Life can go back to normal for most people. But not for die-hard tech fans.
According to a recent survey of Bank of America fund managers. Fund managers were found to have the lowest allocation in terms of technology since 2003.
Tech has a growth problem. That seems strange, but it makes sense when you think it through. Cyclical companies in areas like energy, industry, and materials that fell into the doldrums during the pandemic are now experiencing a Phoenix-like reversal of happiness.
In contrast, sales and earnings for many technologies held up well during the pandemic. So the boost they’re getting from a recovering economy looks pretty hectic in relative terms.
“Many technology companies have seen strong growth due to COVID,” said Vlad Rom, senior investment analyst at Thrivent, a Minnesota-based money manager. He noted that the pandemic drove tech spending forward as companies looked for new ways to reach consumers and hold meetings.
“This was not the case with non-tech companies,” he says. Now that the economy is picking up, these non-tech companies are experiencing a major growth rebound. “A tech company that grew 30% last year will grow 30% this year. A non-tech company with zero growth last year will grow 50% this year. This is what many investors focus on. “
In other words, it’s about the cyclical trading you’ve heard so much about. “The incremental change for a more cyclical business looks better,” said Joseph Chin, an analyst at Cambiar Investors in Denver.
Another problem is that emerging tech companies – think of the recent IPOs – can expect big profit payouts in the distant future. You will be hit hard if investors fear rapid inflation will drive interest rates higher. This reduces the present value of future profits in valuation models.
In short, technology has fallen out of favor, which makes it a place to look for opponents like me. In fact, the technology has already recovered in the last few days of trading. The Nasdaq Composite
COMP, -0.01%
was down 8.5% on its most recent pull-out. As an S&P 500 index
SPX, + 0.12%
and the Dow Jones Industrial Average
DJIA, + 0.41%
The Nasdaq is flirting with all-time highs and is still down over 3%.
“Big tech looks very attractive today, especially given the recent underperformance,” said Todd Lowenstein, chief equity strategist at HighMark Capital Management. “It’s a unique opportunity to upgrade your portfolio to quality in big tech. This is the best value in the market today.”
Here are five reasons why.
1. Buy Insider
For my share letter (Brush Up on Stocks, link in bio below), I followed insiders every day for over a decade, and one thing is always clear: Insider buying from tech companies is extremely rare. But that has changed in the past few weeks – resulting in an unusually high volume of tech insider buying.
I just published an issue of my share letter dealing exclusively with technology for the first time and featured 10 names that look very attractive. I highlighted a few others in my letter earlier this month. I’ve picked out a few below. Bottom line: The widespread insider interest tells me that technology is a buy.
2. Tech’s “growth problem” will go away
The pandemic has generated widespread technical acceptance among companies. That makes year-over-year comparisons with tech in 2021 difficult, says Matt Miskin, co-chief investment strategist at John Hancock Investment Management. ‘But in 2022, we believe the road will underestimate technological growth compared to the overall market. We’d be opportunistic looking at technology for the next few months. “
3. Tech looks cheap
The graph below shows the relative value of S&P 500 technology stocks compared to the valuation of the S&P 500 itself. As you can see, tech’s price / earnings ratio has recently been averaging 1.24 times price – Profit multiples of the comp traded.
Leuthold
4. Tech has an advantage when labor costs rise
While businesses in retail, restaurants, hotels, and other service sectors will suffer from margins due to rising labor costs, technology companies typically don’t have this problem. They employ relatively fewer people.
“Perhaps the best way to tackle the uncertainty surrounding labor costs is through technology,” said James Paulsen, Leuthold Group’s chief investment strategist. “In the past, the relative investment performance of this sector has been largely unchanging for these pressures.”
5. Fears of interest rates and inflation have been overcome
Ironically, tech companies will come to the rescue – and literally save their own stocks. Why? Investments have risen sharply in the past year. This shows us that productivity will continue to increase. That makes it easier for companies Avoid passing higher labor costs on to consumers in the form of price increases.
“The long-term growth of this economy must be driven by productivity growth, and technology will be the key to creating that productivity,” says Miskin.
What to buy
The arms dealers in chips
Companies that make chips and chips look undervalued, says Chin of Cambiar Investors, highlighting Applied Materials
AMAT, + 0.67%.
He is worth hearing because his business owns the shares of his Cambiar Opportunity Fund
CAMOX, + 0.28%.
The fund outperforms its large cap value category and the Russell 1000 Value Index
RLV + 0.61%
up nearly 5 percentage points on an annualized basis over the past three years, Morningstar says.
Chin names four reasons Applied Materials prefer: the persistent lack of chips; the restructuring of chip manufacturing in the US; Demand for trends such as autonomous vehicles, artificial intelligence and data analysis; and competition among chip manufacturers to improve the computing power of chips. “We believe that Applied Materials and the industry are entering a phase of much higher growth,” he says.
“It will take another four to six quarters for supply to match demand and stock levels,” said Harlan Sur, an analyst at JP Morgan who has an overweight rating on Applied Materials, KLA
KLAC, -0.27%
and Lam Research
LRCX, + 1.20%
in chip equipment and some of the major chip manufacturers including NVIDIA
NVDA, -1.35%
and microchip technology
MCHP + 0.14%.
Names that insiders prefer
For the past few weeks I’ve suggested Microsoft
MSFT, -0.87%,
Intel
INTC, + 1.42%
and snowflake
SNOW, + 4.21%
in my share letter a little below current prices, partly because of the attractive insider buying, and I still like these names.
At the start of the great economic recovery, investors flock to growth regardless of the quality of companies. However, mid-cycle investors prefer high-quality tech names, says Lowenstein, who is characterized by high margins, stable earnings growth, and strong balance sheets.
“If you are looking for quality, you will be led to technology,” says Lowenstein.
This will benefit Microsoft in the area of cloud computing and software. Microsoft doesn’t look cheap, but the premium valuation is justified given its rapid growth, says JP Murphy analyst Mark Murphy.
Intel stocks have been held back by manufacturing issues, but now the stock looks relatively cheap relative to the market with a price-to-earnings ratio of around 12, said Hendi Susanto, portfolio manager and technology analyst at Gabelli Funds. “Intel fixes the problem,” says Susanto.
Intel will also benefit from strong chip demand and chip scarcity. “The industry is only 30% to 40% in the current upward cycle,” said Sur at JP Morgan.
Snowflake is all about data. That’s his mission. The company offers a product called Data Cloud that allows customers to share, explore, and unlock the value of data. A big part of the playing field is Snowflake helping customers break down data silos across different parts of hardware, apps, networks and clouds. BlackRock and MasterCard agree. They are customers of dozens of other Fortune 500 companies.
Security software company
The recent Colonial Pipeline ransomware attack, which resulted in widespread fuel shortages on the east coast, reminded us of the continuing need for better security software.
Gabellis Susanto prefers the firewall company Check Point Software Technologies
CHKP, -1.51%,
citing favorable valuations, high operating margins, and the prevalence of recurring revenue. Check Point is trading at 22 times the profit compared to more than 60 for security software company Palo Alto Networks
PANW, -0.14%.
RBC Capital Markets analyst Matthew Hedberg has an overweight rating on Palo Alto, which is partly due to the Colonial Pipeline ransomware attack and the “Sunburst” hack that hit corporations and governments last December, and the malware Indicates attack by Microsoft Exchange Server in March.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned SNOW. Brush suggested NVDA, MCHP, MSFT, INTC, SNOW, BLK, MA, and PANW in its stock newsletter. Refresh stocks. Follow him on Twitter @mbrushstocks.
