Here's Where I'm Buying as Long Overdue Fear Returns to the Market
The Magnificent Seven are seeing a brutal sell-off, but we couldn't put it off forever.
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The stocks of the Magnificent Seven have seen probably what can be best described as a "big flush" over the past week that also has hit most of Big Tech.
The NASDAQ on Wednesday had its biggest one-day loss since 2022. This followed last Thursday when the NASDAQ lost 2% on the day while the Russell 2000 surged over 3% and the daily divergence between the two indexes had its largest gap since 2001. Most of Big Tech has seen similar selloffs and the Philadelphia Semiconductor Index, or SOX, has been taken out behind the woodshed and beaten like a rented mule in the past few trading sessions.
The beneficiary of this massive sector rotation has been small caps, the Dow and other areas of the market that have been laggards throughout 2024. Albeit, the rotation into small caps appears to have petered out over the past couple of days with the Russell 2000 dropping 1.9% in trading on Thursday. The rotation itself has been viciously quick and sharp — not surprising, given how much of daily trading volume is driven by automated trading programs. It will be interesting to see if the rotation is over for small caps or if this is a pause in the coming week or so.
That said, I don’t believe the sell-off in the former darlings of the market is over. They had just come way too far, too fast. Apple AAPL added more than $1 trillion to its market cap from mid-April until its recent sell-off, driven by investor enthusiasm for the giant from Cupertino putting more focus on AI. Meanwhile, earnings estimates for both FY2024 and FY2025 have come down noticeably over the past three months. NVIDIA Corporation NVDA was trading for 40 times revenues and worth as much as seven Exxon Mobil’s XOM. Even with the recent pullback, both stocks still seem significantly overvalued.
It is nice to see some long overdue fear coming back into the market in July as the VIX has moved from 12 at the start of the month to 16 as of market close on Thursday. When the S&P VIX Index gets above 20, I will probably do more than just incremental buying using the significant amount of "dry powder" within my portfolio.
I did establish an initial stake in Organon & Co. OGN in trading on Thursday. This company is focused on women’s health and offer numerous prescription therapies and medical devices to its customer base, including various birth control products as well as drugs that can increase fertility. The company was spun off from Merck & Co. MRK and does not get much attention from Wall Street despite an over $5 billion market cap. The stock is dirt cheap at five times earnings. The stock also has a 5.3% dividend payout that is well covered. Now, the main caveat with Organon is the company has a good chunk of long-term debt ($8.7 billion as of the end of March). However, that means the company should benefit from falling interest rates. It also is seeing big revenue growth out of its small but fast-growing biosimilar division. Organon is just the type of stock I don’t mind legging into while awaiting lower entry points within the overall market.
At the time of publication, Jensen was long OGN.
