You should never stand in front of a raging bull. So I make the following comments while standing outside of the ring, as it were.
But wait. It might be safe to at least stand inside the perimeter. The bull isn’t as feisty these days. He looks to have received a few wounds.
In fact, it might actually be okay to wander around and taunt the poor beast.
The bull, in this case, is the Aussie tech sector. As I’ll show you today, it’s getting weary.
I touched on this yesterday. I told you how short sellers had targeted tech darling WiseTech Global Ltd [ASX:WTC].
It went into a trading halt while management expressed their outrage and prepared a response to the short sellers report. It came out of the trading halt yesterday. And fell 12.3%.
Clearly, the short sellers are winning the argument.
That doesn’t mean they’re right of course.
The latest report from J Capital (the short seller targeting WTC) doesn’t appear to be the most comprehensive document. According to The Australian:
‘J Capital’s latest report is based around a third-party commissioned survey of 13 customers featured on WiseTech’s website customers and interviews with 18 former employees.
‘“Our interviews suggest that, contrary to WiseTech’s public narrative, it is harming the companies it acquires by under-investing and jacking up prices on legacy platforms to force clients to move over to CargoWise One.”’
If we’re talking 18 disgruntled former employees, J Capital might be getting a narrow version of the truth.
But when a stock trades on a price-to-earnings ratio of 109x expected earnings in FY20, a narrow version of the truth sounds like the gospel to those only there because the share price has hitherto been going up.
The only conclusion is sell. Now!
The nervousness caused by the focus on WTC spread to other stocks in the sector:
Afterpay Touch Group Ltd [ASX:APT] fell 3.3% yesterday.
Appen Ltd [ASX:APX] fell 4.3%.
Zip Co Ltd [ASX:Z1P] fell 4.8%.
I have no idea which of these stocks will do well and which ones will bomb.
But I do know that this sector is expensive. Investors have piled in purely because other investors piled in earlier. Momentum creates momentum.
All bull markets start with a solid foundation. Then, investor imagination carries prices well beyond all reasonable value. For some of these stocks, we’re at this point. I just don’t know which ones!
I always tell subscribers of my investment advisory, Crisis & Opportunity, that only three things determine share prices: interest rates, company earnings, and investor sentiment.
Because most tech stocks have little to no current earnings, that leaves interest rates and investor sentiment. In a bull market, all you can see is blue skies ahead. Earnings will increase strongly, year after year. Along with rock bottom interest rates, it makes for big valuations.
While belief in the growth prospects is there, these investments do very well. But when groupthink is questioned, things can turn nasty very quickly.
This is where we could be now with the Aussie tech sector. If you’re in these stocks, my advice would be the same that Joe Biden gave to his son Hunter over his business dealings in the Ukraine: I hope you know what you’re doing.
On a related note, have you been following the iSignthis [ASX:ISX] saga? It’s a tech stock in a league of its own. It has a $1 billion market cap. Yet in the six months to 30 June, ISX reported revenues of just $7.5 million.
This stock price is ALL investor imagination.
Although I think many are now waking up from their slumber. ISX is currently in suspension. Both the ASX and ASIC are asking questions. It’s not looking good.
It’s not looking good for Sydney hedge fund LHC Capital, either. According to a report in the Financial Review, the fund has a 21.75% exposure to ISX.
That’s right. Over one-fifth of the fund is in a stock that has huge question marks over its corporate governance. Not to mention the fact it has a market value of $1 billion and no earnings to speak of.
I’m not sure where the ‘hedge’ is in this fund. I sure wouldn’t like to be an investor.
It’s just a wild guess. But when ISX comes out of suspension, I think it’s going to plummet. Plenty will want out, while no one in their right mind will want in. That sort of supply and demand equation can only be solved with a much lower price.
Ahhh…tech stocks. When they’re good, they’re very good. But when they’re bad…
Editor, The Rum Rebellion
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