The market has been tumultuous lately. But a little more than four years ago, you would have made over $127,000 by investing in one stock.
That’s when I went public with a very bold claim that shocked many folks — myself included. I claimed that Shopify (SHOP) — back when it was just this tiny eCommerce company that few investors knew anything about — was the single most exciting stock in the markets. I thought, “this company is going places,” and promptly urged folks to buy SHOP stock.
Four years later, Shopify’s stock surged 1,170%. That means that if you invested $10,000 into Shopify stock back when I called it “the most exciting stock in the market” in 2017, you would’ve turned that into over $127,000 by October 2021.
To be clear, I’m not telling you this to brag. Rather, I’m telling you this to let you know that right now, you have the opportunity to invest in stocks that will rocket just like SHOP.
Why? Because a once-in-a-decade phenomenon has emerged right this very moment. And it is creating a generational buying opportunity in a certain group of stocks.
So… what’s this phenomenon all about? Let’s find out.
Stock Prices Follow Fundamentals
In the short term, stocks are driven by myriad factors. Geopolitics. Interest rates. Inflation. Elections. So on and so forth.
However, in the long term, stocks are driven by one thing and one thing only: fundamentals.
That is, at the end of the day, revenues and earnings drive stocks prices. If a company’s revenues and earnings trend upward over time, then the company’s stock price will follow suit and rise. Conversely, if a company’s revenues and earnings trend downward, then the company’s stock price will drop.
That may sound like an oversimplification. But, honestly, it’s not.
Just look at the following chart. It graphs the earnings per share of the S&P 500 (the blue line) alongside the price of the S&P 500 (the orange line) from 1988 to 2022.
As you can see, the blue line (earnings per share) lines up almost perfectly with the orange line (price). The two could not be more strongly correlated. Indeed, the mathematical correlation between the two is 0.93. That’s incredibly strong. A perfect correlation is 1. A perfect anti-correlation is -1.
Therefore, the historical correlation between earnings and stock prices is about as perfectly correlated as anything gets in the real world.
In other words, you can forget the Fed and inflation. You can forget geopolitics, trade wars, recessions, depressions, and financial crises.
We’ve seen all of that over the past 35 years. And yet, through it all, the correlation between earnings and stock prices never broke or even faltered at all.
At the end of the day, folks, earnings drive stock prices. History is crystal clear on that. In fact, history is as clear on that as it is on anything, mathematically speaking.
That’s why we invest in world-changing companies that have the biggest revenue and earnings growth prospects. History tells us those stocks will rise the fastest — and by the most!
But today, my team and I are starting to see a rare anomaly emerge in this pattern. And we think it’s creating a once-in-a-decade buying opportunity in stocks like Shopify.
Great Divergences Create Great Opportunities
About once a decade, a rare anomaly emerges. And earnings and revenues temporarily do not drive stock prices.
We call this anomaly a “divergence.”
During these divergences, companies continue to see their revenues and earnings rise. Yet their stock prices temporarily collapse due to some macroeconomic fears. The result is that a company’s stock price diverges from its fundamental growth trend.
Every time these rare divergences emerge, they turn into generational buying opportunities. The stock prices snap back to fundamental growth trends, scoring investors some massive returns.
A first divergence emerged in 1989, on the heels of the Savings & Loans Crisis. Investors assumed a large part of the American financial system was on the brink of collapse. World-changing computer stocks like Microsoft (MSFT) and Intel (INTC) plummeted 30%-plus over the course of a few months, while their revenues rose more than 10% over that same stretch. This divergence ended with both stocks rallying more than 70% over the subsequent year — and more than 500% over the next five years.
A second divergence emerged in 2000, during the dot-com crash. Lots of folks were worried about the internet being a passing fad. This divergence saw Amazon (AMZN) stock collapse 94% in the early 2000s, while the company’s revenues rose 145% over that same stretch. This divergence ended with Amazon stock rising 185% over the subsequent year and 433% over the following five years.
And a third divergence emerged in 2008, during the great financial crisis. Amid that divergence, Salesforce (CRM) stock dropped 70%, while its revenues rose 20%. What happened over the following year? Salesforce stock snapped back, rallying 185%. Over the next five years, the stock gained a jaw-dropping 861%.
You get the point. Divergences between stock prices and fundamentals create exceptional and rare buying opportunities. Indeed, investors can triple their money in a year and make nearly 10X returns in five years.
Well, folks, the funny thing about history is that it tends to repeat itself.
And right now, my team and I observing another great divergence emerge.
The 2022 Divergence
You don’t need follow markets closely to know that there’s a lot of macroeconomic fear out there today.
We have a war in Europe, inflation running at multi-decade highs, and a Fed that’s aggressively tightening monetary policy.
There’s a lot of fear out there. Like there was a lot of fear in 1989, 2000, and 2008. And, just as it did back then, all this fear is creating a divergence.
That is, across the market, companies are seeing their stock prices fall sharply while their revenues keep growing.
And SHOP is a great example of this.
Shopify stock has collapsed over the past few months. Yet, its revenues keep marching higher at a very healthy pace. The result? An enormous divergence between the company’s stock price and fundamental growth trend.
History says what comes next could be an enormous snapback rally in Shopify’s stock.
We think that’s exactly what will happen.
With Shopify, you have one of the highest-quality growth stories in the market, powered by multiple secular growth drivers such as the shift to e-commerce, the democratization of shopping, and the integration of AR into online shopping. The company has basically no sizable competitors and has established a highly defensible network effect which constitutes an enormous competitive moat. The addressable market is huge. The growth runway is long. And the business model is both highly scalable and high-margin.
This is a winning company — and this winning company is growing at lightspeed.
Yet, the stock has been crushed because of macroeconomic fears related to rate hikes and the war in Europe.
If those two headwinds are removed, Shopify stock could be due for a huge snapback rally here.
The Final Word on Divergence 2022
The end of the bear market is upon us. And what comes next is the start of a new tech bull market.
Over the past few months, tech stock prices have diverged enormously from their fundamental growth trends in a way that has only happened three times before over the past 30 years. Each time this rare trading phenomenon emerged, it normally ended with the divergent stocks converging to the tune of triple-digit gains in 12 months or less.
We believe what comes next is a big rally. But the window to capitalize on it is rapidly closing.
Is your portfolio positioned for this rare trading phenomenon?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.