HP Inc. had the latest sales. pushing Wall Street estimates. Here, the HP Wireless Silent mouse.
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In 2020, tech stock valuations were led by FOMO – fear of losing out. Aggressive investors did not pay attention to overvalued signals, offering stocks with high income growth – such as
Glossary,
Avalanche,
DorasDash,
and
Airbnb.
GAAP’s strategy – growth at any price – led to expensive stocks, but FOMO kept them building a rally.
But that was then. Baird investment bank Ted Mortonson, a technology strategist, believes the new tech innovation is FOGK – fear of being killed. We’ll take a look at what’s happened and where investors can turn for shelter from the storm.
The sudden, widespread fall in technical stocks – the
Nasdaq Composite
down 7% over the last two weeks – eased with rising interest rates. Yield on 10-year Treasury notes has jumped to 1.54%, from 0.93% at the beginning of the year. As the rates go up, the emphasis is on high-priced technology.
David Readerman, who runs Endurance Capital Partners, a San Francisco-based technical hedge fund, notes that the discounted valuation of high-growth stock discounts is declining sharply in a rising environment. . That’s because the higher the rates go, the less future profits are worth in today’s dollars.
Most at risk, he said, are companies with very little cash flow and valuations tied to the termination value they see. That description fits much of the 2020 public-sector bidding class, particularly stocks such as
C3.ai
(ticker: AI) and
Avalanche
(SNOW).
Last week, we recorded 15 tech stock trades for at least 35 hours of forward trading, including Snowflake and C3.ai. At the end of Thursday, all 15 were down on the week, an average of 12.6%.
The problem is not just higher standards. It’s how fast they spin, according to Mortonson. Inflation indicators have pushed rates up faster than anyone expected.
“Higher entry fees can be seen at the table,” he wrote in an email.
Some of these costs come from the tech industry itself, with growing demand for 5G handsets, PCs, cloud-based servers, and heavy-duty cars leading to widespread chip shortages. Automated manufacturers have cut output for lack of parts, and PC manufacturers don’t have enough to meet demand.
Mortonson believes a new $ 1.9 trillion stimulus package – now going through Congress – is expected to hit some investors as “adding lighter beer to a wildfire fire . ”
As a result, investors are dumping expensive technical stocks and moving into economically – and rate-sensitive – sectors such as energy, financial services, business products and healthcare. Is the damage done? “Based on my 30 years of experience,” wrote Mortonson, “the answer is no. ”
He said Wall Street employment models may not yet account for higher labor costs in the coming quarters, including higher financing costs, higher prices for parts, and travel and entertainment budgets. return, among other things.
Dell Technologies
(DELL) CFO Tom Sweet warned investors last week that the 2021 operating margins would fall from 2020 levels, partly due to the renewal of employee benefits withdrawn at the darkest months of the pandemic last spring. (Dell stock was still accumulating on the strong fourth-quarter results.)
“There is still no real fear,” Mortonson said. “Investors’ panic must be felt to be at the root.”
Readerman suggests that technology investors hide in “deep value.” It is a celebration
HP Inc.
(HPQ), which posted fourth-quarter sales and profits last week that pushed Wall Street estimates. The PC and printer company bought nearly 5% of its market value in the most recent quarter alone, and expects to keep buying right – at least $ 1 billion per quarter. HP shares have more than doubled since March last year.
Despite the rally, HP shares are still trading at less than 10 fiscal 2022 non-GAAP profits.
Mortonson targets companies with key roles and scale, along with balance sheets to invest in R&D. Because of digital transformation, he recommends
Accenture
(ACN), the leading IT consulting and integration company, and
Twilio
(TWLO), which provides a suite of communication tools to many websites.
Paul Meeks, a portfolio manager of the Wireless Fund, loves semiconductor stocks, with a short chip supply even before the economic recovery began. He told me he is a memory chip maker
Micron technology
(MU) – featured in this column at the end of last year— “that’s probably my best opinion.”
Perhaps the big opportunity is in old-school technology – not only HP, but also Dell,
Hewlett Packard Campaign
(HPE),
IBM
(IBM),
Cisco Systems
(CSCO),
Oracle
(ORCL), and
Seagate Technology
(STX) – as information technology consumption picks up later in the year.
Of that group, all stocks trade less than five times sales and 15 times earnings. The real irony is that these stocks, which were released in the 2020 FOMO rally, are benefiting from the same leading cloud trends that have led the way like Snowflake and C3.ai. The cloud is not a lump of water – it is full of servers, disk drives, routers and switches. And the companies that make that stuff are a lot cheaper than the clouds themselves.
Write to Eric J. Savitz at [email protected]