Stocks have been on fire for months and the technology sector is a star. The high-profile FANG gang are up over 30% in 12 months. Markets have had periods of rotation in and out of the bunch, but in the long run, bulls bought the stuff on every dip with both hands.
This is likely to continue into 2018. I expect that the macroeconomic thesis will remain strong and that central bank leaders and politicians will stay the course of easy money and gradual rate hike cycles. The so-called Trump trade is alive regardless of who is at the helm. Growth is here to stay, and this time it is globally synchronized. Evidence of this is yesterday’s 4% spike in Caterpillar Inc. (NYSE:CAT).
Shorting stocks has been difficult as dips, as rare as they are, don’t last long. From a trading perspective, the ascent speed of stocks makes it difficult to deploy new positions. Winning equities perpetually seem ready to correct.
This is not the same as saying that markets are too expensive. Most worthy stocks are still very reasonable. Most notably, Apple Inc. (NASDAQ:AAPL) has a price-to-earnings ratio under 19. This sustained rally is led by giant stocks of the best quality. They have real earnings right here and now and little speculation. Yes, the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is up 30% this year. This is not a dot com bubble situation where price rose on pure “hopium.”
So I continue my strategy of deploying new bullish risk but with no money out-of-pocket and with plenty of room for error. The idea is simple — I sell downside risk below support and if it holds then I retain my premium for maximum gains. Else I own the shares.
Today I want to invest into three giant tech companies that have changed my life. They are three of the four that make up the collective that is now known as FANG. I opted out of Netflix, Inc. (NASDAQ:NFLX) because of long-term fundamental concerns I have for them.
Mega-Tech Stocks to Buy: Alphabet (GOOGL)
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), which is the “G” in “FANG,” is a money-making machine. They have several platforms with more than a billion users each. Yet, they are only really monetizing only one so there is plenty of potential to unlock in 2018.
There are always critics who call for the doom of the click advertising, but management is making all the right moves to stay ahead of trends. They will not be left behind. They are now firmly into several new industries, including video and self-driving tech. I am willing to own it if it corrects, yet I will still structure my trade to account for some uncertainty in the next few months.
Sell the GOOGL Feb 2018 $905 put and collect $4 to open. Here I have a 90% chance of success. GOOGL can fall 14% and I would still retain max gains. If margin requirement is an issue, I would sell the $925/$920 spread for a 10% yield on risk instead.
Mega-tech Company to Buy: Amazon (AMZN)
The “A” in “FANG” is Amazon.com, Inc (NASDAQ:AMZN). Critics have defied it for a decade and lost. It is a perpetual start-up that never quit growing. Its CEO Jeff Bezos is a daring genius who thinks big and delivers even bigger. They sacrifice some margins but for astonishing growth. Shorting this one has been financial suicide.
They grow with no cash burn and they have proven that they can dial up the margins if they want to. Recently they bought Whole Foods, so now they have a foot on the street and others are worried. There is no financial engineering here; if they borrow it is to grow!
This is impressive execution I can bet on but still with caution. After all, it is up over 50% year-to-date and costs almost $1,200 per share, so the risk is high.
Sell the AMZN Feb 2018 $960 put and collect $5.25 to open. There is only a 10% theoretical chance of failure. This is a 17% buffer zone from here. If margin requirement is an issue, I would sell the $965/$960 spread for a 10% yield on risk instead.
Mega-tech Company to Buy: Facebook (FB)
Facebook Inc (NASDAQ:FB) is the “F” in FANG. This is a quality company with a reasonable valuable. A 30 P/E is cheap considering the growth and the margins. Technically it is still near the all-time high so there is room for dips but in this uber-bull market, buyers will step in. Year-to-date, FB is up 50% so entry points may not be absolute bottoms but with value on my side I am confident that I can manage my risk without major issues should the worst case scenario happen.
Management is a proven winner. They’ve made smart acquisitions and have the daily attention of over a billion users and for hours at a time. It’s hard to mess up such an advantage. Video is the future and they are right there in the thick of it. I am willing to own FB stock for the long term especially if it’s at a discount.
Sell the FB Mar 2018 $145 put naked for $1. This bullish trade has an 85% theoretical odds of success. Otherwise, I would accrue losses below $144. I am comfortable with that given that I have an 18% buffer.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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