Summary
- Lumen Tech in talks to sell off consumer division as I have discussed for a couple years now. Could unleash huge value.
- IWM is a good measuring stick, but not a place to invest.
- Over 100 S&P 500 companies will be replaced by today’s small and midcap stocks in the next 5-10 years.
- QQQJ is a good ETF for those who prefer a little bigger and not to pick too many of their own smaller stocks.
I write Investment Quick Thoughts a few times per month to discuss developments in our VSL companies, as well as, analyze risks and opportunities in their stocks.
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Lumen Technology (LUMN)
As someone noted in the chat room, Lumen is in talks with Apollo to buy over 5 billion worth of assets. This is something I’ve been talking about for a couple years now, even before they restructured into 3 operating units:
- Consumer Residential
- Business Enterprise
- Fiber
The selling off of the consumer division which is slowly shrinking should unlock a lot of value as it allows Lumen to focus on growth and cut debt.
Lumen is the 2nd biggest in fiber after AT&T (T).
The 2 remaining divisions have good symmetry. Fiber delivers broadband to business and Enterprise works with business to add value using fiber.
The stock is trading at about half its historical multiple with the consumer division weighing it down. I think this stock returns to around $30 per share if this carve out comes to pass (and if it doesn’t one will).
https://www.tradingview.com/x/oII2fLcx/
Buy Lumen to a full 3-4% position in dividend accounts.
Sell cash-secured puts. I think you can ask for more premium by stretching it out. I like the October $14 for over $1.50. Pair this with at least a starter position, but with a full position is fine too.
Small Caps
Small cap stocks have trailed large caps since the first post financial crisis market breather in 2011-12. Historically of course, we all know that small caps have out performed by about 2% per year on average.
Why did things change? That’s hard to say, but the movement to investing in indexes certainly seems to be a prime suspect.
Another potential cause of large cap outperformance is that the U.S. government has done little to combat monopoly power in the large cap space since well before the financial crisis, really going back 4 decades. This is especially true on technology where Amazon Apple (AAPL), (AMZN), Google (GOOG), Facebook (FB) and Microsoft (MSFT) now make up huge portions of the indexes, nearly 22% of SPY and a whopping 40% of Invesco QQQ (QQQ).
Today, we look at the S&P 500 after the Fed bailed out the corporate bond market during Covid, and we see around 200 companies with businesses that may never be able to pay down those debts. About a 100 of those companies seem destined for removal from the S&P 500 this decade sometime.
Meanwhile, the 5 tech titans are flush with cash. That’s quite a dichotomy versus some old line companies.
There is change in the air though. The Biden administration is starting to lean on megacap companies. We also have been seeing nations around the world fine Google and Facebook for using copyrighted materials from news sources on their websites. They’ve been told to negotiate fair compensation. That’ll bit a little. More of a nibble at this point.
We are also seeing more aggressive climate change action. The EU just made massive changes to push carbon neutral. So did China. The U.S. is stealthily following suit so as not to offend the one-third of the population that is climate change deniers. This bodes well for some, not so well for others.
Here are a couple charts of the Russell 2000 (IWM):
And here is Scott “Shooter” Henderson’s Elliott Wave chart:
What we see is that if the current consolidation does not hold – and I don’t think it will – then a fall to around the $170s on IWM seems very possible.
Here’s the thing, that would not be a time to buy IWM. Why? Because indexes are more efficient at large capitalizations and in developed markets and less efficient at smaller capitalization and in developing markets.
That means rather than buying a small cap index, you are better off buying either a basket of small cap stocks that can outperform, but were price damaged in a correction, or at least buying a managed SMID cap ETF.
Our SPAC basket is a place to look for opportunity. It is extremely inefficient there. A lot of companies trading far below valuations of similar companies. These are small and midcap companies with big upside that are dialed into the tech led sustainable economy.
There’s more to small and midcaps then SPACs of course. There are dozens of stocks poised to get beat up in a correction that have bright futures and can grow from small or medium sized to bigger. We want a good slug of those as that’s where the growth and future dividends are.
It’s also the group of companies that will replace a 100+ zombies on the S&P 500 in the next 5-10 years.
I also recently added the Invesco Next Gen 100 (QQQJ) to the ETFavorites. That’s more mid and large cap, but I think it’ll outperform SPY for sure and maybe even QQQ. For those of you less inclined to buy your own small and mid caps while wanting to lean to the midcaps and the smaller large caps, this is a good pick for you on a correction.
Disclosure: I/we have a beneficial long position in the shares of LUMN either through stock ownership, options, or other derivatives.
