Tech thrashing long overdue

Tue, Apr 15, 2014, 01:05

Tech stocks sporting sky-high valuations have been hammered of late, the Nasdaq recently suffering its worst three-day losses since November 2011.

The Nasdaq’s 7 per cent pullback doesn’t capture the true scale of the bleeding. Twitter is more than 40 per cent below its high. LinkedIn fell more than 20 per cent in a fortnight, as did Facebook, before both stocks rebounded somewhat late last week.

Amazon hit a low of $313 last week, almost a quarter below its January peak of $408, while other momentum stocks such as electric car maker Tesla as well as the entire biotech sector have also been pounded.

About time too. The Nasdaq 100 stocks that suffered the biggest declines had rallied an average of 134 per cent last year, according to Bespoke Investment Group.

Bloomberg notes the Nasdaq Composite Index trades on 32 times trailing earnings, compared to 17 for the S&P 500, while the 100 biggest Nasdaq companies trade 64 per cent above the S&P 500 relative to sales and 149 per cent relative to estimated revenue. Blackrock strategist Russ Koesterich notes the average biotech stock trades on a price/book ratio of more than seven, while “only the most creative metrics” can justify certain internet stock prices.

The go-go stocks may well race back to new highs, who knows? A good thrashing was well overdue, however.

Little evidence selling will spread
Some see the Nasdaq bleeding as a precursor to a broad market correction. For now, however, it looks more like a rotation out of overheated growth stocks and into better-valued sectors.

Even at last week’s low, the S&P 500 was barely 3 per cent off its all-time high. Typically, the Nasdaq volatility gauge is around 5 per cent higher than the S&P 500’s, but that has jumped to 35 per cent – the highest premium since 2007, indicating concerns remain confined to certain sectors.

The large-cap Dow Jones Industrial Average as well as major European indices were similarly subdued.

Tellingly, emerging markets, where value is most obviously present, saw equity inflows for the first time in 22 weeks.

Nor is there a rotation out of cyclical names – the Morgan Stanley Cyclical Index continues to look healthy.

It’s not even a full-blown rotation out of technology stocks – companies such as Microsoft and Cisco sporting low valuation multiples and decent dividends continue to do nicely.

So far, the market action looks like a move away from
last year’s big winners –
internet, social media and biotech names – and into areas of relative value, a trend likely to develop as the global bull market matures.

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