Kings of Capital

by | Sep 27, 2021

In less than a decade, FANG stocks have taken over equity markets.

Of the roughly $40 trillion in market value represented by the stocks in the S&P 500, these four stocks – Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Alphabet/Google (NASDAQ: GOOGL) – account for 12.5%.

That’s 4 stocks out of 500 taking 1/8 of the pie.

But it’s not irrationality that gave these tech behemoths their commanding share. It was their ability to consistently deliver outstanding returns on investors capital, year after year.

So, while the typical company in the S&P 500 managed to squeeze a skimpy 4% annual return on capital over the last five years, the FANGs averaged over 25%.

And that high return on capital delivered much higher returns for investors.

In fact, for every $100 invested in FANG stocks from the start of 2013 (when all FANGs were publicly traded), you would now have $1,140 – 11 times your initial investment. Had you put that same money to work in the rest of the S&P companies, and your investment would have grown to about $265.

Call them the Kings of Capital. And it’s the ability to get more work out of every dollar that will define the Capital Kings of tomorrow.

And by getting more work out of cloud computing through the power of AI, this small SaaS play could one day join the Capital King club.

Revving up the RoC

Now, cloud computing is nothing new. And neither is Software as a Service (Saas).

For well over a decade, companies like Salesforce (NYSE: CRM) have been using distributed servers to store data and run their applications remotely.

And companies have flocked to these SaaS companies to offload the massive IT burden it takes to manage these applications and scale them quickly to give employees access from anywhere.

Zoom (NASDAQ: ZM), Slack (NYSE: WORK), Dropbox – these are all SaaS companies. And the massive shift to work from home spurred on by COVID-19 shutdowns has only exacerbated this trend.

But AI at scale is new.

And by combining AI with cloud computing successfully, a SaaS company can leverage the amount of profit it squeezes out of every dollar of capital several times over.

Just look at Upstart Financial (NASDAQ: UPST).

It uses AI to make billions of dollars in lending decisions. And because it makes these decisions so much faster and better than traditional lending, Upstart generates a return on capital of 45%.

It’s this ability to get more work out of every dollar invested that drove me to recommend you buy the stock last month when it was trading at $116 per share. At the time, earnings were set to be released soon. And that catalyst along with a cheap valuation and strong technicals set the stage for what I expected to be a strong run.

Upstart is now over $220 bucks. And with an 88% gain in your pocket – or nearly 400% if you went with the calls I recommended – you should consider taking profits on all your UPST positions and plow them into this next big AI-powered swing.

Another AI Powered Value Gap

Egain Corporation (NASDAQ: EGAN) uses AI and cloud computing to help companies drive customer engagement.

It’s trading at around $11 but given the rate it’s growing profits, its easily worth $17. And with a 28% return on capital, it has the momentum to drive the stock higher than that.

Plus, the technicals look strong. And with earnings expected next week on September 1, that could provide the catalyst to move the stock up past the $17 level.

So, to play the move, consider buying the October 15, $12.5 calls (EGAN211015C12.5) and also put in a GTC order to sell at $5 bucks in case the stock makes an even bigger move to the upside.

And be sure to check back in on Thursday for my next Value Gap recommendation.

To your success

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