Are tech stocks safe to invest in again?
The tech-heavy Nasdaq is up 14% in the past two weeks — and markets have stabilized from a turbulent start to 2022. The question on everyone’s mind: Are tech stocks safe yet?
A recession could be good for growth stocks
Growth stocks fell once the Fed first hinted at higher interest rates last year — sending the growth-heavy Nasdaq Composite index down over 10% since November.
Value has outperformed growth these past few months — which David Spika, CIO of Guidestone Capital Management (via Institutional Investor) attributes to:
- “Value stocks performs the best when the economy is expanding”
- “Growth stocks tend to take over when the economy turns south”
Today, the economy is strong with low unemployment and strong consumer spending. It also shows signs of slowing, with growing recession fears — but not all economists expect one this year.
Per Spika, growth stocks are preferred when the economy slows — and thinks growth could outperform in the near-term.
Are tech stocks cheap enough yet?
For years, tech investors favored growth over profits. It didn’t matter if a company was losing 50c for every $1 in sales, as long as it kept growing over 50% each year.
But those dynamics have flipped and investors are prioritizing profits over growth. Between Nov. 2021 – Jan. 2022, software stocks with lower growth/higher margins outperformed higher growth/lower margins by a cumulative 33% (via Voss Capital):
- Valuations expanded: Software stocks were historically valued 4.5-7x sales — but tech stocks soared in 2017 and their valuations quadrupled.
- Still not “cheap” yet: Valuations are still 24-40% above historical average valuation multiples.
Dan Ives thinks tech stocks have likely bottomed but Voss isn’t ruling out further declines — and may “significantly increase” their exposure to software stocks if they fall another 20%.
Investors: Ways to invest in tech
Per Karen Firestone, CEO of Aureus Asset Management, investors can take several approaches to take advantage of the situation (via CNBC)
- Using indexes: Purchasing an S&P 500 index fund or a Nasdaq 100 index fund.
- Bargain hunting: Finding beaten down stocks with strong earnings and have lower price-to-earnings multiples than their pre-pandemic averages
Firestone would also focus on those that can grow sales at least 20% per year in the following 5 years.