“For everything there is a season, and a time for every purpose under heaven…” ~Ecclesiastes 3:1
One of the most important skills every successful trader and investor must have is the ability to adjust course.
Sometimes you adjust course because your first direction was simply wrong.
(Anyone who tells you they’re never wrong is… well wrong!)
Other times you adjust course because the environment shifts and you need to adapt.
Either way, many of us can struggle with this kind of flexibility. If you’re like me, once you set out in a certain direction, it feels counterproductive to turn around.
Especially if you put a lot of time and effort into figuring out your original direction!
So why this philosophical perspective?
Well this week, I’m in the process of reversing course on one key theme that has been in play for several months now.
I’m starting to get bullish on speculative tech stocks!
The Spec Tech Wreck May be Over
Speculative tech stocks have been some of the worst performing investments you could possibly make over the past year.
Hopefully you were able to avoid most of the carnage. Last September, we talked about what could happen if Cathie Wood’s tech-heavy ARKK sank, and that’s pretty much what wound up happening.
Take a look at the chart of the ARKK Innovation ETF over the last few years. What a round trip!
Speculative tech stocks with no earnings — many of which had no prospect of turning a profit — soared sharply higher.
But fundamentals always matter — eventually. And many of these speculative stocks eventually moved back down to levels that more closely match the underlying companies.
Now that speculative tech stocks are trading at lower prices, their investment prospects are much more exciting!
Today, I’m considering adding several of these names to my Speculative Trading Program. There are two primary reasons speculative tech stocks could be poised for a major rebound.
Speculative Tech Stocks are Despised and Oversold
A little over a year ago, speculative tech stocks were extremely popular. New investors opened discount brokerage accounts and bought these aggressive plays with money from government stimulus payments.
Many of these investors did extremely well!
But today, enthusiasm for stocks like Zoom Video Communications (ZM), Teladoc Health (TDOC) and Roku Inc. (ROKU) has turned to distain.
No one wants to own these names. And stocks that posted some of the most outlandish gains in 2020 have now turned into utter train wrecks.
Seasoned investors know that you should “buy when there’s blood in the streets.” And there’s no shortage of carnage with these former favorites!
Today, these stocks are oversold on many different technical levels. The risk of higher interest rates, growing competition, and tougher financial conditions is widely understood.
At this point, everyone knows the bad news. And any good news would come as a surprise. In other words, we’re more likely to see a positive catalyst surprise markets and send these stocks higher. While any negative news would simply be considered “par for the course.”
When stocks are beaten down, oversold, hated and left for dead, that’s when some of the most vicious rebounds can occur.
But there’s another reason these stocks could bounce. One that could lead to some huge gains that occur literally overnight!
Watch for Buyouts as Big Tech Steps In
While most of the speculative tech companies have been unable to turn a meaningful profit, these companies have succeeded in creating some exciting innovation!
This innovation is what made investors excited about the companies to begin with.
Today, blue chip tech stocks like Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG) are flush with cash. They’re also looking for ways to expand their businesses and keep profits growing.
What better way to do this than buying out a smaller technology company?
Buyouts can give a large blue-chip company like Microsoft instant access to new technology. And since Microsoft has a global roster of individual and corporate customers, that new technology can be incredibly profitable!
Earlier this month, Google agreed to pay $5.4 billion to buy out cybersecurity firm Mandiant Inc. (MNDT). The speculative tech stock is unprofitable and its stock had been sliding for months.
But Google’s buyout offer sent the stock up 16% overnight. And historically, other buyout deals have led to much larger jumps for the stock being acquired.
This year, I expect to see more buyout deals announced as big tech companies put cash to work. And many of the beaten down tech stocks that we have avoided for the last several months are great candidate for these buyout deals.
So while it’s still very important to keep a balanced investment approach, I’d suggest putting some of your investment capital to work buying speculative tech stocks at these discount prices.