BHVN - Start Putting Together Your Shopping List For Beaten-Down Tech Stocks

Summary

• This is not an immediate call to start buying technology willy nilly. Or is this a tech only announcement.
• I'm merely projecting that selling pressure will likely reach a crescendo once the Fed raises rates again.
• Put together a shopping list. You have time to understand the stocks you are investing in. More importantly think about what lower price you would start buying the stock.
• You can do it by buying the stock well below your current average price. Another way is to value the tech stock at 16 to 18 times earnings and see if that makes sense. Or make the price no more than 10% or 15% above the all time low price.

Time to start putting together your shopping list. We could get a strong bounce after the market becomes very oversold at the end of March

I don’t at all think anyone should be aggressively buying stocks just yet.

This notion is about buying very selectively, high-quality stocks - small cap and large - that will be closer to their eventual bottom than their top. I'm looking out to the days after March 22 after Powell raises interest rates once again. I think the notion that the next raise will have to be .50% will gain currency and that could help press down stock prices. Perhaps the week before the FOMC meeting, we will once again be treated to a “leak” from the Wall Street Journal either confirming .50% or .25%. Perhaps the stock market starts rallying right before March 22. Use your judgment, if you have gotten the basics of the Cash Management Discipline, then buying a few shares at a time will be something you do as a discipline. If you start right before March 22 and continue to buy in the days after. If the stocks you select to go up 10% as you are acquiring, use your judgment there to decide if you should hold up your buying and wait for another leg back down before restarting. I think the first half of the year will be in a consolidation phase, and perhaps after the half-year mark stock market participants will begin to look into next year and exhibit a more bullish approach.

Why am I focusing on March 22? If there's going to be a bit of a rally it would have to be after the next rate rise. Powell lately has avoided the "Jackson Hole" persona and that gives the market an excuse to go up. Also, by March 22 rate rise we will likely have squeezed out most sellers, and properly discounting the worst-case scenario.

The narrative has been moving too little or no recession. Get ready to hear the opposite argument.

At the end of last week, Fed President Bullard stated on CNBC that a soft landing is feasible in the U.S. if the post-pandemic rate regime shift is executed well. Very often when a conjecture like this rises because of some data points, there will arise other points that will serve as a counterargument.

The narrative at some point will swing very far into the skeptic camp and take the market lower first. I'm not against a rally, I just think we have a ways to go before the rally takes hold. Just keep in mind I doubt we will see the SPX far above 4100 for many months. Once you get acclimated to the notion that we will trade under 4200 you can trade, or invest below 4200 significantly (unfortunately for those that are stuck above), perhaps as low as 3200 (my base case is higher like around 3600 for now), good profits are highly achievable.

As rates go higher, talk of certainty of recession will only get more frequent. We've seen this pattern before leading into the nadir of December with tax-loss selling surging in toward year-end. My base case is that the recession will be mild and only identified as such after the recovery already starts. That said, we still have to take the "accepted wisdom" into account when navigating this market. References to a "soft landing" and in (what I remember as) 99% or at least the vast majority ended up in a recession where the public felt the consequences. I was merely pointing out that we will hear more and more references to the "big one" that will devastate all. We can take advantage of these discrete moments by considering them as close to a bottom when it becomes a crescendo of doom. We at Dual Mind Research will monitor, and weigh out that bottom, and our community will be ready to take advantage.

I guess we'll likely have such an event with the March 22 rate hike, and the speech and Q&A by Powell. He should stop giving them because he undoes whatever effect the rise is supposed to have. He comes off as too congenial, and soothing, either come out swinging like "Jackson Hole" or raise the rate and be done. So it depends on which Powell we get, to know if we've achieved the bottom, as temporary as it is. Remember, my base case is that we're in for a long consolidation period. Right now, we'll see how far the downturn takes us. The first stop should be around 3800. Whether we break that and fall past 3700 right to 3500 really depends on whether this uptick in inflation continues and gathers momentum. It will stay closer to 3700 if inflation proves to be less sticky than now expected. It could just be some "noise," this is because no natural system heads straight up or down. Eventually, the sellers will be squeezed out of the market, and then optimism reigns again. Wash, rinse, repeat. We just need to identify when "wash" is over and "rinse" starts again, get short beforehand. This is our current tactic. Recession talk is supported in a number of ways. The one cited most often is the yield curve inversion. I'm very skeptical that this indicator is very accurate right now.

Never mind the yield curve.

I would like to point out that this inversion is the most manufactured of any yield curve in history. Why? Well, first we had Quantitative Easing and now we have Quantitative Tightening. In fact, we have QT to the tune of $95B a month. We don't know where on the curve they're actually tightening. Also, what is the form of this tightening? Are they just letting shorter-term bonds run off, or are they actively selling the longer end of the bonds? Have they been selling the huge amount of MBS that they are holding? Or are they sitting on them? The issue with selling the farther dated Mortgages is that maybe they were bought at 3% and now they have to be sold at the prevailing rate of 6.88% and incurring tremendous losses. Anyway, long rates were compressed for so long that maybe the rate rises are smaller than they could have been had they not been tampered with for years.

Also, there is a Wall Street saying: "The bond market has accurately predicted nine out of the last five recessions." I would take the whole yield curve inversion with a grain of salt.

Just start thinking about what you might get long in (beaten-down stocks will be on my shopping list).

This is not about scooping the bottom of the bottom, however, I think that the next few weeks selling pressure will push out the weak hands. If you can find a week where there are few sellers the next step is a move up. That means this is an ideal time to trade around a position. Look at your average stock price of any one position. The idea of selling around a position is to buy shares under your average price, wait for a move up in the stock price, then trim to more expensive shares. This will lower your average price and make it easier for you to get a stronger return.

Shopping list – Make sure you know what you are buying and why you want to be in the stock. Otherwise, if the stock goes against you it will upset you if you don’t know what you own. There could be a lot of dips coming, be prepared.

I'm going to look at big-cap tech names. A lot of ink has been spilled on whether tech will lead this market. I do believe that big-cap tech will have a leadership role going forward. However, let's side step this whole discussion. If tech falls far enough it becomes more about being less bad than their current valuation, and that can generate nice returns.

Adobe ( ADBE ) is currently on the bad list because they're in danger of losing the transformational acquisition of Figma. I'm hoping that selling pressure takes it below 300. I will start accumulating under there.

Alphabet ( GOOGL ): My average price for the GOOGL I'm holding right now is just below 87. When GOOGL comes in below that level I would start rebuilding this position. I will start very small on these and hope that all these tech positions will fall well further than 87. These are the starting points.

Amazon ( AMZN ): My average price here is also just below 87. I don’t feel I need to defend buying these two names. For GOOGL I really don’t see ChatGPT as a threat. GOOGL has the best platform for AI/ML development. As far as AMZN until anyone can be as big a part of our lives that AMZN and AWS is then I would question getting long in this name. In fact, let’s assume that all the tech names I'm listing here there is a good bull case for them. If you don’t agree then pick the ones you like. Of course, this is my list, I expect you to create your own list. Just remember, you don’t have to justify that technology will be the dominant sector in the near future. Just realize the tech sector is about 20% of the S&P 500. All you need to do is pick a stock that has fallen hard enough that when the selling is over, it could be looked at as being “less bad” than assumed during the sell-off.

Apple ( AAPL ): I haven’t been a big fan of AAPL, however, I have seen AAPL jump smartly from 120 several times so perhaps I will give AAPL a try under 120.

Smaller Cap Techs: Confluent ( CFLT ), Hashi Corp ( HCP ), MongoDB ( MDB ), Snowflake ( SNOW ), I'm not putting buy prices here. They're more vulnerable to strong selling pressure. I know I will return to this in a few weeks' time and see where they can be priced properly.

Biotech names:

Moderna ( MRNA ): I think this cancer vaccine joint venture with Merck (MRK) is extremely exciting. Right now MRNA is being punished for a very stupid reason (IMHO). They're getting less revenue from COVID vaccines. Also, I think they had a setback for Flu and RSV vaccines. So if MRNA breaks under 140 I will start building a position there and do so very slowly.

Seattle Genetics ( SGEN ) right now the stock is being lofted by yet another rumor of a takeover. If the deal doesn’t go through I could see it back down to below 140. I would add to my current position if that happens.

Small caps: Biohaven ( BHVN ) under 14, Iovance ( IOVA ) under 7, TG Therapeutics ( TGTX ) under 15 Medtech: Dexcom ( DXCM ) under 105.

It’s not so much what I'm buying, it's about how I'm setting up my shopping list. The first thing to note is that I start with the maximum price that I would buy shares. Also, I will be building these positions slowly, there is no hurray. I don’t see the market rallying to any appreciable level until mid-year. 4200 should be the top for quite a while. Perhaps by then, there should be hope that the Feds' interference with the market should ebb.

The tactic illustrated here can be used for other sectors that you feel will lead the market. It could be energy, insurance, or industries. I actually think these sectors can work as part of the leaders of the market later this year.

Happy hunting!

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