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☕ Should you get on the small cap bandwagon?

Jul 16, 2024

Good morning! 👋

I suggested a while back that investors had best be buyin’ or they’d be cryin’. Particularly and repeatedly when it comes to big tech, a thought that caused a lot of consternation for many in the “stocks are expensive” crowd.

I hope you did.

The melt-up continues.

My S&P 500 target of 5751.51 is increasingly within reach. (Watch)

Here’s my playbook.

1 – My “desert island” stock

I recently sat down my long-time friend and colleague, the affable, incredibly talented, and super savvy Bill “BP” Patalon when he asked me to participate in his “desert island” stock challenge – as in what one stock would I buy if I had to go away to a desert island and return years later. I thought you might enjoy our conversation. (Read)

Meanwhile, Apple continues to fire on all cylinders.

Btw, two more Wall Street firms have now jumped on board with my assessment (months ago) that Apple’s AI would a) be a big deal and b) kick off a massive upgrade cycle. (Read)

I hope I own enough ... shares, that is. 😊

Keith’s Investing Tip: Most investors don’t own enough of the right stocks which is why they’re falling behind at the worst possible moment, particularly the “diversifiers.” Those who do because they’re “concentrators” are having a radically different experience. For example, the SPY – a popular choice for diversifiers - has returned 102.37% over the past 5 years which sounds positively fabulous (and is) right up until they figure out that Apple’s returned 371.93% over the same time frame. See what I mean? I’ll be here if you need me.

Still not convinced?

I get it - I run into this all the time and have for decades.

Wall Street has done a super effective job convincing people to spread their money around so that they “don’t lose” but the world’s most successful investors play to win, a very different mindset. Let that sink in.

2 – A trade idea for the unexpected if you’re expecting the unexpected

AutoNation says that last month’s CDK software outage will dent earnings by $1.50 a share when it reports on July 31st. (Read)

The company says it’ll be a one-time charge consisting of guaranteed compensation paid to retain associates, but I have a hard time buying that – pun absolutely intended.

My experience is that there’s probably still considerable damage in scheduling, ordering, payment, and reporting functions for the simple reason that nothing in today’s tech-addled world is one and done.

Traders and investors are logically hunting to the downside but, I think the real play is higher because lower interest rates courtesy of Team Powell may bring new buyers a’running.

Buying calls or at least LEAPs could be interesting into earnings or immediately afterward when everybody is distracted. Bullish call spreads could work nicely, too. As would Selling Cash Secured Puts.

3 – Past its Prime or not?

Prime Day is underway. Expectations are for $7.1B today and $6.9B tomorrow.

CNBC’s Jim Cramer called AMZN a buy ahead of time (Read). He’s probably right but I’ve got bigger, more profitable fish to fry as the old expression goes.

If anything, I’m tempted to buy a few AMZN putskies – bet that the stock goes down – if and when it hits $200 where there is considerable open interest and potentially a lot of “pin risk” that I can use to my advantage.

Hmmm.

4 – Should you get on the small cap bandwagon?

I’m not.

The fact that Wall Street is talking up small caps almost guarantees they’re anything but a good bet. Peloton comes to mind, among others.

There are exceptions, of course.

But those are few and far between and usually have extremely compelling investment cases worth your time and the risk that comes with owning ‘em. Palantir, for example.

Shares have returned 69.51% over the past 12 months versus the S&P 500 which has turned in 26.90% over the same time frame. Anybody following along as directed in One Bar Ahead ® has had the opportunity to enjoy one heckuva run that, btw, is just getting stared imho.

Remember how the game is played.

Wall Street’s job is to make money... by separating you from yours. It’s nothing personal; it’s their job. That's what they do.

The old adage very much applies.

If you’re thinking you’re the smartest person in the room, you’re in the wrong room.

5 – I've never thought I’d see this in Japan

Japan has historically tried to avoid bankruptcy and protect existing jobs at all costs in the name of productivity. Now, there is a new and chilling wind blowing.

One that I’d never imagined I would see.

Japanese government ministers are apparently preparing to let “zombie businesses fail.” (Read)

As usual, there’s a wrinkle.

Ministers believe that letting the zombies fail will drive a new wave of acquisitions into more productive and presumably profitable businesses that’ll be good for Japan’s economy.

I’m not so sure that’s true.

Many of the zombies are 3rd and 4th tier suppliers to the Japanese economic machine including quite a few mom-and-pop shops making super-specialized parts or filling in the gaps that are otherwise unprofitable or unwanted by bigger players.

It’s a legacy of past glory, not a path to future economic prowess.

MyPOV: I’ve spent more nearly 35 years closely involved in Japan as a businessman, husband, father, and resident so these are observations I don’t make lightly. I hope I am wrong but, sadly, don’t think I am. They’re messing with fire, culturally and economically speaking.