

For now, we believe that the index will continue to consolidate sideways in the near term. The breadth and momentum indicators are suggestive of consolidation. Therefore, investors who have been patiently waiting for such consolidation can start to engage with their watchlist.

Focus on Stocks With Robust Free Cash Flows

QQQ Vs. ARKK ETF 3 year performance

QQQ Vs. ARKK ETF 3Y performance % (koyfin)

It's an imperfect comparison. However, we think a comparison between the QQQ and ARK's flagship ARK Innovation ETF (ARKK) highlights the criticality of diversification between predictable and speculative/high-growth stocks.

The more speculative ARKK outperformed the QQQ when the monetary policy was more accommodative. However, the solid businesses in the QQQ helped the ETF catch up and overtook ARKK subsequently (3Y performance).

We think ARKK has bottomed together with the QQQ recently. However, we don't expect ARKK to resume its outperformance in the near term. Therefore investors in ARKK need to maintain a minimum of a five-year perspective, as the full risk-on mode has not returned. ARKK could outperform moving forward if the environment is more permissive and less uncertain. So, investors need to be patient with speculative growth.

QQQ top 10 tech holdings NTM FCF yield

QQQ top 10 tech holdings NTM FCF yield % (TIKR)

Consequently, we believe that investors should allocate most of their portfolio exposure to stocks that can generate positive free cash flow (FCF). Using FCF as a benchmark helps us to evaluate the resilience of their business models. It also helps us think about the competitive moat of these businesses. For example, the top 10 tech holdings in the QQQ ETF have positive FCF yields. Even a high-growth stock like Tesla (TSLA) is FCF profitable, albeit with a relatively low NTM yield of 0.71%.

ARKK ETF top holdings NTM FCF yield

ARKK ETF top holdings NTM FCF yield % (TIKR)

However, a glance over at ARKK ETF's top holdings unveils a different story. Suddenly TSLA stock's low FCF yield among its QQQ peers didn't look so disparate anymore.

Because in ARKK, there are stocks like Exact Sciences (EXAS) with a negative FCF yield of -3.9%. As explained previously, the environment toward these high-growth stocks is not conducive yet, even though ARKK could have bottomed. Therefore, if investors decide to add exposure, they should be more circumspect in allocating higher exposure to stocks in the ARKK than stocks in QQQ.

Of course, there's no way to tell when the environment will be all clear for growth and tech stocks. Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett articulated in 2008 (edited): "If you wait for the robins, spring will be over." Hence, if you are more conservative, you can always add in phases. First, focus on higher-quality growth stocks and then on the more speculative ones. It helps you to participate in both categories of stocks.

Key Takeaways

We hope our guide has been constructive in helping tech and growth investors with their portfolio construction in the challenging macro environment. Investors are encouraged to continue paying close attention to price action.

Please share your preferred growth stocks to navigate the challenging macro environment!

Do you want to buy only at the right entry points for your growth stocks?

We help you to pick lower-risk entry points, ensuring you are able to capitalize on them with a higher probability of success and profit on their next wave up. Your membership also includes:

  • 24/7 access to our model portfolios

  • Daily Tactical Market Analysis to sharpen your market awareness and avoid the emotional rollercoaster

  • Access to all our top stocks and earnings ideas

  • Access to all our charts with specific entry points

  • Real-time chatroom support

  • Real-time buy/sell/hedge alerts

Sign up now for a Risk-Free 14-Day free trial!

This article was written by

JR Research profile picture
14.28K Followers
Sifting through the ultimate growth stocks for your portfolio

I'm Jere Wang, the principal analyst and founder of JR Research and Ultimate Growth Investing Marketplace service.

Ultimate Growth Investing is curated to help investors achieve 5x to 10x returns over the next five years. 

As a growth-oriented investor myself, I am aware of the challenges investors face in their quest to find the right growth stocks. There are so many high-potential companies in the market. As these are emerging leaders, the due diligence required is even more crucial. All growth investors want multi-bagger returns. Unfortunately, most could hardly find the time to do the necessary work. 

Therefore, our service is here to help these investors. We are full-time investors and traders. We work day-in, day-out to find the best opportunities for ourselves. Now, we are extending those opportunities to these investors through the service. 

If you also prefer someone to do all the hard work for you, I invite you to try out our service. 

Subscribe right now because you get to try out the service for 14 days FREE. Seeking Alpha's unconditional guarantee also protects your free trial. 

Your billing only starts after the free trial. So there's absolutely no risk at all for you to subscribe. Upon subscription, you will have access to all of our investing resources. You will also have access to our Growth Portfolio.

Come and join our community of investors as we navigate the ups and down of the market together. All our best ideas are shared only with our community in the service. Hence, you will not be able to find them on the free site. 

If you have any questions, feel free to send me a direct message. I'm here to help. 

I look forward to connecting with you in Ultimate Growth Investing soon!


More About Me:

I was already a full-time investor and trader before I joined Seeking Alpha as a contributor. I enjoy sharing my experience, knowledge, and mistakes with fellow investors who don't have time to look at the market. It is not a part-time job that I do on the side. I depend on what I do for a living. I take these responsibilities very seriously.

I was previously an Executive Director with a global financial services corporation. I graduated with an Economics Degree from National University of Singapore [NUS]. NUS is Asia's #1 university according to Quacquarelli Symonds [QS] annual higher education ranking. It also held the #11 position in QS World University Rankings 2022.

I'm also a Commissioned Officer (Reservist) with the Singapore Armed Forces. I'm the Battalion Second-in-command of an Armored Regiment. I currently hold the rank of Major.

I love spending time researching high-quality growth companies. That also includes investing time analyzing their price action. In addition, it has allowed me to develop a clear understanding of how institutional investors play their game.

Our best research ideas in the service are highly actionable. We own our best ideas and have skin in the game. Our ideas are not just designed to be a good read. Therefore you wouldn't get abstract theories or concepts from us. You will only get timely and actionable ideas. These are also high probability and workable set-ups with lower-risk entry points. 

My LinkedIn: https://www.linkedin.com/in/jjere/







Follow

Disclosure: I/we have a beneficial long position in the shares of AAPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.