ProShares UltraPro QQQ ETF: Still Waiting On The Sidelines

Many investors have been looking to put money to work as the markets have continued to bounce lower in recent weeks. One of the more interesting options for tech investors is the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ). The ETF is designed to capture 3x the daily move of the underlying QQQ index. I have written about it several times, but I still haven’t been able to pull the trigger yet.

Investment Thesis

TQQQ is a good option for investors bullish on the megacap tech companies. It offers a levered upside if markets trend upward, as the largest components of the ETF are the largest companies in the world. Different investors have different time horizons, ranging from short to mid-term traders (1 to 6 months) to long-term investors with a time horizon of three years or more. I plan to put a tiny portion of my portfolio (less than 1%), with the hope that it will grow into a larger portion over several years. However, I’m not willing to bet on the short-term price action of broader markets, and I still haven’t seen the fear, capitulation, and margin calls that are my main sentiment signal to start layering into a position of TQQQ.

Apple and Microsoft

Apple (AAPL) and Microsoft (MSFT) are two of the highest-quality blue chips available to investors today. I sold my positions in late 2021 because the valuation didn’t lead to the conclusion that the forward returns would be similar to the past 3- and 5-year windows. However, the valuation still doesn’t leave a margin of safety in my opinion. I have written articles in the last couple of months explaining that opinion, and comments from investors who are still long and bullish disagree. Shares of both companies are down more than 20% YTD, but I still the valuation makes both companies a hold right now.

Amazon

Amazon’s (AMZN) 20:1 split came and went, and shares are trading slightly lower post-split. Amazon is a long-term holding of mine, and I’m still bullish on the company due to its growing AWS and advertising business segments and its margin profile that is bound to improve as those two segments grow into a larger portion of the business. They also have invested a significant sum into the expansion of the ecommerce in the last couple of years, and the operating cash flow is projected to expand significantly in the next couple of years. The company has a long-term history of innovating, and I think that the company’s market cap could grow significantly from its current market cap of 1.1T. Shares are down by more than a third YTD, but I think that the company is trading at an attractive valuation for long-term investors. If the selloff continues, I might add to my position.

Google, Nvidia & The Rest

Google (GOOG) is also down more than 20% YTD, and many investors have explained why it’s a buying opportunity. I can understand why with the valuation, but it’s just not a company I’m interested in owning. Their 20:1 split is coming soon, which might be a catalyst, but if Amazon is any indication, the market has bigger worries and might not get excited by a stock split. One of the companies that is a large component of TQQQ that has started to get interesting valuation-wise is Nvidia (NVDA).

Nvidia had a massive blow off the top near the end of 2021. I sold my position in the last half of 2021, half at 220 and the remainder at 330. I had owned shares for a while, and I’m not claiming to be a genius on this one. The shares were a result of the Motley Fool tech stock dartboard approach that I started with several years ago, and my investing approach has changed a lot since then. I had a couple of big winners as well as a couple of duds, but luck plays a role in investing, no matter how much research goes into the investing process. I sold just because the valuation, which was already rich to begin with, became a little ridiculous as shares went parabolical. Shares have started to get near a fair valuation, and I plan to write this one up in more detail at some point soon, as I think it could be worth a closer look after shares have been cut in half.

Meta Platforms (META), Tesla (TSLA), and the other large components of TQQQ have also sold off to varying degrees in 2022. While I have opinions that might not be fit for mainstream consumption on several of the largest companies in TQQQ, I think a couple are starting to get interesting from a valuation perspective. They all get near-constant coverage on Seeking Alpha, and I think that there are a lot of valuable insights from the steady stream of articles that you won’t get from a surface-level summary here on TQQQ.

The Biggest Reason Why I’m Waiting On TQQQ

Like many investors, I’m working to build up a retirement account and regular brokerage account that will generate solid returns for years to come. While I like the potential of TQQQ for long-term investors that have decent timing, I have been putting money to work the last couple of weeks in opportunities that I think have a better risk/reward profile than TQQQ. That has been primarily Altria (MO) in the last couple of weeks, but I have also been nibbling on Innovative Industrial Properties (IIPR) and NewLake Capital Partners (OTCQX:NLCP). All three have large dividends and I think double-digit returns are likely from a combination of growing dividends, multiple expansion, and increased earnings or FFO/share for the REITs.

Unfortunately, I have limited capital to work with, so TQQQ has ended up on the back burner for now. If we see another leg down, I will probably start nibbling on TQQQ. One piece of advice I would give is that investors shouldn’t buy their whole position at once. This applies to every stock, but especially a volatile investment like TQQQ. I will probably buy in quarters once I start buying, and I think it would make sense to buy in chunks, especially when double-digit weekly moves are routine for an ETF like TQQQ.

Conclusion

TQQQ is reserved exclusively for investors with a high-risk tolerance and a stomach for volatility. We have seen plenty of that in 2022, and my guess is that it will continue for some time. Of the largest components of the underlying ETF, I’m only bullish on Amazon at current prices, but the selloff has investors interested to varying degrees in several of the top 10 holdings of TQQQ. Valuations across the board are still pretty rich, and I think it’s possible that we could see declining earnings for several of the largest components in the coming months. When I see capitulation, fear, and margin calls start to happen, I might start nibbling on TQQQ, but it remains on the back burner for me for now.