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Rainbow in the Market
One day in the year of the pox, came a time remembered well … when the strong young trader of the rising sun heard the tolling of the open bell.
One day in the year of COVID-19, when the bell began to ring, it meant the time had come for one to go … to the temple of the small-cap king.
There in the middle of the circle, Ian stands, searching … seeking. With just one touch of his investing hand, the answer will be found…
For those of you who didn’t catch the Rainbow, we have a smorgasbord of tech tidbits and market morsels for you today. But we’re not digging into any ol’ earnings reports or ho-hum quarterly updates — no siree!
Instead, we tackle a reader email that just barely missed the cutoff for yesterday’s edition of Reader Feedback. Here’s Jamie with a question that I bet many of you have silently wondered yourselves, so listen up now, you hear? Hi Great Stuff team!
I’ve invested for a few years now with a handful of major tech stocks. I don’t know where to go from here and want to squeeze more juice from my lemon of a portfolio. Big Tech bores me by the day, and I want to invest in actual innovation and just “new” stuff. What do I do?
Thanks for the memes and constant prog rock flashbacks, by the way.
— Jamie J. Thank you for writing in! I take it you weren’t enthralled by the Apple event, eh?
Now, your email would’ve been in yesterday’s edition of Reader Feedback … had it not set me rambling for so long, I eventually looped in my colleague Ian King to ramble with me.
Aside from being an all-around interesting guy to talk tech with, Ian King has one of the best track records here at Banyan Hill. He’s the head honcho over at Automatic Fortunes — which you may dig if you’re looking for the tip-top of the tech market crop!
And now you see why we looped him into Jamie’s “anything but Big Tech” bonanza.
Join us now as we forego our usual festivities in favor of an extra-special Q&A with Ian! We sat down last night to talk all things tech … from alternative energy to the love-hate relationship with the FAAMG big boys.
But wait, there’s more: For those of you asking about that whole “VIP treatment” you get with Great Stuff … buckle up!
We snuck you behind the velvet ropes to check out Ian’s adventure in the world of small-cap investing right here. (Click me!)
So … what’s a small cap? A 1-gallon hat or something?
Think “tiny stocks” … typically with a total market capitalization between about $300 million and $2 billion. So, these are nimble, growing businesses that are far from penny stock territory.
No sign of the morning coming, you won’t be left on your own like a rainbow in the dark. Not when you have the who’s who of tech investing and small-cap sleuthing at your fingertips!
To see why you should stop sleeping on small-cap stocks — and figure out what the $#^% is going on with tech these days — read on! | 
Great Stuff:
Thanks for reaching out to the Great Stuff gang with me today, Ian. Everyone reading this knows that we simply love to rant and rave about tech — who doesn’t?
So, what’s your take on the Big Tech picture — especially going into earnings?
Ian King:
From an investing perspective, 2020 is one of the most consequential years in history.
A “once in a 100 year” pandemic forced companies and people to think differently about everything — from how we communicate to we shop to how we socially interact.
Technologies that were expected to take decades to adopt accelerated overnight. Companies replaced meetings with zoom calls, and water cooler talk became Slack conversations.
Here’s a chart of e-commerce that clearly illustrates this inflection point:  (Click here to view larger image.) Moreover, we’ve reached a tipping point in the amount that companies spend on digital investments, as it crossed over physical investments earlier this year.
The realized savings from these digital investments will help companies run leaner, more-efficient businesses. It will also have longer-term consequences for physical investments.  (Click here to view larger image.) This shift benefits mega-cap techs such as Amazon, Microsoft, and Google that offer digital investments, like enterprise software and cloud services.
In terms of their outlook for earnings, FAAMG are all trading at the high end of their forward price-earnings ratios.
So that means there is more short-term risk to the downside if earnings don’t blow away expectations. In the longer term, however, this secular shift to digital will keep big-cap tech valuations elevated. So, any pullbacks are buying opportunities.
Great Stuff:
Awesome insights, Ian. As far as accelerated trends go, a bunch of our readers have made bank on Roku (Nasdaq: ROKU) with the stay-at-home market’s insane rush for streaming services.
With those quickened trends in mind, what’s going on with your main gig — Automatic Fortunes?
I heard about your triple-digit gains on SolarEdge Technologies (Nasdaq: SEDG). Congrats, by the way! Alternative energy is hot right now, but what trends are you looking for next?
Ian King:
We’ve had a great year, even in light of the market pullback!
Our portfolio is focused on the biggest trends in technology, many of which are accelerating as the result of the world’s shift to digital.
I think the biggest trend to watch over the next decade is the adoption of self-driving cars. In the last few weeks, Waymo expanded its program in Phoenix, and General Motors’ (NYSE: GM) Cruise division received the green light to send driverless Chevy Bolts around San Francisco.
Mobility is a $7 trillion industry that will have the biggest transformation in at least 100 years as we remove human drivers. This will impact everything from supply chains to the way we travel to the places we live.
With that much disruption ahead, it’s an exciting time to be an investor! 
Great Stuff:
A most-exciting time, indeed. Now speaking of industries in flux, real estate investment trusts (REITs) have gained a lot of popularity lately — especially with our Banyan Hill colleague Ted Bauman.
What are your thoughts on REITs, their rising popularity and their potential as an investment play during the pandemic?
Ian King:
First, I’d be avoiding mall and office property REITs because of the shift from physical to digital.
I know some of the dividends look juicy, with Simon Property Group (NYSE: SPG) yielding close to 8%, but there’s significant downside risk in their real estate portfolios as companies reimagine their office spaces.
According to a recent survey by Gartner, 74% of companies plan to shift some of their employees to remote work permanently. On average, they can save about $11,000 annually for each employee who works remotely at least half the time.
All REITs aren’t the same. There are data center REITs that own server farms that are helping to accelerate this great digital shift. There are also health care REITs that invest in assisted living facilities and hospitals.
Last year, we recommended purchasing a REIT that owns the largest amount of refrigerated warehouse space. This is a play on the accelerated growth of online grocery shopping.
(Learn more about Ian’s research in Automatic Fortunes here.)
Great Stuff:
Let’s talk about some of the market’s tinier up-and-coming innovators.
You recently talked about small caps bringing the heat now compared to their larger cap brethren. Don’t small caps typically under-perform in a volatile or — dare I say it — bear market?
Ian King:
They do. But you’re assuming we’re heading for a bear market.
We are more likely to see the economy roar next year as people who have been sitting at home for nine months catch up to all the travel and leisure they’ve missed. That’s especially the older generation which has the most savings but has spent it the least in 2020, as they’re more risk averse.
As per small caps, the typical small-cap company carries less cash on their balance sheet. A weak economy means they’re more likely to need to raise cash by selling more equity.
That’s why small caps were hit the hardest when the economy shut down in March.
However, small caps are still trading at an unjustifiable discount to big caps. Take a look at the ratio of two exchange-traded funds (ETFs), the iShares Russell 2000 ETF (NYSE: IWM) to the SPDR S&P 500 ETF (NYSE: SPY):  (Click here to view larger image.) At a current reading of 0.467, this ratio is where it was in 2003. It’s also well below the average range of 0.55 to 0.65. Additionally, if you look at the downtrend from mid-2018, it appears to be reversing with this latest move.
On a valuation comparison, small caps are trading at the biggest discount to large caps in nearly two decades! Here’s the price-to-sales ratio of the Russell 2000 Index vs. the S&P 500 Index:  (Click here to view larger image.) The last time that small caps were trading at such a significant discount was in late 2000. That was the start of a 92% rally in the IWM’s up until its peak in 2007.
After the financial crisis hit, IWM rallied 115% between March 2009 and April 2010. And it looks like they’re poised to surge again once the economy reopens and the coronavirus is in our rearview mirror.
What this means to me is that we’ll see small caps outperform their large cap brethren over the next couple of years as valuations play catchup. And there are hundreds of small-cap companies that benefit from the larger tech trends like 5G, AI, self-driving cars and precision medicine.
Great Stuff:
You sold me on taking a deeper dive into the small cap sea, Ian. Do you have any other advice for investors in this crazy market?
Ian King:
If we start to see a melt-up in the next few years (which is likely), the most important thing is to always have a plan to get out and to stick to it. The market always provides an opportunity to get back in.
Great Stuff:
That’s the perfect optimism to start our week off on, Ian. Thank you for the tête-à-tête today! Finally, why do we drive on a parkway but park in a driveway?
Ian King:
Because words have been around longer than cars. | Great Stuff: On That Note… Thank you for joining me and the team for this look back at our first Great Stuff interview! Don’t you worry: We’re planning many more interviews in 2021. More chances to hear from the Banyan Hill folks you love most — and maybe one or two you’ve never heard from before.
No more spoilers here, but don’t forget to check out what’s shaking in the small-cap shuffle. In other words … click here to learn more about Ian King’s small-cap research.
So, what’d you think of our special feature? Have you invested in Ian King’s research before? What tech trend have you not seen anyone cover yet?
Share your thoughts with us at GreatStuffToday@BanyanHill.com! Who knows? Just like Jamie’s email, your message could send us on a whole other rambling quest through the market’s zany depths…
We’ll catch you on Monday. Same place, same time (maybe), same Great Stuff. In the meantime, you can check us out on Facebook, Instagram and Twitter.
Until next time, stay Great!
Joseph Hargett
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