Have you heard Trump’s latest words?
He told Fox News that the US and China could strike a ‘great deal’ when they meet this month. He also added that billions worth of tariffs were at the ready if they couldn’t come to an agreement.
Way to play both sides.
He’s essentially said nothing…the outcome could be good, or it could be bad. Pretty much anyone could have said the same.
And yet, most see Trump’s words as more positive than negative. The Dow Jones rose almost 2% after Trump’s ‘great deal’ comment. Our own market jumped more than 1%.
But I’m hopeful for more tariffs to come…
More tariffs means more opportunities
If you remember in yesterday’s Money Morning, I wrote that taxes — whether that’s income or tariffs — are terrible. So why am I hopeful for more of them?
Well, it’s something investors won’t be expecting. Everyone wants things to get better. It’s why they’ve jumped back into stocks. They want a ‘great deal’ to happen.
But if it doesn’t, more money will fly out of stocks.
This might hurt your existing positions in the interim. But it will also create buying opportunities which will pay off BIG TIME in the long-term.
The problem with stocks, for a long time, has been prices.
No matter how good the business is. No matter what the growth potential. Too often, investors get excited by future growth and fall in love with wonderful businesses.
Amazon.com, Inc. [NASDAQ:AMZN] is a great example.
Amazon is an amazing company. Their culture, ethos and drive to please customers is what puts them on top of almost every industry they enter.
But even for a company as wonderful as Amazon, 56-times forward earnings is a pretty penny to pay.
To earn just a 10% return on the stock, such a multiple implies the business will grow free cash flow (FCF) at 33%…for the next decade.
Is 33% growth possible? Maybe. Is it probable? Maybe not.
And this is even after the stock has dropped 25% from its high this year.
To achieve 33% growth over the next decade is something short of a miracle (I’ve been told they do exist though).
Yet investors look at fast growing industries like the cloud, the addressable market for online retail, and other web industries to justify the stock’s high price.
If Amazon was to fall to say 35-times forward earnings, then your return potential looks a lot better. At a price of $956.5 per share (a market cap of about $470 billion), Amazon only has to grow at 25% for the decade for you to earn a 10% return over the same time.
Again, it’s a steep ask, but it’s much more achievable than 33% growth.
But I won’t hold my breath waiting for Amazon to drop another 38%. Such a drop would require a mammoth event to happen.
But maybe you don’t have to wait at all. What if I told you there’s an Amazon-esque company trading for just 26-times forward earnings? Would that peak your interest?
Could Amazon’s cousin be your saviour?
I can already feel some of you wince at the mere mention of 26-times forward earnings.
If earnings don’t grow, such a multiple represents a 3.8% earnings yield. It’s a little more than you’d make on a US government 10-year bond.
Like Amazon, this company is jumping into emerging fields. They’re dominant players in the e-commerce, payment and cloud industries.
And thanks to Donald’s tariffs, they’re also fast developing a chip business, from which could spring quantum computing, artificial intelligence (AI) and similar divisions.
In March, the company even trialled a facial and voice recognition system. As subway commuters made their way to work, all they needed was their face and voice to buy tickets.
Bloomberg Businessweek explains:
‘A voice recognition system identifies them [commuters] and dings their Alipay accounts accordingly. Soon, as trials expand, millions of riders may not need cash, or a wallet, or even a cell phone to get around. They’ll just need Alibaba.’
If you’ve not heard of Alibaba Holding Group Ltd [NYSE:BABA] before, they’re China’s answer to Amazon.
OK, so they’re not a replica. Alibaba’s e-commerce model doesn’t involve inventory like Amazon. Instead they act as a middle man, creating sales from selling ad space and page rankings on their massive e-commerce ecosystem.
And unlike Amazon, Alibaba has dropped a whole lot in 2018. Thanks in part to trade tensions and investors demand for higher expected returns.
It’s why billionaire investors like Howard Marks are rushing to places like China. Where there’s lots of negative sentiment, there are usually lots of opportunities.
And Alibaba could be one of them.
Editor, Money Morning
PS: Guess what else the majority hate…cryptocurrencies. Sam Volkering believes the crypto world is one of the most misunderstood. It’s why he has written a free report to help you navigate and potentially profit from the massive trend that is decentralised payments. Check it out here.