Director James Wells is traveling, so I (Maria) will be bringing you today’s mailbag edition. Let’s get right to it…
First up is a question for Jeff Brown, our go-to tech expert here at Legacy Research.
It’s to do with the 5G wireless buildout we’ve been telling you about, and why Jeff believes now is the best time to invest in quality 5G stocks…
Reader question: Jeff, in previous presentations and correspondence, you repeatedly encourage jumping into companies involved in the 5G rollout. But it sounds like the conversion to 5G will take up to three to four years.
Just asking for a bit of understanding about the timing of investing in 5G companies.
– Joe W.
Jeff’s answer: Thanks for the question, Joe. It’s true that it will take several years for 5G wireless technology to be as ubiquitous as 4G is today. In fact, one forecast indicates that 5G won’t overtake 4G (in terms of a percentage of mobile connections) until about 2025 – I think it will happen sooner than that, but it will still take a few years.
I’ve shown the chart below before. It gives you an idea of how 4G (and even some 3G) connections will be live as the 5G networks are built out.
But to answer your other question… if it will take years for 5G to be fully built out, is it too early to be investing in 5G-related companies? The answer is no.
And the reason is simple. It might take a few years for 5G to be 100% adopted. But companies involved in the 5G rollout have to make decisions for future 5G products right now.
Let’s consider just one example…
We know that Apple will launch its 5G-enabled iPhone in Q4 of 2020. But Apple has to make strategic decisions about what components go into that device right now. And the companies that produce the components needed for 5G iPhones are going to see an increase in order volume in a matter of months. That means higher revenue and share price for these companies.
As an investor, if we wait until the 5G iPhone is “real,” we will miss out on those returns. The market will have already priced the increase in new business into the share prices.
(The above example isn’t hypothetical. Earlier this year, I gave a presentation on an essential component that will be needed in the 5G iPhone and every future 5G-enabled device. The company that produces that component is one of the best ways to play the 5G device boom. Catch up here.)
The same is true with companies involved in building 5G network infrastructure. These companies are already beginning to see increased order volume from the 5G buildout.
My mission is to make sure my readers get exposure to the biggest technology trends before they reach mass adoption and the majority of gains are gone.
Joe, I see you’re a subscriber to two of my technology research services, The Near Future Report and Exponential Tech Investor. If you haven’t already, I encourage you to review our 5G portfolios (find them here and here). These 5G companies won’t stay at these levels for long.
Our next two questions are for Palm Beach Research Group co-founder Tom Dyson, who now writes our new Postcards From the Fringe e-letter.
Tom believes gold is the place to be right now. And he believes stocks are the place not to be. (It’s why he went all in on gold.)
He tracks this thesis by watching the Dow-to-Gold ratio. And a few of your fellow readers want some clarification…
Reader question: You’ve taken such a bold step going all in on gold. What makes you supremely confident that you would put “all your eggs in one basket”? What’s your strategy once you’ve cashed in?
Tom’s answer: My reading of the fundamentals – debt, Federal Reserve policies, valuations – matched the sentiment in gold (hated, ignored) and stocks (about halfway through a valuations bear market), and suddenly I saw a new decisive downtrend appear in the Dow-to-Gold ratio.
I wouldn’t put “all my eggs” into a single stock or bond. But gold is money. The “eggs in the basket” rule doesn’t apply to gold.
My strategy is to wait for the Dow-to-Gold ratio to hit 5 and then convert all our gold into “dividend aristocrats.” These are companies that have long track records of raising their dividends every year.
Reader question: Your argument for gold is persuasive, and although I am familiar with the Dow-to-Gold ratio, your graph is the first where I have seen it presented in that fashion.
As we are talking about three variables in the end – gold, Dow, and dollars – for the first two waves, gold and the dollar were fixed, as we were on the gold standard. However, all three float relative to one another during this third wave (including the nadir in the ’70s prior to it). Is the historical baseline 5 ratio prior to 1972 still applicable?
Tom’s answer: What a great and thoughtful question. I’ve wondered this myself. There’s also the issue that the stock market compounds over time but gold doesn’t. So you’d expect the Dow-to-Gold ratio to trend gradually higher over the years – both its peaks and troughs.
But I’m going to stick to using 5 as my target. I think it’s a conservative target.
I’ll also be watching the Dow’s P/E ratio and Tobin’s Q readings closely, because ultimately this is a market-timing strategy based on the great waves in stock market valuations.
(The P/E, or price-to-earnings, ratio measures how much investors are paying for every $1 of a company’s earnings. Tobin’s Q looks at the combined market value of all the companies on the stock market relative to their replacement costs.)
Moving on, a couple of questions that will come in handy if you’re an aspiring options trader. And for the answers, we turn to our master trader, Jeff Clark…
Reader questions: Please explain the difference between buying and selling a put?
I’m wondering what the difference is between puts and uncovered puts? Thanks.
Jeff’s answer: Hi Paul and Johanne, thanks for your questions.
Paul, when buying a speculative put option, you’re betting on the stock falling. You’re putting up money to buy the option in anticipation of selling it later at a higher price.
When selling uncovered put options, you’re taking the other side of that trade. In other words, you’re bullish or at least neutral on the stock. You profit if the stock goes up or stays the same. You collect money up front when selling the put. And you hope to buy the option back later at a lower price.
Johanne, to answer your question… When a put option is uncovered, that means the option writer does not hold the underlying position in their account. A covered put means the option writer does hold the underlying position.
Finally, Jeff Clark shares some guidance that can help you out next time you go to close a position – no matter which of our letters you follow…
Reader question: I’m enjoying profiting from your trade suggestions. Most of the time my entry price is closer to the higher end rather than the lower end of your suggested prices. You suggest selling half of our position when the price doubles.
A double of the lower price is less than a double of the higher price, so when you recommend selling half at twice your price, should I sell half of my position at this price, or try to wait until my higher entry price hopefully doubles? Thank you.
Jeff’s answer: Thanks for your question, Don. We record our entry price as the most likely price most subscribers were able to get into the position – based on where the option was trading at the time of publication and where most of the volume occurred.
Sometimes your price is going to be higher or lower than our recorded price. But it shouldn’t be too much of a difference.
When I recommend selling a position at a double, that recommendation is always based on our recorded price. That price may not represent a 100% gain for you. But it should be close enough that it doesn’t matter too much.
Remember, the reason we always sell half of a speculative option trade once we’ve made 100% is to reduce risk and minimize the possibility of taking a loss on the trade. Selling half of a trade for 100% profit, or 90% profit, achieves that.
That’s all for this week. Have a great weekend.
Managing Editor, The Daily Cut
P.S. By the way, if you haven’t heard… Jeff made an ominous call a few months ago. He predicted the stock market would crash in October. And he’s sticking to his guns. Don’t believe him? Listen to his proof…