A 19th century fable, astrobiology, monetary policy, and 1980s buzzwords have one thing in common. Even better, understanding how these intertwine could help you outperform the S&P 500 by more than three-fold, writes Matthew Carr, editor of The First Bar with Matthew Carr.
A delicate dance has been playing out in the technology sector for months. Companies want to show investors that they’re healthy and hip, but also serious about doing grown-up things like managing expenses.
In turn, there’s a pattern that’s emerged. And if you’re a fan of trends – and hopefully you are if you’re reading this – then you know things like this pique our interest.
It starts with a concept known as the “Goldilocks Principle.” It’s inspired by that lovable B&E enthusiast and vandal, Goldilocks. And the idea is centered on, “just right.”
For many years, we enjoyed a “Goldilocks economy” in the U.S. (until its recent, violent end). That’s where market-friendly monetary policy from the Federal Reserve, moderate growth, and low inflation happily co-exist. It’s an economy that’s not too hot, not too cold…it’s just right.
Today, we have a “Goldilocks zone” for tech companies who are laying off workers – 6%. They want to shed enough workers to demonstrate to investors they’re cutting costs in a meaningful way, but not too much to signal there’s a fundamental problem or face public backlash.
But is that “just right” for your portfolio?
I know, no one wants to be seen as the bad guy. But let’s be honest…if you’re the boss, you’re going to eventually play the villain. And sometimes that’ll mean attacking a problem with a cleaver not a scalpel. So, while tech boardrooms and PR departments appear to favor that 6% “Goldilocks zone” when it comes to layoffs, you want to see more as an investor.
In a high interest rate environment – like we’re in now and will be in for the foreseeable future – tech stocks shoulder a hefty burden. They tend to struggle with bigger debt loads and smaller profits. And right now, the best returns for investors are coming from those companies hacking more meat from the bone.
I’m talking Affirm (AFRM), Coinbase (COIN), Groupon (GRPN), Meta Platforms (META), Salesforce (CRM), and others – all who announced workforce reductions in the double-digits.
They’ve been forced to do more. But it’s resulted in better rewards for shareholders. When tech companies announced layoffs of 10% or more, their shares saw an average one-day move of +3.29% on the news. And since those announcements, shares of these companies are up an average of 17.28%. That’s more than three-times the return of the S&P during the same span.
That means for investors, the true “Goldilocks” number in tech has been over 10%. Companies making these deep cuts now might be just right for your portfolio in 2023 and beyond.