All eyes are on Nasdaq.
The Nasdaq stock market is home to the big technology companies – the likes of Apple (AAPL, Financial) and Microsoft (MSFT, Financial)-- that dominated the market and provided most of its oomph in 2019 and 2020.
In the two years ended in December, the Nasdaq 100 Non-Financial Index advanced more than 103%, nearly quadruple the gain in the New York Stock Exchange Composite.
This year, the worm has turned. The NYSE Composite has gained 8.2%, while the Nasdaq 100 has limped to a 0.38% return.
If Moses (the technology giants) can't lead the market into the Promised Land, will there be a Joshua to take his place?
That's the question of the hour.
New leadership?
I hope that the new leaders will be solid value stocks, including a lot of industrials and financials.
History shows that market leaders don't have to be big tech companies. Energy companies led the parade in 2007, with a 34% return. In 2012, financial stocks were the leaders, up almost 29%. In 2013, consumer discretionary stocks scored a 43% gain.
So there's no law that says tech stocks have to be in the driver's seat. And yet…
Technology stocks have been the leaders in three of the past four years. Over the past 14 years, according to a tabulation by Novel Investor, tech stocks have averaged a 15.2% return, the best among the 11 Standard & Poor's sectors.
Only twice in the past 14 years has the technology sector shown a decline. On both occasions – 2008 and 2018, the overall market was also down, as measured by the Standard & Poor's 500 Index.
My conclusion is that tech stocks don't have to lead for the market to do well, but they have to at least perform decently.
Predictions may be folly, but here's mine for the Nasdaq in the coming 12 months. The big (mostly tech) stocks in the Nasdaq 100 will achieve about a 7% return. The broader Nasdaq Composite will be up 11%. And the U.S. stock market, as measured by the Standard & Poor's 500 Index, will also be up 11%.
My favorites
My favorite stocks on the Nasdaq today include America's Car-Mart Inc. (CRMT, Financial), LGI Homes Inc. (LGIH, Financial) and StoneX Group Inc. (SNEX, Financial).
America's Car-Mart specializes in selling used cars to customers with shaky credit, mainly in the South. Almost all its customers take out a car loan. The company is astute at pricing both the cars and the loans; it has profits in each of the past 18 years.
LGI Homes, more than any other homebuilder I know, specializes in lower-cost starter homes. I think millennials as they start having children will want single-family homes, but most of them would be strained to buy the more expensive ones.
StoneX Group's specialty is clearing commodities and currency trades. I expect the commodities business to heat up as inflation increases over the next two to three years. Currency trading may also increase if the Biden administration proves more pro-trade than its predecessor.
Among the biggest, most popular stocks on Nasdaq, I continue to like Apple and Alphabet Inc. (GOOGL, Financial). I consider Microsoft too pricey at 35 times earnings. The same goes for Amazon.com (AMZN, Financial) at a 73 multiple and Facebook at 26.
As for Tesla (TSLA, Financial), which trades at 1,108 times earnings, I'd rather be short the stock (betting against it) than own it.
The record
This is the 15th column I've written that includes my favorite stock picks on Nasdaq. My average 12-month gain on the first 14 columns was 21.2%. That compares with 19.3% for the Nasdaq Composite Index over the same periods, and 14.1% for the Standard & Poor's 500 Index.
The past year started with the market totally in the tank because of the Covid-19 pandemic and the initiation of shutdowns. From that low base, the S&P has climbed 68% and the Nasdaq Composite 93%. My picks, up 111%, beat both.
My best pick last year was LGI Homes, up 230%. My worst, Exchange Bank of Santa Rosa, rose 39%. In between, Johnson Outdoors Inc. (JOUT, Financial) returned 187%, Investors Title Co. (ITIC, Financial) 57% and Kimball International Inc. (KBAL) 45%.
Bear in mind that my column recommendations are hypothetical: They don't reflect actual trades, trading costs or taxes. These results shouldn't be confused with the performance of portfolios I manage for clients. Also, past performance doesn't predict future results.
Disclosure: For clients and personally, I own Alphabet, America's Car-Mart, Apple, LGI Homes and StoneX Group. One or more of my firm's clients owns Microsoft and Facebook.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
