2022 was not a good year for tech stocks. This year likely won’t be much different.
Giants like Tesla (TSLA) and Meta (META) are more than 65% below their highs. Pandemic favorites like Zoom (ZM) and Peloton (PTON) are down more than 85%.
Even down here, there’s still a lot of risk in these stocks. Many of them still carry rich valuations that aren’t in line with the kind of growth in store (that is, zero or negative growth).
And it’s not just the obvious tech names. Plenty of stocks have heavy exposure to technology that’ll cause them to stumble in the very near future.
Don’t get me wrong. I’m not saying you shouldn’t touch these stocks. On the contrary, I believe their volatility and potential for further losses makes them the most attractive names in the market.
You just need the right trade to take advantage of this volatility, without exposing yourself to needless risk.
Let’s first look at one “non-tech tech stock” that’s facing a strong headwind right now, and then I’ll show how you can make big money as it falls…
Ditch the Frappuccino for the Mr. Coffee
Especially now, as tech stocks continue their decline, Silicon Valley needs a shakeout.
One example — meal prep subscription services — explains why.
Epicurious.com lists the 39 best services. Yes. The thirty-nine “best.” That implies there are somehow other meal kit delivery companies that didn’t make the cut.
The sheer number of these companies ensures few of them will be profitable and survive the bear market. There aren’t 39 national grocery market chains. How can there be 39 successful companies that lose money mailing food to people’s doorstep?
The answer, until 2022, was venture capital funding. But as we discussed last week, that venture capital funding is quickly drying up. Now, the industry will inevitably consolidate as companies go through bankruptcy.
And it’s not just meal kit services that will suffer. Countless tech stocks that launched in the last five years, causing rampant marketplace bloat, will feel the pain.
Think of all the cash-transfer and digital banking apps that launched in the last five years. All the streaming services. All the cloud-computing companies … and e-commerce websites … and food delivery apps.
These companies will, and should, suffer from the glut. Too few of these names make too little money. Valuations are at irrational extremes. Now, they need to reflect reality.
My favorite trade of late has been a different kind of tech company, Starbucks (SBUX).
While Starbucks is primarily viewed as a coffee company, most of its growth from recent years can be attributed to the company’s technology. I don’t stand in line when I visit its stores. I place my order through the app and pick it up at the counter. Its app also recommends new, more expensive purchases to me based on what I normally buy, or whatever they’re promoting that week.
These innovations helped the company greatly during the coronavirus pandemic.
Most people don’t realize Starbucks also has an online bank with over $1 billion in deposits. These are people who have loaded money onto the app to spend later. That’s impressive considering most U.S. bank have less than $1 billion in assets.
From the 2020 bottom to July 2021, Wall Street couldn’t keep its hands off SBUX. The stock’s current price-to-earnings ratio is 45. That’s down from a recent high of 175, but still more than twice the market average.
Buyers pushing the stock to that extreme valuation were missing the big picture. In an inflationary crisis, consumers have no money to spend. And they certainly don’t spend it on discretionary items, like overpriced coffee and muffins. Adding tech to the picture wouldn’t change that.
Wall Street knows this, and so SBUX was punished alongside the tech stocks last year. It was down more than 40% during 2022’s sell-off — only to enjoy a nice rally in the past few months.
This is the perfect setup for my Shakeout Trade strategy. And if this setup is anything like recent performance, we could soon see another winner.
We’ve already enjoyed two quick trades in the stock…
(Click here to view larger image.)
My strategy picked up the first signal on October 19. The stock fell about 2.5% over the next five days. My shakeout trade delivered a 66% gain on that small move.
On November 2, I saw another signal. The stock fell and a day after that signal, I closed out a 51% gain.
I trade with my subscribers, so I enjoyed those gains as well.
We’ll keep trading SBUX the same way, waiting for irrational rallies on the verge of breaking down, striking, and then walking away with double-digit gains in a matter of days.
But we’re not going to do it the way you might be thinking…
Why You Shouldn’t Short Stocks
Short trades are probably the main way you know of to profit from declines. If you’ve never heard of them before, here’s shorting in a nutshell:
Traders who short are selling shares of a stock they don’t own. They first borrow shares from a broker. Then, the trader puts the shares for sale on the market. If the stock falls, the short seller buys back their shares and keeps the difference as a profit.
The reason you’ve probably heard of shorting before is The Big Short — the hit book and movie about Michael Burry making huge gains shorting the market in 2008.
It sounds enticing, especially right now. But this strategy is very risky.
If a trader shorts a stock and it goes up, the trader has a loss. And the potential for that loss to grow is infinite.
At the same time, the profit potential is capped at 100%. And that can only happen if the stock goes to zero. Starbucks might go to zero. But no trader in their right mind would hold a short trade until that happens. Because, on top of all that, traders have to pay interest on the loan from the broker and suffer a loss on that, too.
Clearly, shorting stocks is too risky for individual investors. But there is a clear solution to benefit from declines that avoids all this risk.
Instead of shorting, I recommend my subscribers buy put options.
Like shorting stocks, put options rise in value when prices fall. But unlike shorting stocks, there’s no cap to your potential profits and you can never lose more than the cost of the trade.
There’s also no lending involved. Like buying a share of stock, you buy a put option and it either rises or declines in value.
Of course, there are other aspects to trading put options. Expiration dates, volatility premiums and many other things factor in. But it’s still the most low-risk, potentially high-reward strategy for betting on falling stocks and individual investor can use.
And very soon, I’m going live with my next big three put option recommendations and giving anyone the chance to trade them…
Join Me This Afternoon for a New Silicon Shakeout Trade
I don’t think I’m done trading SBUX. It’s become one of my favorite stocks to trade this year.
And the same strategy I used to find these short-term profit opportunities with SBUX is going to help us find even more gains during this Silicon Valley shakeout.
Before July, I expect dozens of smaller opportunities, assuming you consider a one-day 51% gain “small.”
And I also have my eye on three big opportunities, which could return as much as 824% by July.
You don’t want to miss out on this awesome opportunity. Claim the spot I have for you by clicking here, and join me this afternoon at 4 p.m. ET so I can give you all the details.
Editor, One Trade
P.S. If you missed Monday’s episode of The Banyan Edge Podcast, I highly encourage you to go here and catch up.
I sat down with Charles Sizemore, Ian King and Adam O’Dell for a frank discussion on the state of the tech market, and show why a continued shakeout is in the cards.
Click here to get caught up — your fellow Banyan Edge readers say it’s our best episode yet.
Market Edge: How to Short Without Losing Your Shorts
By Charles Sizemore, Chief Editor, The Banyan Edge
I remember my first short sale.
I was a kid, fresh out of college, just itching to try something I had read about for years but, without a job, couldn’t get approved for margin to actually do.
Remember, when you short a stock, you actually have to borrow shares you don’t currently own from another investor. You then sell them with the obligation to buy them back … hopefully at a lower price! You profit as the stock falls in value.
Returning to my trade… It was the early days of the dot-com crash of 2000, and I boldly shorted Yahoo, the tech darling of the day, up to the maximum my margin account would allow.
I lost my nerve 10 minutes later and closed the trade … at a profit of a modest $90.
I really had no idea what I was doing. It was more of an experiment than anything else. In the years that have passed, I’ve executed dozens and dozens of shorts.
But even on that first trade, I noted that shorting felt different. Expecting a stock to fall in value — and profiting when it does — is a different psychological experience than buying a stock and celebrating when it rises. You’re taking a contrarian position … going against the grain. And you’re all alone.
If you buy a popular stock and it rises, you can celebrate with the rest of the investing public. It’s a communal experience! And if you buy a popular stock and it falls, you can take solace in the fact that you all lost together. It doesn’t feel quite so bad.
But when you short a stock, and make money while it tanks, you celebrate alone … because your friends and colleagues likely lost money. And if you short a stock and it goes the wrong way on you, you suffer alone. You’re not likely to get much in the way of sympathy.
There is also the issue of risk. A stock can only fall to zero. So in a standard short sale, the most you can ever earn on the trade is 100% minus the margin costs.
But stocks also have no upside limit. Any stock can hypothetically rise to infinity if enough traders keep bidding it up. That means potentially infinite risk.
If you let a short sale get away from you, or you get squeezed — as we saw in the shares of GameStop and other meme stocks back in 2021 — you can get wiped out.
Of course, there are safer ways to bet against stocks. Rather than accept potentially unlimited losses, you can specifically measure and limit your losses by trading put options, as Mike showed you today.
And even if you do decide to engage in good old-fashioned shorting, you can massively reduce your risk by avoiding heavily shorted stocks with the potential to get squeezed.
But more than anything, it’s good to have the help of an experienced trader like Mike Carr. You absolutely can profit from a major shakeout in tech stocks and you can do so without taking the crazy kind of open-ended risk that buried the GameStop shorts.
Mike’s going live with all the details this afternoon. If you haven’t already, click here to make sure you join.
Chief Editor, The Banyan Edge
P.S. With the markets and our offices closed this Monday, I’m sitting down with a few of our investment experts for the newest episode of The Banyan Edge Podcast this Friday afternoon.
Before I do, though, I want to know what you think about perhaps the most divisive investment asset in the world: bitcoin.
The guests we’ll have on Monday’s show are a perfect group for such a subject, and I’d love to show them what Banyan Nation thinks about it — especially after it’s fallen by more than half from its highs.