Why I’m Using TQQQ To Capture The Growth Rebound

Why I'm Using TQQQ To Capture The Growth Rebound

PM Images/DigitalVision via Getty Images Thesis

Growth stocks in the Nasdaq-100 (NASDAQ: QQQ ) have been sold off and are now more undervalued than value stocks, and by extension the overall market (NYSEARCA: SPY ). Although I can’t call the bottom of the selloff and there could be substantially more downside if fundamentals worsen, the current growth selloff is already historic. Since I’m out of cash, I’m using a small amount of leverage to get more exposure to the Nasdaq-100 through ProShares UltraPro QQQ (NASDAQ: TQQQ ) with the hope of capturing more upside during a rebound. Growth Vs. Value

I normally believe in keeping a good balance of growth and value investments. But these days many value investments are trading at fair if not elevated prices. For example, UnitedHealth (NYSE: UNH ) and Walmart (NYSE: WMT ) are near record high P/E ratios. On the other hand, many growth investments like Adobe (NASDAQ: ADBE ), PayPal (NASDAQ: PYPL ), Netflix (NASDAQ: NFLX ), Facebook (NASDAQ: FB ), and Google (NASDAQ: GOOG ) are near the lowest P/E ratios they’ve had in the last five years.

While looking at historical valuations isn’t necessarily indicative of the future and growth stocks are (as always) still more expensive than value stocks in absolute terms, all of the aforementioned stocks are heavily traded mega caps. So there should be some “wisdom of the crowd” baked into their valuations, and in the long term I expect some mean reversion.

Right now nobody wants to own growth stocks as they’ve largely guided for slowing growth rates in the midst of high inflation, rising interest rates, and a war-induced risk off environment. According to a Bank of America client survey , investors ramped up their underweight tech position to its largest level since 2006.

Overall, I agree that the current environment is not favorable to growth stocks. But I also know that the current environment won’t last forever, and that the market will often turn before the fundamentals do.

For the past year, the narrative has been all about rising rates, high valuations, and inflation. But over the past few weeks, I’ve started to notice talk about recession for the first time. In the event that recession becomes a real risk, we’d likely see lower inflation, fewer rate increases, and more demand for increasingly scarce growth opportunities. Whether the narrative starts to shift in favor of growth now or in a few months or even years, I can’t say. I’m also not saying that a recession is necessary to put growth stocks back in favor.

But the Nasdaq-100 fell 21% from peak to trough this year, and bear markets for major indexes don’t happen often. Of course there could be further downside, like there was in 2000-2002, 2008, and briefly in 2020. But for long term investors, I see much more upside than downside at this point. Nobody has ever gone wrong buying during a bear market and holding for years, and bear markets deeper than -21% are very rare. Valuations

The previous section basically makes the argument that stocks have gone down, but they’ll revert to the mean and go back up eventually. While that’s always been true in the past, it’s fair to say that just because stocks have gone down doesn’t mean they’re by default undervalued.

I won’t try to value all 100 stocks in the Nasdaq in a single article. So, I’ll use Morningstar’s valuation model. Morningstar is a well-respected research firm whose five star recommendations have generated alpha in the past, indicating that their DCF-based valuation models are somewhat effective. No analyst is perfect, but Morningstar is certainly a good starting point.

Here’s a chart showing the price movement implied by Morningstar in the top 25 QQQ holdings and the impact those movements would make on the index returns: Ticker QQQ Weight % MS Implied Change % Impact On QQQ % AAPL 12.644 -17 -2.200056 MSFT 10.138 28 2.83864 AMZN 6.753 51 3.44403 TSLA 4.053 -15 -0.60795 GOOG 3.959 41 1.62319 GOOGL 3.743 41 1.53463 NVDA 3.705 -7 -0.25935 AVGO 1.925 -5 -0.09625 COST 1.878 -15 -0.2817 CSCO 1.863 -3 -0.05589 PEP 1.773 -2 -0.03546 CMCSA 1.708 30 0.5124 ADBE 1.667 46 0.76682 INTC 1.569 37 0.58053 AMD 1.401 23 0.32223 QCOM 1.371 8 0.10968 TXN 1.255 3 0.03765 NFLX 1.229 -11 -0.13519 TMUS 1.21 17 0.2057 AMGN 1.057 13 0.13741 HON 1.024 21 0.21504 INTU 1.017 16 0.16272 AMAT 0.91 14 0.1274 PYPL 0.905 53 0.47965 Remaining 27.94 19 (est) 5.30917 Total 99.997 19 (avg) 18.365044 […]

source Why I’m Using TQQQ To Capture The Growth Rebound

Leave a Reply