Tech stocks are looking cheap after falling hard

The whole world is ignoring the pain of their falling tech stocks. But don’t ignore them for too long, the same ones you’ve been avoiding are starting to look cheap.

Finding value in the pain

Since the beginning of 2021, investors focused on stocks that benefited from economies coming out of lockdowns (retail, airlines, commodities). The rotation into value stocks led to tech stocks falling 30-50% amongst other factors.

Over the past month, many of these tech companies reported rising earnings — but their stocks remained relatively flat. Since Sept 2020…

• Big tech stocks (i.e. Google, Facebook, Apple and Microsoft) earnings increased 31% but their stock prices only rose 7%.
• Companies that benefited from reopenings had their stock prices rise faster than their earnings.

The higher their earnings rise (considering their stock prices don’t rise together), the cheaper their stocks will be. But does this mean value stocks are getting expensive? Not necessarily.

• According to Gavin Baker, managing partner of Atreides Management, growth stocks are getting increasingly attractive but still believe consumer cyclicals (i.e. those benefiting from a recovery) are still cheap.

Play the opposite game

Views on growth stocks have been so negative that it’s hinting at a bullish signal. The market works in cycles and the losers today could become tomorrows’ winners.

Before that happens, bargains can be found but investors should be careful — not all tech companies are the same as the market navigates through choppy conditions…

• Higher-quality companies with strong fundamentals are a safer bet.
• Speculative hype stocks might need to take a back seat.

Investors: Be prepared, the market won’t wait

According to Karen Firestone of Aureus Asset Management (via CNBC), increasing earnings but lacking investor interest could create buying opportunities.

Here’s how investors can prepare:

• It might be a good time to start sifting through your tech stocks watchlist again — in preparation to buy your favorite tech stocks at a discount.
• But don’t forget, the market has a few risks ahead of it (i.e. inflation and rising interest rates). Be defensive and focus on companies that have stronger earnings potential.

With several risks ahead, the ride back up will be anything but straight.