Keep One Eye on Resource Stocks and the Other on the NASDAQ

The Dow Jones Industrial Average hits a record high and people go wild.

The S&P 500 hits a record high and the same happens.

The German DAX and the UK FTSE 100 approach their 2007 peak and we wonder whether the euro crisis happened at all.

When the Aussie S&P/ASX 200 reached a five-year high, thoughts were that it would keep going higher.

And yet, there’s one index that hasn’t gotten much attention, but has beaten them all. It hasn’t hit a new high, but it has climbed 50% higher than the Dow Jones, and it could have further to go…

Yesterday, Diggers & Drillers editor Dr Alex Cowie showed us a report from Goldman Sachs that said ‘buy resources – sell banks‘.

When you’ve got Goldman Sachs behind a trade, well, we won’t say it guarantees gains, but if the big investment bank can do for the Aussie resource sector what it did for the US bond market, it could be a good year for resource investors.

And boy, do resource investors need something to go right after the rotten start to the year. But the Doc isn’t one to stay on the back foot. After (rightly) keeping his powder dry through the start of this year, the Doc teed up a triple-whammy of stock picks in his latest research report, released last night.

As usual, the Doc has meticulously picked these three stocks based on eight criteria. The most important of which in a market like this is ensuring the company has plenty of cash on the books.

The work the Doc does researching the small resource stocks is nothing short of outstanding…which is more than you can say for the Goldman folks…

‘Tell Me Something I Don’t Know’ about Resource Stocks

Let’s be honest, a recommendation to ‘buy resources – sell banks‘ is a little [ahem] two-dimensional.

If your editor was a Goldman client we’d have to say, ‘Try harder.’

When the Doc showed us the Goldman note it took us back to a meeting we had with a prospective client about eight years ago during our days as a stockbroker.

The client told us clearly, ‘I don’t want you to give me buy and sell advice on Rio or BHP, I can work that out for myself, I want you to tell me something I don’t know.

It was one of those things that has always stuck in our mind. It’s a rule we try to stick to every day. Tell you or show you something you don’t know. So if we relate that back to the Goldman Sachs note, does Goldman really need to tell clients to ‘buy resources – sell banks‘?

Maybe they do, who are we to say? But it strikes us most clients could have figured that out for themselves. Saying that, yesterday the Metals & Mining index fell 1.2% while the Financials index only fell 0.8%.

So perhaps clients aren’t listening to Goldman Sachs’ advice anyway. But that’s by the by. Back to the point we made at the top of this letter.

Amongst all the hubbub over the major indices hitting new highs; the fuss about the Aussie dollar hitting the skids; and gold and resource stocks falling, investors have missed one thing.

And that’s the fact that the NASDAQ index (comprised of mostly technology stocks) has outperformed the two other major US indices since the market bottomed in 2009.

Since then the NASDAQ has gained 140%. Compare that to the woeful 45% gain by the S&P/ASX 200 index.

It’s Not All Resource Stocks in the Small-Cap Market

It can’t be a coincidence that part of the reason for the relatively poor performance of the Aussie index is because the Aussie market is so two-dimensional – bank stocks or resource stocks…resource stocks or bank stocks.

When investors want to shift from one sector to a number, they’ve got a fairly limited choice.

Of course, we’re being a bit unkind. Search a bit further into the small-cap end of the market and it may surprise you what you find. It’s far from just resource stocks.

In fact, resource stocks make up less than half the stocks on the Australian Small-Cap Investigator recommended buy list.

But the performance of the NASDAQ isn’t a coincidence. And unlike the gains for the Dow Jones and the S&P 500, we’re not convinced all the NASDAQ gains are the result of the US Federal Reserve’s money printing.

Our guess is there’s more to it than that. While some NASDAQ stocks will have benefited (the NASDAQ actually contains a number of financial stocks) from money printing, the reasons behind the rising index are more likely due to what we see as the start of a new phase in technological progress.

While the internet boom may have kicked off about 17 years ago (Wow, that long ago!), only now is the cream really rising to the top.

And we’re not just talking about the big consumer names like Google, Facebook and Amazon. We’re talking about the stocks led by entrepreneurs who are innovating and shaking up the world’s economy.

The Molecular Economy

The internet boom was all about loud and brash arrivals on the market. The internet crash was all about promises never delivered.

This time it’s different. That doesn’t mean stock prices will keep going up in a straight line. We’re old enough to know that doesn’t happen. But we do believe that the performance of the NASDAQ index is worth noting.

A 140% gain in four years is nothing to sniff at. To our way of thinking, after a few false starts, the Dinosaur Economy is on its last legs. It’s only surviving due to the money printing of central banks. By contrast, the New Economy (or Molecular Economy as we call it) thrives on ideas and entrepreneurialism.

In short, we agree that it’s a good idea to buy beaten-down resource stocks. But in our view you’re cheating yourself if that’s the only place you invest. To borrow Goldman Sachs’ advice, we’ll put it this way ‘buy molecular – sell dinosaur’.

Over the last six months we’ve been working on an exciting new project with this idea in mind. And we’ll be ready to go public with it soon. We can honestly say it’s the most interesting and exciting research we’ve ever done. And we can’t wait for it to launch in the next couple of weeks, so we’ll keep you posted.

It’s a great opportunity, so look out for it. As Jim Mellon states in his great book, Cracking the Code, ‘we are at the stage that Apple or Microsoft were 20 or more years ago…and that alone makes it important for serious investors to sit up and take note‘.

He’s absolutely right.

You’ll see what we mean very shortly. Watch this space.


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