Where to find the best value plays in the beaten-up technology sector
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Investors are looking for reliable and stable returns, which has led to technology stocks falling towards multiyear lows. It is now 25.2% down from its highest levels and has seen its worst start in a single year. As tech stocks have tumbled, investors believe there are some values to be had in select areas while other parts of the industry will remain broken for a while. Alphabet, Amazon and other megacaps have seen their stock prices fall by 20%-30% this year. Snap’s profit warning decimated its stock, reducing its value by more than 40% on Tuesday. This has impacted tech stocks as well. Technology behemoths saw their value drop by more than $1 trillion over three days in May. This was due to investors abandoning growth stocks in favour of safer markets. UBS Friday stated that global tech earnings will grow at a lower percentage than its earlier mid-teens projection. UBS said that investors could use the current environment to rebalance their portfolios or increase exposure to top-quality companies in AI, cybersecurity and big information. The uncertainty over the Federal Reserve raising rates and rising inflation is responsible for much of the market volatility. While many stocks trade at low levels, it is not necessarily a good deal. Due to increasing costs, many companies are continuing to lose large sums of cash. This could lead to further losses. Dan Niles, Satori Fund, stated that “until the Fed stops raising rates, there is no way to know where the bottom is” and the valuations remain extremely high. Anybody who says a stock price is too low simply because it fell 50% or 75% from the highs of its previous peak will be wrong. The market where all these stocks trade remains extremely expensive. CNBC spoke to several prominent investors, who shared their ideas for finding value amid the current market volatility. Tech bellwethers’ and inflation signals Recent earnings outlooks, including Snap and Nvidia, show that there is less growth in the future. Snap experienced its worst trading week ever after warning it that it may miss the forecasts it made a few months ago. Snap’s rapidly declining outlook is a red flag for consumers spending. Gene Munster (Managing Partner at Loup Ventures) said that this reinforces his cautious attitude on technology in general. Munster keeps about half of his cash on hand because he believes there will be more market pain. We believe that there will be more bad news from companies when they report on their September and June quarters. He said that this belief had increased. He said that the problem lies at the bottom of it all, with inflation running at 40 year highs and the Federal Reserve trying to control it by increasing interest rates and slowing down demand. Munster is watching a basket of commodities — everything from oil and natural gas, to lumber, oats and orange juice — for signs that inflation’s chokehold is loosening. He said that this is “really at the heart, the essence, of what’s impacting consumers”. Munster anticipates investors to start investing in tech stocks this year after growth expectations have reset. Munster explained that by 2022 there would be too much negativity in tech stocks, and the pendulum will likely overcorrect. A lot of stocks within the sector trade at steep discounts on an forward price-to earnings basis. These are well below their historical average valuations for the past five year. Others are trading below their expected P/E as of the beginning 2022. The forward P/E for Alphabet is 18.6, compared to the average 25.6 in five years. Meta Platforms, on the other hand, trades at only 15.4 times forward earnings, against a 5 year average of 23.4. Its forward P/E was 23.6 at the beginning of the year. Nvidia’s forward P/E is 32.2. That’s a decrease of 57.8 and 39.8 respectively over the previous five years. Picking the right strategy For investors looking to make a play in tech but reduce risk, index funds may be a viable option. Niles is the founder of Satori Fund and is also its portfolio manager. However, Niles does own KraneShares CSI China Internet ETF – which trades at 62.2% below its 52 week high. This fund is home to big tech names like Tencent Holdings, JD.com, Alibaba Group, and Tencent Holdings. Niles explained that China is experiencing many issues, including Covid lockdowns which slow down technology company growth, and stepped up regulation. He suggested that shorts could be used to hedge positions in China. Niles stated that it was too risky for me to pick specific names as I can guarantee there is a Snap in the list of names we have bought. The rising cost of technology means that this decline in tech will continue. Even though the stock price of big-name corporations has fallen from its highs, this doesn’t necessarily mean that it’s a great deal. According to Bill Nygren, Oakmark Funds is more than just price-to earnings multiples. It also invests in value-tech businesses. Oakmark can adjust a company’s income statement to make long-term investments or grant credit to the company for cash on its balance sheet. “After you make those adjustments, those companies are selling at dramatic discounts to the S & P 500,” Nygren said. Paul Meeks is a portfolio manager for Independent Solutions Wealth Management. He looks for companies that have solid fundamentals, reasonable valuations, and are expected to increase earnings per share in the next year. Palo Alto Networks’ cybersecurity company and Arista Networks were among his picks. The stock of Palo Alto Networks is down by 9% compared to its peers on the Nasdaq. Arista Networks has seen a 26.4% drop in shares. While both stock are pricey, Palo Alto’s ability “special” to improve its outlook and grow despite the chaos in markets is what Meeks described. He’s also rediscovered old-school tech names like IBM and AT & T . Both companies are growing at attractive valuations, and both offer great dividend yields. Meeks stated that they also have younger CEOs which could be a catalyst for stocks, as these executives shift strategies. Waiting for earnings reports from companies before purchasing is another key strategy for bargain hunting. Meeks stated, “If there is even a smatter of a miss you are punished so harshly, so I wait.” I want them to be able to confess to their sins in the confessional, and then purchase Snap stock at 30%. Snap will not have to drop the previous day. Nvidia’s earnings were similar to Snowflake’s. The shares of the chipmaker dropped by more than 10% during extended trading, despite an earnings beat. Snowflake’s shares plummeted 16% in hours after receiving light operating margin guidance. Semiconductor stocks tumble as sector struggles with supply chain bottlenecks. The iShares Semiconductor ETF has fallen 21% and 23.4% since its high. Some are finding deals at these levels. According to Meeks, Advanced Micro Devices (Qiwi) and Micron Technology trade “dirt cheap.” AMD’s share price is now lower than it was at the beginning of this year. It is also 37.8% below its highest level and 38.8% away from its recent highs. Qualcomm, on the other hand is down 23.6% over the past year and just 27% off its 52-week peak. According to Meeks, “I’m not sure if anyone took a look at all the publicly traded stocks in tech companies worldwide if they could find any stock cheaper than Micron.” Micron currently trades at five times earnings, and has fallen 21.3% since last year. Munster supports Intel as a geopolitical investment. U.S. is looking for ways to increase domestic semiconductor production. He said that if Intel failed, there would be a greater problem for the U.S. because of its technology risk. For security purposes, advanced chips must be manufactured in large quantities in the United States. There is an Intel backstop, I believe. Intel shares fell 13.5% last year. There are many opportunities outside big tech Technology investors tend to gravitate towards big-name stocks such as Alphabet, Amazon, and Apple. Strong growth opportunities exist beyond the FAANG, semiconductor names. Munster has a number of top picks, including Intel and Take-Two Interactive Software. Shares in Take-Two have fallen by more than 29.2% over the course of this year. They also reached an all-time low 52 weeks ago. Munster stated that Grand Theft Auto’s maker has an important product cycle. Munster said, “It’s likely two-to three years away, but it will be the mother all of gaming upgrade cycles.” Video games have become a popular form of entertainment, but they are still cheap. Take-Two boasts a wide product selection that includes titles like “Bioshock”, “Civilization”, and “Borderlands”, and he believes it is “timeless.” David Neuhauser, Livermore Partners, also believes Take-Two is a good investment. The stock has fallen sharply since its peak. Neuhauser indicated that it has strong financials, solid leadership, and is likely to continue making money in the face of increased mergers, acquisitions, and consolidations. After Take-Two and Intel, Munster is now third in the list: Liberty Media Formula One – a streaming and content play. Formula 1 relies on contracted revenue to support its business. Munster stated, “When you consider this market and the uncertainty it’s nice having contractual revenue.” Formula One shares were up in this year’s decline of 1.9%. FAANG stocks and other big tech are worth looking at. The stock-price drop has also affected mega-cap tech firms, formerly known as “FAANG” shares. Many of these large names contributed to the 22.3% loss of 3,638.66 points in this year’s Nasdaq 100. Sid Choraria is a portfolio manager for SC Asia. He continues to place bets on Alphabet and Meta Platforms, which are high-growth stocks that generate a lot cash flow and great returns on capital. His comments were that they might fall in the near-term depending on how markets perceive the Fed or whether interest rates are raised too quickly. However, he stated, “Yes, they can decline in the immediate term if the Fed makes a mistake or inflation isn’t controlled, but this would allow us to keep adding to our position.” Choraria explained that while investors may be skeptical of Facebook’s parent company’s metaverse model for communication, they see value in countries like India, where WhatsApp has become a common mode of communication. The pandemic-dagger Zoom Video is also a priority for Choraria, who said that it’s more than just a Covid-19 beneficiary like Netflix, Shopify, and Peloton. Zoom is simple to use. It has strong markets in Southeast Asia. Businesses of all sizes can make savings by opting for Zoom as an alternative to travel. This year, the company’s share price has fallen 40%. Munster stated that his company’s view of mega-cap stocks like Apple was to treat these stocks as “foundational for how we live.” There is always a risk of macroeconomic instability so you may not want to invest in all these stocks. Apple’s exposure to so many market segments – from augmented reality to health care to automotive – gives it plenty of ways to grow, said Munster. While the bulk of Oakmark’s investments are in traditional value sectors like financials, energy and what Nygren describes as “anything with wheels” – in other words, autos, trucks and their suppliers – he has stood by picks in the tech sector, including some of the FAANG stocks. Oakmark has recently acquired Amazon. Oakmark recently added Amazon to its stock. It is currently down by 30% year-to-date and 39% from its 52-week peak. Nygren stated that an investor should value its Amazon Web Services company at the same price as other software-as-a-service companies. She will pay less for Amazon’s retail sales if she values it similarly to other software. According to Nygren, Netflix is half as valuable per subscriber than the HBO portion of Warner Bros. Discovery His statement was, “We find it difficult to believe that the gap exists due to fundamental differences between the companies.” Nygren, who also holds Workday and Salesforce shares, said they trade at a discount to software companies and that they “we believe they are substantially better than the average company in software.” Workday and Salesforce share prices hit 52 week lows this week. Both are down 41.9% and 35% respectively this year. Nygren explained that many tech stocks have “untethered” from the business value. He said that people became so used to the stock going up. Investors had a belief that you don’t need to worry about the price of a business if it was good. It will increase in price if it’s good. People who believed like this were always subject to a day in reckoning, and it seems that we are at that moment.
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