SOFTWARE SLUMP ‘creating a lot of opportunity,’ says Howard Management CEO

Bottoming Out: Market Opportunities & AI Impact – A Discussion with Vance Howard

Key Concepts:

• Magnificent Seven/Seven Kings: Refers to the large-cap technology stocks (originally Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) that drove significant market gains. Now being referred to as “Seven Kings” due to their profitability and dominance.
• IGV (iShares Expanded Tech-Software Sector ETF): An exchange-traded fund focused on software and technology companies.
• Technical Analysis: A method of evaluating investments by analyzing past market data, primarily price and volume. Key patterns include “higher highs and higher lows” and “cup and handle.”
• Creative Destruction: The process by which innovation leads to the obsolescence of existing technologies and businesses.
• AI (Artificial Intelligence): The simulation of human intelligence processes by computer systems.
• Drawdown: The peak-to-trough decline during a specific period for an investment.

I. Market Sentiment & Opportunity in Sell-offs

Vance Howard argues that recent market sell-offs, particularly in the technology sector, are overdone and present buying opportunities. He specifically mentions IGV (iShares Expanded Tech-Software Sector ETF) as being significantly undervalued, drawing a parallel to the regional bank sell-off earlier, which also provided a chance to acquire strong stocks at discounted prices. He believes the fear surrounding AI is exaggerated and won’t lead to widespread business failures. Howard emphasizes the importance of relying on analysis rather than emotion during these periods, stating that investors should “be taking advantage of it.” He acknowledges that the market can sometimes anticipate changes in fundamentals before they are reflected in data.

II. The Rise of the “Seven Kings” & Microsoft’s Potential

Howard proposes renaming the “Magnificent Seven” to the “Seven Kings,” highlighting their exceptional profitability and strong management. He used Microsoft as a prime example, stating he took profits in other holdings to begin building a position in Microsoft during the recent sell-off. He believes Microsoft is “way oversold” and will benefit significantly from AI, potentially even offering a substantial dividend yield (8-10%) in the future. He advocates for investing in these established giants rather than chasing speculative “needle in a stack of needles” stocks, as they are better positioned to capitalize on AI advancements. He notes the dramatic 30% drawdown of Microsoft with “no real news” as a key indicator of the opportunity.

III. Creative Destruction & Employment Concerns

The discussion addresses concerns about creative destruction driven by AI and its potential impact on employment. Howard acknowledges that efficiencies will increase and some employment levels may rise, but he dismisses the notion of widespread job losses. He references a previous guest, Eric, who he felt provided an excellent perspective on this issue. He believes fears of a jobless future are overblown and that companies like Microsoft will adapt and thrive, becoming even more profitable.

IV. NVIDIA & Semiconductor Opportunities

Howard expresses a bullish outlook on NVIDIA leading into its earnings report, but cautions that the stock could initially react negatively to the news, similar to recent market trends. He describes NVIDIA as a “pressure cooker” that is poised for a breakout, which he believes will lift the entire technology sector. He highlights NVIDIA’s strong financial performance – “making money hand over fist,” well-managed, with little debt. He also identifies opportunities in secondary semiconductor companies like MPWR (Monolithic Power Systems) and Texas Instruments.

V. The Importance of Technical Analysis

Howard strongly advocates for the use of technical analysis in trading, stating it has “saved people a lot more money than fundamentals have.” He specifically mentions the “cup and handle” chart pattern as a positive signal for MPWR. He emphasizes a disciplined approach – setting stop-loss orders to limit potential losses and quickly seeking new opportunities when trades don’t perform as expected. He acknowledges that relying solely on fundamentals can be frustrating and lead to premature selling.

Notable Quotes:

• “They’re the Seven Kings. They have seven kingdoms.” – Vance Howard, describing the large-cap tech companies.
• “When you get these dramatic selloffs like Microsoft, you need to start adding to your position.” – Vance Howard, on capitalizing on market dips.
• “Technicals have saved people a lot more money than fundamentals have.” – Vance Howard, emphasizing the value of technical analysis.

Data & Statistics:

• 30% Drawdown: Microsoft experienced a 30% decline from its all-time high in a short period.
• 6 Months Sideways: NVIDIA has been trading sideways for approximately six months.
• Potential Dividend Yield: Howard suggests Microsoft could potentially pay an 8-10% dividend in 5-7 years.

Logical Connections:

The conversation flows from a general discussion of market volatility and opportunity to specific stock recommendations. Howard consistently links his investment ideas to the broader theme of AI and its impact on the technology sector. He uses the example of Microsoft to illustrate his point about the resilience and profitability of established tech giants. The discussion then expands to include other semiconductor companies, highlighting the importance of adapting to changing market conditions. The emphasis on technical analysis serves as a practical framework for implementing his investment strategy.

Conclusion:

Vance Howard presents a cautiously optimistic outlook on the market, arguing that recent sell-offs have created attractive buying opportunities, particularly in established technology companies like Microsoft and NVIDIA. He believes fears surrounding AI are overblown and that these companies are well-positioned to benefit from the technology’s growth. He stresses the importance of a disciplined investment approach, combining fundamental analysis with technical indicators to identify and capitalize on market opportunities. His core message is to avoid emotional reactions and focus on long-term value.