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Investors Sour on Software Stocks

Is the massive software rally finally finished?

The once-unstoppable software stocks took a collective beating during an otherwise uneventful start to the trading week. Many of the industry’s biggest names registered double-digit losses as the selling intensified in afternoon trade.

These high-growth names had been “among the standout gainers in the S&P 500 this year, as investors have been have been willing to pay higher prices for faster revenue expansion amid concerns about slowing global growth,” Bloomberg reports. “They’ve also been helped by limited China exposure, which has increased their appeal amid the Sino-American trade war.”

The financial media has also been quick to point to rich valuations as the culprit behind yesterday’s abrupt selloff. Of course, these reports fail to mention that these stocks have been trading at nosebleed valuations for quite some time. As with most things in life, the fact that a stock is “too expensive” doesn’t matter much to investors… until it does.

Bull markets thrive on rotations. Traders can ride the market’s strongest trends and reap big gains — until the music stops. And right now, it feels like these software names are beginning to fall victim to some serious profit taking.

Software looked invincible for much of 2019— and we’ve booked gains on more than our fair share of these stocks over the past 18 months. They could very well shake off yesterday’s drop and catch a bid instead of completely falling into oblivion.

But I don’t like to see a formerly red-hot sector fail to rally just as the major averages are breaking out of their summer funk.

Just look at this chart of Shopify Inc. (NASDAQ:SHOP):

SHOP

SHOP had enjoyed a virtually unstoppable run this year. Even factoring in yesterday’s drop, the stock is up almost 160% year-to-date.

We’re still up about 7% on our SHOP trade that we entered in late July. But I don’t want to risk letting this small gain turn into a small loss. Let’s take our profits today and let these software stocks figure out where they are going to land.

Meanwhile, the law is not happy with big tech companies like Facebook (NASDAQ: FB) and Alphabet Inc. (NASDAQ: GOOG).

According to CNBC, the state attorneys general from 48 states are joining forces to launch an antitrust investigation into Google— which also faces scrutiny from the Department of Justice.

Texas Attorney General Ken Paxton is leading the investigation

The bipartisan support and sheer number of people involved makes it look like this probe will be more than a slap on the wrist if the investigation finds anything. But we must remember one crucial fact: Never underestimate the ability of a Silicon Valley tech company to slither away from responsibility.

While Google is scrutinized by seemingly every legal entity in the country, Facebook faces a separate probe from eight different attorneys general in yet another antitrust case.

What could actually happen to Google and Facebook after the investigation is open to interpretation. CNBC notes that privacy related fines have served as little more than a slap on the wrist for massive tech companies. Antitrust litigation, however, is another beast entirely.

We’ll be watching how this unfolds over the next few weeks…

Finally, after investing a huge chunk of change, an activist hedge fund has some new plans for AT&T (NYSE:T).

Paul Singer’s Elliott Management announced a $3.2 billion stake in the telecommunications company early Monday The fund said it’s looking to increase the value of shares by over 50% by 2021, reports Market Insider.

In a letter to the company, Elliott’s team said that it will “Activate AT&T,” whatever that means. The letter also expressed disappointment in the company’s failure to do anything meaningful with Time Warner as well as other past failures.

“Elliott called on the Dallas conglomerate to get rid of businesses that don’t make sense, like DirecTV,” The NY Post reports. “And while Elliott didn’t name [AT&T CEO] Stephenson directly, the firm demanded the board to take a closer look at its management team.”

AT&T stock jumped a little over 4% at the news and leveled out over the course of the day, just missing the highs from January of last year. Ma Bell is now up 35% year-to-date.

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Rude Awakening PRO and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing for 13 years. In 2018, Greg’s Rude Awakening PRO portfolio beat the S&P 500 by 14%.

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