The past two years has been great for American technology stocks. They have benefitted from a huge amount of investor optimism as the Covid-19 pandemic pushes a lot of activity online. Money printing by the US Federal Reserve has kept interest rates at near-zero levels, allowing them to raise plenty of capital on the basis of future profitability, even if they are currently losing large sums of money. However, with the pandemic starting to wane, and the Fed preparing to tighten policy, this party seems to be coming to an end. Some of the more bubbly stocks are starting to experience large falls, including HubSpot (NYSE: HUBS).
This firm sells a range of online-marketing and customer-management services over the internet. Its share price soared more than fivefold from $162 at the start of 2020 to a peak of $840 at the end of last November, as a large number of small businesses were forced to expand their online operations as a result of the pandemic. However, HubSpot’s price has been in freefall over the last six weeks, declining by around 40% to $509 – levels not seen since last May.
Competition is growing
While this has been bad enough for its shareholders, if you look closely at its business, worse may be yet to come. It’s true that HubSpot’s services generally have a good reputation, enabling it to charge premium prices, but it is now facing ferocious competition from a wide range of new entrants into the market, such as Pipedrive, ActiveCampaign and Klaviyo, many of whom are now offering packages that are much cheaper. This is likely to reduce growth, which is already expected to slow in any case as more normal life resumes, but also to hit margins.
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Indeed, despite its rapid growth, HubSpot has struggled to make large sums of money. Some analysts, such as the short-seller Sahm Adrangi, have even argued that when you take into account the share options that it is issuing to executives, it is actually losing money. Another worrying sign is that several key executives, including the chief executive officer and chief strategy officer, have stepped down from their roles in the past two years and several insiders – including the two co-founders – have been selling shares.
Hard to justify
Even if growth continues at a strong rate, HubSpot will still struggle to justify its huge valuation. The recent decline still leaves it on 20 times current sales and a whopping 213 times estimated 2022 earnings. As a point of comparison, rival firm Salesforce, which offers several similar services and is only growing a bit more slowly, trades at nine times current sales and 49 times 2022 earnings. With the share price showing signs of collapse, I’d suggest shorting it at the current price of $530 at £4 per £1. Because tech shares can be extremely volatile, I’d suggest having a wide stop-loss, so I’d cover your position if it hits $771. This gives you a total downside of $964.
Trading techniques: new year resolutions
In 2021, I followed the lessons from the previous 12 months, analysed in our Christmas issue, with some resolutions for the new year. This year, I’m going to do the same thing again, with three principles that I’m going to follow in 2022.
1. Avoid revisiting past tips
In the past I’ve revisited both successful and unsuccessful share tips. However, while this can sometimes work, provided the justification and conditions are good, it’s always good from a psychological perspective to take a break. While I’ve made it a rule to wait at least six months before tipping a share again, I’m going to extend this rule to one year from the time the trade was closed, no matter how good I think the investment case is.
2. Find more short ideas
Despite the pandemic, the stock market in the US continues to boom and the S&P 500 is now over a third higher than it was in February 2020. However, the fact that interest rates are rising is going to make it a more challenging year, especially for sectors, such as technology. Many high-flying stocks will find it much harder to get away with running up endless losses. It therefore makes sense to rebalance the portfolio by coming up with a greater number of short-selling ideas.
3. Lock in profits systematically
At the moment, I recommend stop-losses for each tip in order to limit the downside risk. I also usually suggest closing any position that isn’t making money after six months. However, my policy on what to do beyond that is a little less systematic. I’m therefore going to be more aggressive about regularly raising stop losses on positions that have been running for more than six months, both to lock in profits and to ensure that they don’t lose their momentum.
How my tips have fared
My long tips have put in a mixed performance over the last few weeks, with four out of the six increasing in price. Supermarket chain J Sainsbury rose from 276p to 279p, wealth manager Rathbone Group advanced from 1,892p to 2,060p and mobile phone company Airtel Africa rose from 126p to 135p. Bus company National Express also went up from 247p to 255p. However, homebuilder DR Horton fell from $105 to $96 and construction firm Morgan Sindall fell from 2,425p to 2,362p. Overall, the falls in the latter two shares cancel out the gains in the other four, with the result that my long tips are making a profit of £3,823, exactly the same as during my previous update in our Christmas issue.
The good news is that both my short tips moved in my favour. US cinema chain AMC fell from $24.45 to $22.78. At the same time, remote medicine company Teladoc went down from $88 to $79.80, probably because it remains unprofitable and rising interest rates are likely to increase the cost of debt. Overall, my short tips are making £1,909, up from £1,714 two issues ago.
Going forward, I have six long tips still running (J Sainsbury, Rathbone Group, Airtel Africa, National Express, DR Horton and Morgan Sindall) and three shorts (AMC and Teladoc, plus HubSpot added in this week’s issue). As noted in my resolutions, I’ll be looking to add more short tips in the future. While I’m not going to close any of my long positions, I suggest that you raise the stop losses on them. So I’d increase DR Horton to $88 (from $85), Morgan Sindall to 1,850p (from 1,800p), Rathbone Group to 150p (from 1,467p), J Sainsbury to 150p (from 144p), Airtel Africa to 95p (from 85p) and National Express to 125p (from 123p). I’d also cut the price at which you cover the AMC short position from $65 to $45.
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