By Michael Brush, MarketWatch
Even as the stock market hits new highs, there’s discernible negativity toward the technology sector. That sets up the classic “wall of worry” for these stocks to climb — which makes them a buy.
Below, a few experts with great records in technology weigh in on the false fears, and offer some of their favorite names at the moment.
False fear No. 1: The earnings slowdown
Earnings growth at S&P 500 /zigman2/quotes/210599714/realtime SPX -3.37% companies will be sluggish at best for the first two quarters of this year. Performance is getting hit by a pullback in business activity and capital spending because of worries about the economy, trade wars, and Brexit. All of this hits sentiment on tech, one of the most economically sensitive groups.
But these worries are overdone, because the economic outlook is not that bad. “The U.S. economy appears to have stabilized after a shaky start to the year,” says Mark Zandi, chief economist of Moody’s Analytics. “President Trump may soon strike a deal with the Chinese to end his trade war with them, and that is lifting spirits.”
China’s use of monetary easing, tax cuts, and infrastructure spending appear to be kicking in. And the decision to delay Brexit has reduced the potential damage from a no-deal Brexit — at least until October.
False fear No. 2: Expensive unicorns
Unicorns — private companies worth $1 billion or more — aren’t what they used to be. They look overpriced, and it shows when they hit the market.
LYFT /zigman2/quotes/208999293/lastsale LYFT -7.82% , for example, fell 28% after it debuted in a March initial public offering. With SoftBank /zigman2/quotes/207137761/delayed SFTBY -2.38% leading the charge, there’s too much capital chasing too few names in the pre-IPO arena. “Some of the IPO valuations are hard to get your mind around,” says Eric Marshall, portfolio manager and head of research at Hodges Capital Management.
So while a lot of innovative tech companies are due to IPO this year, they won’t create the tech-sector buzz that IPOs normally generate. “Lyft has obviously cast a pall on everybody,” says Tom Vandeventer, portfolio manager of the Tocqueville Opportunity Fund /zigman2/quotes/204439204/realtime TOPPX -3.20% , which handily beats competing funds over the past three to five years, according to Morningstar. “Because unicorns are coming to the market later than normal, a lot of the returns have been realized by the private-equity investors.”
Read Scott Galloway: Lyft’s stock 1 year after IPO will be much, much lower
The pushback: He’s right. But does anyone really care, outside of the tech millionaires inside these companies, and their bankers? After all, more mature tech companies that have been public for a while will continue to generate interest by posting nice earnings growth.
Besides, IPOs are way overrated. You don’t have to participate in every one right away. In fact, a good strategy is to do the opposite and avoid them all until they turn into “busted IPOs” which means they trade significantly below their debut prices. This happens to a lot of IPOs, so it is worth being patient.
“You don’t have to buy on day one. You don’t have to buy in year one. Wait for the right moment,” says Kevin Landis who manages the Firsthand Technology Opportunities Fund /zigman2/quotes/203635118/realtime TEFQX -1.82% .This ability to be patient probably helps explain why his fund beats competing funds by 3.7 percentage points annualized over the past five years, and 2.7 percentage points over the last 10 years, according to Morningstar.
False fear No. 3: Rich valuations
Many investors worry that the hottest areas of tech — like software — look overvalued. But the fears are misplaced. “We are talking about companies that are growing their top lines at 25% to 40% and expanding their margins,” says Vandeventer. What explains this, in a fairly sluggish 2% growth economy?