Chief Investment Strategist, The Freeport Society
When my son was eight, he loved scary movies.
By the look on his face as he was watching the movie, he knew it was a bad idea… and that it would give him nightmares.
Yet he kept watching.
That’s how I feel when I look at today’s market.
I know it’s not sustainable.
I know this ends badly.
Yet I can’t stop watching.
The S&P 500 is trading at nearly 30 times earnings and three times sales. That makes it one of the most expensive markets in history. By the price/sales ratio, it is the most expensive.
Enthusiasm over AI is driving much of this.
I get it. I use AI daily. It’s changing the world… turning established industries upside down.
It’s wildly exciting.
We’re watching the stuff of science fiction become reality in real time.
But we’ve seen this movie before.
In the late 1990s, investors believed the internet would change the world.
They were right.
But then, as now, companies massively overspent on tech infrastructure like fiber optics, data centers, and servers.
And investors massively overpaid for growth.
In 1997, former investment banker Gary Winnick led a group of entrepreneurs to launch Global Crossing. The mission was to crisscross the world with a massive global network of undersea fiber optic cables.
By 2001, it had connected 200 major cities in 27 countries and laid an estimated 80,000 miles of cable.
But it wasn’t the only company doing this.
Before the turn of the century, companies laid 80 to 90 million miles of fiber-optic cable. That’s enough to loop around the Earth about three and a half times… or get you a third of the way to the moon.
The overcapacity reached an extreme.
The bubble eventually burst… in March 2000.
In the aftermath, the S&P 500 lost nearly half its value. The Nasdaq lost 78%.
The bear market of 2000-02 was one of the worst in history, bringing with it a nasty recession.
By 2002, only about 5% of the cables that had been laid were in use. The remaining “dark fiber” went unused for the better part of a decade until demand for video streaming from Netflix (NFLX) and YouTube took off.
Fast forward to today.
Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Meta (META) expect to spend a combined $364 billion in AI-related capital this year.
Across the broader “Magnificent Seven” group of tech giants – Microsoft, Alphabet, Amazon, Meta, Tesla (TSLA), Apple (AAPL), and Nvidia (NVDA) – more than $100 billion has already been spent on data center construction in just the 90 days.
It’s like we’ve learned nothing at all.
Does this mean you should dump your AI stocks?
No.
It’s still too early for that.
But it is time to find new investment themes to diversify into… ideally as far away from tech as possible.
So today, I’ll point to one of the first non-tech investment opportunities to consider in preparation for whatever comes next.
The Rotation Underway
Make no mistake, we are in the early stages of a market rotation, just like we witnessed in the last 1990s.
That market transformation – from 2000 to 2002 – was one of the most dramatic rotations in modern history.
After the dot-com bubble burst in March 2000, technology stocks – trading at astronomical valuations – collapsed. It wasn’t just speculative start-ups that suffered. Even high-quality firms like Cisco (CSCO) and Intel (INTC) saw their shares fall more than 70% as investors fled anything tied to tech growth.
But while the bear market mauled the tech sector, other corners of the market did just fine.
Value stocks, particularly those with strong balance sheets and steady earnings, outperformed.
The biggest winner of all was real estate.
Including dividends paid, the FTSE Nareit All REIT Index made 26%, 16%, and 5% in 2000, 2001, and 2002. And it chalked up gains every year through 2006.
$10,000 invested in these “boring” real estate stocks at the beginning of 2000 would have been worth $40,191 six years later… at a time when tech stocks were a dumpster fire. The same $10,000 invested in the Nasdaq would have been worth $5,900.
I can’t promise that real estate will be another four-bagger over the next six years… or that tech stocks will collapse to the extent that they did in 2000.
But I do know that, as was the case 25 years ago, real estate isn’t on most investors’ radars. Dirt just isn’t all that interesting in a market dominated by AI and cryptocurrencies.
That makes it interesting and potentially profitable to us.
In this month’s Freeport Investor, I share one of my favorite real estate plays.
It’s not a REIT or a real estate holding company. Rather, it’s a major landowner converting underused farmland into new suburban developments in some of America’s fastest growing cities.
The value of its current landholdings could conservatively be worth more than triple the current share price.
That means investors could enjoy gains galore as that mispricing is corrected.
To find out more, click here.
And make sure you have real estate on your radar from here on out.
To life, liberty, and the pursuit of wealth.