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  1. Home
  2. / Investing
  3. / Fixed Income

Buy Tech Company Bonds Instead of Their Decaying Stocks

Thursday's stock market rout is just another reminder that flat yield curves and equity investing do not mix.
By JIM COLLINS
Dec 20, 2018 | 03:46 PM EST
Stocks quotes in this article: AAPL, XOM, FB, AMZN, GOOGL, TSLA, MSFT, INTC, ORCL, CSCO

In my last column I advised playing defense with your portfolio, and Thursday's rout in the equity markets is just another reminder that flat yield curves and equity investing do not mix.

The FOMC decision to raise the fed funds rate by a further 25 basis points flattened the yield curve, an outcome that I and many others, including noted "bond king" Jeffrey Gundlach, had predicted. The flight-to-safety trade has brought the 10-year U.S Treasury yield down to 2.76%, 30 basis points lower than where it stood one month ago.

There is virtually no profit left in the trade between short-term and long-term money. If you are a bull on stocks the yield curve is moving in the wrong direction at both ends, and that is a very expensive distortion.

A flat yield curve is indicative of the bond market's view that the economy is slowing. Is that really a bad thing, though? For equity market bulls the answer is an unequivocal "yes."

Fed Chair Jerome Powell showed his inflation-fighting chops Wednesday, but remember that inflation is good for stocks. For those who only focus on reported returns, not returns adjusted for inflation - "real returns" in economic parlance -- portfolio values will tend to increase in times of accelerating inflation.

Apple (AAPL) would rather sell you a more expensive iPhone, Exxon Mobil (XOM) would rather have you fill up your tank with more expensive gas, Kroger K would rather you fill your cart with more expensive groceries, and Netflix NFLX would rather charge you $12 a month than $8 a month. Such price increases help those companies maintain margins in times of rising input costs, especially labor costs in the U.S. with unemployment rates at a 50-year low.

So, the fact that the Fed is now fighting inflation -- instead of helicopter-dropping money into the economy -- is, at the margin, a negative for stocks.

In my previous column I advised shifting your portfolio to a mix comprised mainly of bonds -- I threw out a figure of 60% for bond allocation. The old rule of thumb is that inflation is bad for bonds, so it stands to reason that if the Fed can actually defeat inflationary forces in the U.S economy that should be good for bond pricing. It certainly has been over the past month.

Having to finance the deficit of the U.S. Treasury and those of other countries around the world always makes me queasy. Fortunately, though, corporate bonds offer an alternative to sovereign credits and, crucially, also an alternative to risky and still-plummeting U.S. stocks.

For the past two years the mega-cap tech titans have powered stock market returns. If your advisor was pushing you into more FAANG names (Facebook (FB) , Amazon (AMZN) , Apple, Netflix and Alphabet (GOOGL) ) in September or -- even worse -- putting your money in top-down ETFs such as SPDR S&P 500 ETF SPY and Invesco QQQ Trust QQQ that were forced to buy more and more of the mega-cap names as their stock prices rose, those returns have turned decidedly negative.

The bust in tech stocks obscures the fact, however, that most of the West Coast tech titans -- Netflix and Tesla (TSLA) are the most notable exceptions -- have high margins, strong cash flows and cash-laden balance sheets.

Thus, even as the stocks are hammered, the bonds become better buys. If you bought Apple stock at its all-time high of $230 on October 3, you "locked in" a paltry dividend yield of 1.3%, but have subsequently seen one-third of your investment disappear in 2 1/2 months. That is an excruciating experience, but note that Apple's bonds are trading flat since October 3.

I focus on Apple's 5/2043 3.85% notes as the benchmark for the Cupertino giant's bond pricing. As of this writing they are quoted at 95.5 cents on the dollar, offering a yield of 4.14%, a nearly identical figure to that recorded on October 3. So, you would have secured nearly triple the yield by buying Apple bonds instead of its stock in October, and of course also avoided the unpleasant reality of riding the wave down in a crashing stock market.

I often communicate with investors who base their portfolio allocations on their love of tech -- self-driving cars, AI, neural networks, etc. By buying tech company bonds instead of holding onto their decaying stocks, you still maintain exposure to these disruptive technologies without assuming the risk of clearly creaking equity markets.

I'll go through the individual bonds -- and how to buy them if your advisor is totally clueless on any asset class other than U.S equities - next time, but my strategy entails buying bonds of companies that are household names.

Apple, Microsoft (MSFT) , Intel (INTC) , Oracle (ORCL) and Cisco Systems (CSCO) all have publicly-traded bonds that meet my investment criteria.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer manages as a charitable trust, is long AAPL, FB, AMZN, GOOGL, MSFT, and CSCO.

TAGS: Bonds | Corporate Bonds | Fixed income | Interest Rates | Investing | Treasury Bonds | Technology | U.S. Equity

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