If the recent stock market action has shown us anything, it’s that the gap between the stock market “haves” and “have nots” is widening with ferocious speed. While thousands of cash-poor old-school companies are struggling mightily, hundreds of cash-rich technology companies are cruising comfortably through the crisis. This dichotomy was well established before the novel coronavirus arrived. We even coined a term for it: the Technochasm.
But now that the pandemic has lobbed a grenade into the global economy, the Technochasm is widening even more rapidly and decisively. The effects of this powerful trend are becoming more visible by the day.
Amazon has soared more than 400% during the last five years, while Simon’s shares have slumped more than 70%.
Or take a look at the ups and downs of the chart below. The share price of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the one-stop shop for internet search, news and almost every other media-related thing, has advanced more than 150% during the last five years. At the same time, the share price of Gannett (NYSE:GCI), publisher of USA Today and 260 regional newspapers, has tumbled more than 90%.
Clearly, the Technochasm has not only created two entirely different American economies.
It has created two entirely different stock markets.
Don’t Buy ‘Dinosaurs’
As my colleague InvestorPlace CEO Brian Hunt said in an email this week:
On one side of the chasm, you have companies like Amazon, Tesla, Netflix, Facebook, Salesforce, Apple, and Microsoft. These companies are on the right side of the Technochasm. Heck, they are the drivers of the Technochasm!
In this world, companies enjoy huge profit margins and steadily rising sales. They can “scale up” and explode in size very quickly.
They “eat up” more and more of the economic pie each year. They drive more and more dinosaurs out of business each year.
They act as powerful “engines” inside investment portfolios that allow people to safely and steadily growth their wealth.
They generate huge capital gains and dividends.
They bring financial freedom and abundance.
They help people enjoy early retirements, beach homes, new cars, and amazing vacations.
In some cases, they can add a zero to your net worth.
In the other world… on the other side of the Technochasm… you have the dinosaur companies.
The brick-and-mortar retailers.
The old-school manufacturers.
Old-school car companies.
Oil and gas companies.
These dinosaurs are typically defined by having a huge amount of very expensive physical assets like factories, stores, and machinery.
These things cost a fortune to build and maintain.
Another common dinosaur characteristic is low profit margins and slow or nonexistent revenue growth.
Another common dinosaur characteristic is a high debt load, which can kill a company during a rough period like the COVID-19 lockdown.
Another common dinosaur characteristic is a vulnerability to technological disruption.
Brick-and-mortar retailers are vulnerable to internet retailers.
Old-school auto companies are vulnerable to innovators like Tesla.
Oil and gas producers are vulnerable to advancements in renewable energy production.
All these ugly characteristics make dinosaurs weak, low-margin businesses whose market values can stagnate for years… or even plunge as innovators gobble up their market share.
That’s why investing on the wrong side of the Technochasm can produce such grim results.
A portfolio like that could lose half its value over the next decade as technological disruption reshapes the business landscape and kills off the businesses that fail to innovate.
Bottom Line: The stock market trends of recent years have demonstrated quite clearly that loading your portfolio with companies on the right side of the Technochasm can make you a fortune … while loading your portfolio with companies on the wrong side of the Technochasm — the “dinosaurs” — can cost you a fortune.
That’s why it is so critical for us investors to understand the Technochasm, its effects and how to get on right side of it.
When You Get Stuck on the ‘Wrong’ Side of the Technochasm
Tellingly, even the most successful “old school” investor of all time, Warren Buffett, is struggling to make headway against the powerful forces of the Technochasm.
This mega-billionaire’s investment vehicle, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), has made very little progress in recent years. In fact, during the last five-, 10- and 15-year time frames, Berkshire has produced a smaller investment return than the S&P 500 … and a much smaller return than technology-centric indices like the Nasdaq Composite.
The companies on the prosperous side of the Technochasm don’t simply gain market share and competitive advantage. They generate huge amounts of cash. Generally speaking, companies on the losing side of the chasm don’t.
In a way, this competition isn’t a fair fight. Some businesses, like manufacturing, are capital-intensive enterprises and always will be. These sorts of businesses must operate with relatively high debt-financing and low profit margins if they are to compete effectively. There’s nothing they can do about it.
Many technology companies, on the other hand, develop such powerful strategic positions that they can generate tremendous amounts of cash from incremental sales without having to borrow gobs of money or make massive ongoing investments.
For perspective, take a look at the operating companies (i.e., excluding finance companies) in the Dow Jones Industrial Average. The ones with the most cash on their balance sheets are the tech leaders Apple, Microsoft and Cisco Systems (NASDAQ:CSCO).
Together, these tech titans hold $154 billion of net cash (total cash minus all debt) on their balance sheets — equal to about 6% of their combined market capitalizations.
By contrast, only one of the other 22 names on that list has net cash, and that company is Nike (NYSE:NKE). Even including that one exception, these 22 stocks hold net debt equal to 19% of their combined market values.
This quick-and-dirty analysis shows just how cash rich tech stocks can be relative to their non-tech counterparts.
Companies like these are rare. The overwhelming majority of companies carry some level of debt. And many carry life-threatening levels of debt. Those are the ones I suggest betting against.
In general, companies with heavy debt loads face a difficult road ahead, especially if they operate in any of the industries that were hard-hit by the coronavirus, like energy, brick-and-mortar retail and hospitality.
Many companies in these industries were limping along, even before the coronavirus burst onto the scene. Now, they can barely get out of bed.
But the companies on the winning side of the Technochasm do not struggle with heavy debt loads. They advance from strength to strength and throw off cash.
Identifying these powerful innovators isn’t always a simple task, especially early in their development. But if we at least understand what we’re looking for, we’re sure to find many of them.
P.S. If you liked what InvestorPlace CEO Brian Hunt had to say up above, then you’ll want to join us on May 28. That’s when Brian and I are sitting down for an in-depth conversation about the year so far … and what’s in store for the second half of 2020. Topic No. 1, of course, is the global pandemic and how it’s affected the stock market, the economy and the stocks I’ve recommended. Brian and I will share some of the biggest opportunities out there … the biggest dangers … and a lot more.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.