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It seems so obvious and logical – no profit, no good
I remember not too long ago that public companies were condemned for managing their business targeting short-term profits. Short-termism was blamed for the US losing major industries wholesale to foreign companies. Now high-growth tech companies with 30% to 40% and even 100% revenue growth are eschewed. Which is it? By investing every cent of cash flow back into the business they achieve this heady growth. This fulfills the erstwhile criticism for short-term profits at the expense of future expansion. Let me reiterate, companies that are not self-funding, not producing free cash flow, and cannot grow their revenue are not under discussion here. What the talking heads are pushing is to sell great companies because they are unprofitable, and to instead buy a value cyclical company that is going to gush cash in this high-inflation soaring economy. So of course this means that a cyclical value company must rely on those preconditions to gush profits. Let me grant you that I embrace certain areas of the economy that are considered cyclical, but that will never be a major feature of my portfolio. High technology, whether it be biotech, Medtech, transportation, aviation, and of course data and information technology. I don’t care how high oil goes along with the demand, we all know it’s temporary now. We know agriculture is now ascendant, so maybe buy a fertilizer company? At some point supply will catch up with demand since it’s a commodity. Now consider the Chip industry, chips and the software that instructs them are needed everywhere. Let’s go back to agriculture for a moment. Just a few days ago at the Consumer Electronics Show, John Deere, the farm equipment manufacturer, featured a self-driving tractor. There are in fact dozens of tech startups working on robotic farm equipment, and start-ups in space that are counting on demand from farmers to survey their croplands for irrigation and pest data. I would much rather find the chips inside of that tractor than invest in yesteryear’s advance in chemical fertilizers.
I am not wed to a particular sub-sector of tech. That would be foolish
Will there ever be a time when chips are obsolete? Perhaps, and if I were alive then I would seek out the newest and fastest-growing tech that overtakes it. Just to make it plain, I do buy cyclical stocks and I would buy John Deere (NYSE:DE) (especially with this sexy new tractor) at some point, and you know, I am active in oil. This is not about eschewing cyclical names. In fact, I have my eye on materials like aluminum …….