OT:Viewpoints

Investing Strategies Mechanical Investing
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Tricky times for tech stocks
History suggests inflation, earnings, and the economy could pose challenges in 2022.
FIDELITY VIEWPOINTS – 01/19/2022 4 MIN READ

Key takeaways

Technology stocks have historically underperformed when inflation has been high.

Inflation has historically mattered more for tech stocks’ performance than has the health of the economy.

Tech stocks have historically underperformed following periods of high corporate earnings.

Value tech stocks may offer opportunities despite potential headwinds facing the sector.

https://www.fidelity.com/learning-center/trading-investing/t…

See chart
Historical tech sector odds of outperformance by inflation and growth scenario (year-over-year), 1962-8/31/2021

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Value tech stocks may offer opportunities

Intel springs to mind.
The past is not a reliable guide to the future, but FWIW EPS have grown 18%/year in the last 5 years and they’re trading at about 9.8 times trailing earnings.
It’s hard to spot a period they haven’t had 20% ROE, even with very low leverage. (they’re usually rolling in cash, so the debt is low)
They’re generally expected to have a bad year or two, so they’re deeply out of fashion.

Jim

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Interesting (recent) take on Intel - namely that the chip design/build model has been surpassed (out-evolved) by companies which do only one of these two things:

https://stratechery.com/2022/the-intel-split/

Quotes:

"…at that time, it was thought that every company needed manufacturing, needed wafer manufacturing, and that was the most capital intensive part of a semiconductor company, of an IC company. And I saw all those people wanting to leave, but being stopped by the lack of ability to raise a lot of money to build a wafer fab. So I thought that maybe TSMC, a pure-play foundry, could remedy that. And as a result of us being able to remedy that then those designers would successfully form their own companies, and they will become our customers, and they will constitute a stable and growing market for us"

and

"Given Intel’s performance over the last decade, though, it might have been more risky to stick with the status quo, in which Intel’s floundering fabs take down Intel’s design as well"

–sutton
doesn’t know enough about the industry to otherwise comment

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Intel springs to mind.

The common view in tech circles is that Intel has badly botched the innovation race and is a company in decline.

Elan

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The common view in tech circles is that Intel has badly botched the innovation race and is a company in decline.

Sure.
Whenever a big profitable company’s price is cheap, it’s because there is a common view that there is a big problem.
Sometimes there is. Sometimes there isn’t.

The issue isn’t finding the current narrative, but trying to discern when it’s really valid.
(none of that is a comment about the current complaints about Intel, other than I suspect they’re a little overblown…
the company is likely to make many many billions of profit in the next decade with no trouble at all)

Walmart was trading at a P/E under 12 for most of 2011 and half the world’s investors thought that was too expensive at prices in the low $50s.
In the narrative of the time, they were toast.
Now they’re trading at a P/E of 49 and half the world’s investors think that’s too cheap.

It would be churlish of me to suggest that it’s to a large extent the same half.

Jim

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Well, Intel is putting their money ($20 Billion) where their mouth is. Just heard that they are building a $20 B fab in central Ohio to combat the chip shortage in the US, and maybe elsewhere.

It normally takes 10 years to build a fab (last I recall). Either they have a great crystal ball or the build time has shortened somewhat. Who can predict chip needs in 10 years?

Professor Talon

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It normally takes 10 years to build a fab (last I recall).

I remember reading an interesting article about HOW you build a second fab, if you have a good one working.
You duplicate it. Make zero changes.
Same layout, same cafeteria, same bends in every pipe and wire, same supplier for everything, including the tables.
It takes so long to get one working a high yields, and there are so many subtle variables to control, they don’t always know which ones are important.

Who can predict chip needs in 10 years?

More?

: )
Jim

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Who can predict chip needs in 10 years?

Robots can now be rented for $8 an hour that do some repetitive jobs people are paid $15 an hour to do. And there’s a labor shortage. More chips will be needed, but maybe not Intel chips.

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Who can predict chip needs in 10 years?
Jim: “More?”

One project I worked on at Motorola around 1980, we had 7 (identical) CPUs in this communication controller.
One was the “real” cpu where all the work was done.
The other 6 were there because it was cheaper to have a cpu handling each serial port than to add a priority interrupt chip to the main cpu.

A few years later (beginning days of cell phones), I was astounded to find out that our handset had 5 CPUs. Same reason, it was cheaper to handle certain logic in a dedicated general-purpose CPU than to do that work on a dumb logic chip.

Recently I counted the number of cameras in a Honda CR-V. There is something like 12 cameras. One is the backup camera, the others are for the computer monitoring the road & other safety things.

So, yeah, more.

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Who can predict chip needs in 10 years?

More?

Or, for Intel bulls, Moore.

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It normally takes 10 years to build a fab (last I recall).

Intel to invest $20 bln in Ohio chip plant site
https://finance.yahoo.com/finance/video/intel-invest-20-bln-…
Intel will invest $20 billion in a massive new manufacturing site in Ohio…And it’s just the first step in what could be an eight-factory mega-complex costing $100 billon…

Intel says output from the first two factories will begin in 2025.

DB2

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Remember back in the day when we’d buy a screen of stocks and not even know what the tickers stood for?

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Remember back in the day when we’d buy a screen of stocks and not even know what the tickers stood for?

No.

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Market pullback: What’s ahead?
Here’s what could be on the horizon after January’s market choppiness.
BY JURRIEN TIMMER, DIRECTOR OF GLOBAL MACRO FOR FIDELITY MANAGEMENT & RESEARCH COMPANY (FMRCO), FIDELITY VIEWPOINTS – 01/24/2022

Key takeaways

The market’s pullback since the start of the year has been most sharply felt in more-speculative sides of the equity market, while less-speculative equities have held steadier.

On a technical basis, the market now looks oversold.
2022 is unlikely to see strong valuation-driven price gains. Instead, price gains will likely hinge on earnings growth.

We may be in an extended mid-cycle, with modest price gains, but also more wobbles.

When a storm blows through, it’s usually better to be on a large sturdy ship than on a dinghy. The markets are definitely going through their own version of a “Small Craft Advisory” these days (a warning the National Weather Service issues to small boats in times of high wind speeds). Stocks that are the most dependent on easy liquidity conditions—and that aren’t backed by steady earnings growth—have been reversing most of their pandemic-related gains.

https://www.fidelity.com/learning-center/trading-investing/m…?

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Reflections on corrections
What history tells us about pullbacks and how to navigate the ups and downs.
FIDELITY VIEWPOINTS – 01/28/2022

Key takeaways

Stock markets fall as well as rise, but the trend is up over the long term.

For long-term investors, having a diversified investment plan—and sticking to it through market ups and downs—is better than selling stocks when they drop and locking in short-term losses.

If the market pullback has shifted your target mix of stocks, bonds, and cash, consider rebalancing your portfolio back to your target asset mix. That can help position you for the eventual rebound.

After hitting new highs in January, the S&P 500® Index of large-cap US stocks was briefly down by more than 10% on January 24, driven by a none too tasty cocktail of concerns. Among them: lower corporate earnings expectations, rising inflation and interest rates, the Omicron variant, and a potential war in Ukraine. That 10% drop put the S&P into correction territory, a place it had not been in almost 2 years.

https://www.fidelity.com/learning-center/trading-investing/s…?

Are we out of the woods yet?
The worst of the market’s decline may be over. Now we could be in a holding pattern.
FIDELITY VIEWPOINTS – 02/02/2022 3 MIN READ

Key takeaways

We may have already seen the worst of the market’s recent decline.

Although this near-correction may have seemed sudden, in reality it’s been a rational adjustment to the changing interest-rate outlook.

Valuations such as price-earnings (P/E) ratios have already come down significantly since the market’s early-January peak.

While valuations may have further to fall, the remainder of the compression may happen gradually via earnings growth (instead of suddenly via further price declines).

In this environment, investors could consider low-volatility, high-quality dividend-paying stocks such as utilities.

It’s been quite a few weeks, to say the least. My strong sense is that the worst is behind us in terms of the market’s decline, but that it may take some time before we revisit its recent highs. Let’s dig in.

https://www.fidelity.com/learning-center/trading-investing/o…?

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Stock markets fall as well as rise, but the trend is up over the long term.
For long-term investors, having a diversified investment plan—and sticking to it through market ups
and downs—is better than selling stocks when they drop and locking in short-term losses.

It’s not false, but it’s a truly fine piece of “broker economics”.
i.e., it’s always time for the clients to buy, because that’s what makes money for the brokers.

The trend is up in the long term, sure.

But consider that the real total return of the S&P 500 in the 15.5 years after November 1968 was -0.53%/year.
On the start date of that stretch, the market was trading at a cyclically adjusted P/E of 21.6
Today it’s trading at a cyclically adjusted P/E of 36.5, same data sources and cyclical adjustment method.
Things might be different this time, optimists have to really work at it.

More recently, in the 13 years after March 2000 the real total return was -0.31%/year.
That’s also a pretty long wait.

We don’t know what the returns will be from the broad market in the next 10-15 years.
But knowing that the “long term” trend is up might not be a very large amount of comfort–
this kind of long stretch of no returns is definitely possible because it has already happened more than once.

Jim

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Jim wrote:
this kind of long stretch of no returns is definitely possible because it has already happened more than once.

Isn’t that the truth!

Here are the returns from a dividend adjusted S&P 500 from 1926 to present - based on having a full ten years and five years of data.

         **10-Year  10-Year  5-Year   5-Year**
 **ROI      CAGR     ROI      CAGR**
**Minimum** -49.01%  -6.53%   -66.31%  -19.58%
**Maximum** 616.42%  21.74%   357.52%  35.66%
**Median** 165.21%  10.24%   68.53%   11.00%
**Average** 198.67%  10.36%   71.37%   10.09%

But the real question is how long is it possible for the CAGR to be negative for ten years or five years.

**Negative  10-Year     CAGR        Months**
          **Begins      Ends        Negative**
          10/24/1927  6/29/1931   44.8
          10/19/1998  10/6/2000   23.9
                                  
**Negative  5-Year      CAGR        Months**
          **Begins      Ends        Negative**
          9/23/1926   3/23/1931   54.7
          12/4/1935   10/11/1937  22.6
          4/8/1965    6/2/1965    1.8
          5/22/1969   1/29/1970   8.4
          10/25/1972  4/17/1973   5.8
          7/15/1997   11/16/2000  40.7
          10/8/2003   8/2/2004    10.0
          2/2/2005    9/8/2005    7.3
          8/7/2006    1/3/2007    5.0
          5/15/2007   7/26/2007   2.4

Of course, the worse periods are from the Great Depression, but note that for ten year there is a negative CAGR from 10/19/1998 to 10/19/2008. Or for five year from 7/15/1997 to 11/16/2000. The real problem is that most individual investors enter after the lion’s share of gains have already been achieved and it is actually time to start lightening up on one’s portfolio exposure.

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The real problem is that most individual investors enter after the lion’s share of gains have already been achieved and it is actually time to start lightening up on one’s portfolio exposure.

Sure enough. It is easy to explain, but hard to do.
Grantham’s latest interview is interesting…he advocating going largely to cash in 1998.
It was no doubt a very painful couple years of looking like an idiot.

But buying back in at lower prices later on was not especially difficult…
Someone who sold at the average level of 1998 had multiple years to get back in at better prices.
And opportunities as recently as 2011, in nominal index terms.

Jim

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Someone who sold at the average level of 1998 had multiple years to get back in at better prices.
And opportunities as recently as 2011, in nominal index terms.

Just for a little extra colour—

The S&P trend earnings yield on the average day in 1998 was 2.791%, corresponding to P/trendE of 35.83, the way I smooth it.
At the moment, calculated the same way, the trend earnings yield is 2.816%, corresponding to P/trendE of 35.51
Kinda rhymes.

I’m not going to predict the same outcome…real total return for the S&P 500 negative 4-6 years later, 10.5-12 years later, and again 13 years later.
And I don’t really expect anything very similar.
But I would not absolutely positively rule out that king of thing, either : )
If something has already happened once, it’s presumably not absolutely impossible.

Jim

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Just to add some 1998 Intetest Rate Color -
https://www.federalreserve.gov/releases/h15/19980824/

GLTA,
Paul