Tech Stocks: Growth turned Safe Haven?
Large tech stocks have rebounded spectacularly in an environment where everyone is fully dependent on the wonders of the internet. The NASDAQ, which is heavily weighted to technology stocks, has outperformed the S&P 500 year to date by just under 14%, reaching an all-time high. Many analysts state that the market has been overstretched – with the Fed propping up the stock market and retail investors buying the dip. With regards to tech stocks, however, are these prices justified?
Tech Stocks – Premiums finally justified?
To keep it relatively simple, we’ll stick to the FANG stocks. If we take a look at their P/E Ratios over the past five years
We can see that Google and Netflix have historically traded at extremely bloated multiples, with Facebook and Apple trading at multiples relatively closer to earth. However, if we look at the current prices (as of 10th / 06 / 2020),
They are all currently trading below their average P/E ratio over the last 5 years. A bullish case could be made on the premise that if investors are consistently paying for their premiums even when their premiums were consistently questioned, would it not make sense that they have tentatively earned their bonus due to their ability to generate free cash flow during unprecedented times like these? If they were historically overpriced before the pandemic, would that suggest that they’re currently fairly priced? If we take it a step further – if they were priced reasonably due to their growth rate before the pandemic – would that suggest they’re currently underpriced?
Is that a tank or a Tech stocks’ balance sheet?
With central banks lowering interest rates to 0, the search for yield has become short of impossible. Furthermore, treasuries have not performed as well as gold as the ballast for a typical portfolio. The cash position with the likes Facebook, Amazon, Microsoft, and Google are reaching heights even Berkshire Hathaway has not seen, with Microsoft also having the covenant Triple-A rating on their bonds. Their ability to generate revenue regardless of the conditions alongside fortress-like balance sheet solidify their position as a haven in many portfolios. In a world where interest rates are low, stocks like the Apples and Microsoft’s provide a chance at a positive yield dividend and capital appreciation.
Not everyone is convinced in the Stock rally
PNC’s Financial Services Group, who amassed $14 Billion recently from the sale of its BlackRock stock, is waiting for valuations to cool off before putting their capital to use. Chief Executive Officer William Demchak stated that PNC “will be patient” and that “[the coronavirus] hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”
Are you joining the tech stock rally?
