Op-ed: This is what investors misunderstand about tech stocks

Google announced last week that 60% of its workforce will be working in the office three days a week, 20% in new office locations and 20% from home.

David Paul Morris | Bloomberg | Bloomberg | Getty Images

If 2020 taught us that we are all naive about the possibility of a pandemic bringing the world to its knees, it has also taught us that we cannot exist without the interconnectivity that the giant tech companies offer.

Of course, this realization did not go unnoticed by the market, which was a good reward for technology stocks. The sector grew 47.5% over the year, and the average gain for the powerhouse group of Apple, Alphabet, Microsoft, Facebook and Netflix was 51.2%.

However, hot stocks can cool off, which was the case with some tech names like Amazon back in September as positive vaccine data turned investors’ attention to stocks that had been knocked down by Covid but would eventually emerge from hibernation.

Tech stocks were overlooked during the reopening of trading

In one form or another, “reopening” trading has dominated the US market since last fall, despite two spikes in February and again in April.

Experts routinely proclaim technology stocks to decline, forecast their ongoing underperformance, and cite the numerous reasons why this trend should continue.

Whether it’s higher interest rates, inflation, excessive valuations, or the growing start-up economy, the tech names are considered underdogs today.

Should they be?

My initial reaction isn’t statistical and gut based, which means it’s worth less than the screen it’s typed on: Almost everyone who thinks about the market today is very negative about technology stocks, which up to me feels like a bullish signal.

Different tech colors

A banner for Snowflake Inc. will be displayed on the occasion of the company’s initial public offering on the New York Stock Exchange (NYSE) in New York, United States on September 16, 2020.

Brendan McDermid | Reuters

A more differentiated look under the market roof reveals some important undercurrents.

The popular term “tech sector” generally encompasses a wide range of stocks in the official S&P tech group like Apple and Microsoft, but also the digital powerhouses Google and Facebook, both of which are located in the “communications services” space.

Tesla and Amazon are based in the consumer discretionary sector, which further shows that there is no simple homogeneous meeting place for companies whose technological innovations have produced their great success.

Bubbles that have accumulated in various groups like favorites Robinhood and Reddit have already partially popped up, and many stocks like Tesla, Snowflake, Teladoc, Zoom Video, Trade Desk and many others have fallen 30% to 50% from their peak .

At their peak in 2021, stocks that sold with valuations in excess of $ 10 billion – more than 14 times expected sales for the next 12 months – made market cap over $ 5 trillion, or about 10, according to FactSet % of the total US market. Despite their decline, the overall market has not imploded but has started these deals without major disruption.

Where technology giants are

The logos for Facebook, Amazon, Netflix and Google on smartphones and tablets

Jason Alden | Bloomberg | Getty Images

When we turn to the digital giants that the market sees as “Big Growth Tech”, including the FANGs and Microsoft, we see an interesting picture.

Just as they have underperformed for the past six months or more, consensus gains estimates for 2021 have accelerated between August 2020 and today. This implies that their price / earnings ratio has decreased due to both price declines and positive EPS adjustments.

The table below shows the estimated changes since last August and the resulting declines in P / E ratio today.

Tech Stock Price adjustments

2021 EPS SPORTS Price change from 01.09.20
TogetL 54% -10% 39%
FB 29% -17% 7%
MSFT 20% -11% 7%
AAPL 34% -27% -3%
Median 31% -14% 7%

The table above suggests that togetL, FB, MSFT and AAPL are certainly not as expensive on a measure (P / E) as they were last August, reminding us that the strength in 2020 wasn’t just based on multiple expansions as the The market cleverly anticipates an acceleration in profits. On average, expected earnings for these four companies have increased 31% since last August and their P / E ratios are down 14%, while the median price increase was 7% versus the 18% increase at S&P.

How do these changes compare to the value and reopening of stocks? We selected a group of different stocks from a number of sectors including airlines, hotels, retail and banking, and made changes to estimates from last August to the present day.

Reopening of stock price adjustments

2021 EPS SPORTS Price change from 01.09.20
OF THE -288% N / A 49%
TO DAMAGE -26% 83% 35%
BAC 41% 16% 63%
CAT 36% 23% 66%
M. 281% -29% 169%
DRI 32% 22% 61%
Median 34% 22% 62%

Earnings changes have been both up and down, but the P / E ratio of each name has increased significantly, with average price movement up 62% since late summer.

The big digital stocks (formerly “darlings” but not now) have gotten more attractive again, and some of the reopening / value / cyclical stocks are currently expanding. There are few arguments that the technology and communication services sector will grow faster in the long term than airlines, industrial companies and large banks.

However, the upward revisions and incredibly strong first quarter results for growth stocks, including Apple and Cohort above, weren’t enough to generate much buying excitement. This kind of market indifference can create buying opportunities.

Who can predict, but the big digital players could become the “value stocks” of the second half of 2021.

Karen Firestone is chairman, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to contemporary wealth management for families, individuals and institutions.

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