TINA

TINA 

There Is No Alternative: 

That’s been the mantra of the markets for much of the last 18 months as AI fever gripped traders and the Magnificent Seven (mostly) swept all before them. 

Nvidia (NVDA US) which reported after the close yesterday (21-02-2024) has added +224.0% over the last 52 weeks and its market cap has expanded to just over $1.79 trillion.

Only a few weeks ago Meta Platforms beat earnings forecasts, instigated a dividend and announced a further buyback of its stock. That sent investors into a frenzy, with Meta’s share price jumping by +20.0%  creating $200.0 billion of additional value in the company. The single biggest one-day gain in market cap ever. 

In this article we will look at whether there are any alternatives to the Magnificent Seven, and technology in general, in the wider market, and if so where might they be found.

A catalyst for ideas

The idea for this article came, as they so often do, from an exchange between myself and Tim Vollans in the Fink Discord. 

It's hard to overstate the importance of the interactions Fink members and chat participants enjoy in the Discord.  This makes it a veritable cauldron of ideas and information (currently a 20% discount on annual subscriptions!)

Tim and I are always sparking off of each other, and pro traders in the chat constantly share their thoughts and highlight favourable risk-reward opportunities.

This excerpt from an interview with Stanley Druckenmiller, a legendary investor and former colleague of George Soros, at the Quantum fund triggered the conversation between Tim and me. 

The text below refers to Druckenmiller’s thoughts ahead of the infamous crash of 1987 (something I participated in and was witness to).

Source: Market Wizards

Tim quite rightly pointed out that not everything was or is a corollary to a prior crash or correction. And that each situation is different and should be judged on its own merits - nonetheless are some striking similarities between then and now but that's another conversation.  

The point about price-to-book values reminded me of this chart which I had seen and saved over the previous weekend. 

Source: Bloomberg

As you can see the chart highlights the disparity between price to book values in the S&P 500 and the  MSCI All Cap World index ex the US. That’s pretty much all other equities on the planet except mid and small cap names in the USA.

That set me thinking and looking back in to my archive, which is extensive and if am honest a bit disorganised (maybe some day someone will create an AI bot to sort that for me?) Any way  i found the chart that I was looking for, See below.

In this instance the chart shows the differential in relative valuations between tech stocks in the S&P 500 and the other 400 odd index constituents. 

The spread between these two groups has reached historic highs. Or to put it another way non tech stocks, in the S&P 500 have never been so undervalued, relative to their tech and comms services peers.

Valuation gulf

We can get a sense of the net effect of that gulf in valuation by looking at the performance of the Cap weighted and equal weight versions of the  S&P 500, as a proxy for tech or not tech (although of course the EW index still contains the tech stocks). 

Looking at the two indices, over the last three years.  A period which captures the renaissance of tech and the emergence of generative AI. We can see the substantial difference that the mega-cap tech stocks have made to the performance of the cap-weighted index 

Source: Barchart.com

And just to ram home the point here are the Info Tech and Comms Services sectors versus the broad S&P 500 over one year, which speaks for itself I think. 

Source: Barchart.com

So we have established that tech, and tech related to AI has been “dish of the day” for at least 18 months if not longer. And that tech story has driven US equity markets/indices to unprecedented highs, relative to those stocks listed on other stock exchanges. around the globe.

Does that automatically mean that all other equity sectors and markets are worthless? Or not worth worrying about?

The answer to that is an emphatic no because there are plenty of opportunities out there many of which have little or nothing to do with AI…

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