I was talking with my editor on Friday about the huge tech rally we’ve seen so far this year … and if it actually has legs.
If you’re subscribed to The Banyan Edge and caught my piece on Friday, you already know where I stand there. I’m more than a bit skeptical about this rally, given how shallow it is.
But I know the majority of investors don’t share my mindset. Take, for example, my editor’s good friend.
Apparently, this guy took a modest investment on Friday morning and plugged 100% of it into the following Nasdaq stocks (stop me if you’ve heard these before):
- NVIDIA Corp. (NVDA).
- Advanced Micro Devices Inc. (AMD).
- Google/Alphabet Inc. (GOOGL).
- Apple Inc. (AAPL).
- Tesla Inc. (TSLA).
- Acom Inc. (AMZN).
It’s a bold choice, for sure. Such a selection assumes the clearest skies ahead, with the classic Big Tech stocks taking up the reins of the market once again.
Far from an all-weather portfolio, which can perform in the best or worst of times … I’m calling this a one-weather portfolio of extreme optimism.
But what if there’s something to such a strategy? Is there enough quality among these names to mitigate any downside risk?
In true Stock Power Daily fashion, today we’ll turn to the Green Zone Power Ratings system to find out…
How the “NAGATA” Portfolio Stacks Up
This is FAANG 2.0 … so let’s give it a new name: the not-quite-as-catchy NAGATA portfolio (see the list above for the source of the acronym).
Let’s start right at the top, with NVIDIA Inc. Here’s NVDA’s Green Zone Power Rating…
NVIDIA rates a “Bullish” 65 out of 100. That means it’s expected to outperform the broader market by 2X over the next year.
Its Value factor certainly holds it back, with NVDA’s eye-water price-to-earnings (P/E) ratio of 200! That’s almost 7X the broader Nasdaq 100’s P/E ratio of 30 and proof that these huge names are propping the rest of the index up.
The Size factor is a sore spot as well, given that the company is on the cusp of a trillion-dollar market cap… But then again, size is an issue for all the stocks on this list. Mega-cap tech is not where you should be looking for market-beating gains at this stage of the cycle.
Overall though, NVDA’s 65 rating is a green flag. If you want to invest in tech and especially AI, you can do a whole lot worse than NVIDIA. (C3.AI, looking at you.)
By contrast… Let’s move right along to the next stock, another chipmaker Advanced Micro Devices Inc. (AMD):
My proprietary system looks less kindly on AMD than its big brother NVIDIA. The stock scores a “Bearish” 26 out of 100 and has several factors holding it back.
It gets a knock for Size here, as well, given its $200 billion market cap. Stocks of this size generally aren’t in the best position to outperform the market over the intermediate term.
The Value factor, too, is in the dumps, with AMD’s P/E ratio of 501
Also of note is that AMD’s Momentum, Quality and Growth factors all rate quite high, but not as high as NVDA.
If you have to buy one large-cap chip stock, Green Zone Power Ratings shows you’re better off sticking with the more established NVIDIA for the time being.
Next up, the company that’s become synonymous with the internet itself, Google (or Alphabet Inc., if you really want to call it that)…
Google earns the same score as NVDA, a “Bullish” 65 out of 100.
What’s noteworthy here is GOOGL’s waning momentum compared to the chipmakers. We can see that Google hasn’t caught the attention of AI investors nearly as much as some of the other stocks on this list.
GOOGL also has a slightly improved (but still bearish) Value factor compared to the first two names on this list. Considering its relatively cheap P/E ratio of 27, it’s easy to see why.
The company also rates a near-perfect 99 on my Quality factor, the highest of any of the stocks on this list. It‘s bullish on Growth and Volatility as well.
Perhaps Google is the sleeper AI stock to own? From a value and quality perspective, that might be the right trade to make.
Next up is Apple Inc. (AAPL)…
In Apple, we find a picture not too dissimilar from Google. The company is massive, and commands a pricey 30 P/E ratio, though that’s nothing compared to what we’re seeing in the chipmakers.
It’s also a high-quality company, though not as firmly in Growth mode as Google is.
What we can applaud Apple for is its Volatility score, the highest on this list. For a large-cap tech company — that’s an understatement, it’s the largest company in the world, period — we’d expect a lower level of volatility, and that’s what AAPL offers.
Setting aside the Value picture, AAPL stock isn’t the worst buy in tech you could make. Vision Pro, its pricey new mixed reality headset, may not be an overnight hit, but the company still sells hundreds of millions of iPhones every year with no signs of that stopping anytime soon.
Next up is Tesla Inc., and longtime readers already know how I feel about this one…
TSLA stock rates a “Bearish” 27, with four of its individual factors holding it back.
The Value picture on Tesla is weak, sporting a P/E ratio of 69 and a Value score of 4.
Granted, the stock rates high on Quality and Growth. The easiest way to sum that up is that Tesla continues to generate meaningful revenue from its vehicle sales. It also benefits from a strong (but weakening) moat in the electric vehicle business.
But overall, TSLA stock is not a good bet right now. It’s a stock to avoid, or if you’re like me or subscribers of Max Profit Alert, one to strategically trade against as a bet on its vulnerability.
Last up on the everyday investor’s new tech basket is Amazon Inc.
The most immediate red flag with Amazon is its Value factor, which rates a 9 and is reflected in its 301 P/E ratio.
On all metrics but Growth, AMZN stock also rates a Neutral score or below. Even Quality, which most of the other stocks on this list can point to as a strong factor, is middling. Its Momentum and Volatility aren’t much better.
My Green Zone Power Ratings system says to avoid Amazon for the time being.
Grading the One-Weather Tech Portfolio
As a composite, the “All-Tech, One-Weather” portfolio scores an average rating of 46, aka “Neutral” within Green Zone Power Ratings.
A Neutral rating means we can expect these stocks to more or less keep pace with the broader market over the next 12 months. And that makes a whole lot of sense when you consider that stocks like these make up an outsized majority of the Nasdaq 100 Index.
In other words, if you’re looking to beat the market and uncover stocks that will help you do that, you’re better off looking away from the mega-cap tech stocks with few exceptions.
That’s where I come in…
You see, these six mega-cap tickers are driving today’s shallow tech rally. And it’s impressive, for sure! But when the next bull market starts in earnest, certain small-cap names will soar 500% higher or more.
I’ve handpicked a small selection of tickers trading under $5 per share with the potential to shine when that happens.
To see why I’m confident in these tickers (three of which rate a 96 or higher in Green Zone Power Ratings), click here.
Editor, Stock Power Daily