By Tim Mullaney
Bloomberg Enlarge Image
Pity the stock market, down some 4% since the S&P 500 Index closed at a record high of 1,891 on April 4. It’s an old game to mock Wall Street’s short-term obsessions, but the extant notion of a few down days being a new bear market is a doozy.
That said, lots of stocks have been hit much harder. According to Strategas Research Partners, at least 17% of S&P 500 stocks have pulled back 10% or more. Tech has its share of corrections that hurt, hitting even darlings like Netflix /zigman2/quotes/202353025/composite NFLX +2.07% (down 28%), Tesla /zigman2/quotes/203558040/composite TSLA +5.04% (20%) and Pandora (36%).
In an improving economy, tech’s bounce back isn’t a serious question — the issue is how to play it. Small investors should apply a two-fold screen: Is the company I’m eyeing either huge and dominant, or is it changing everything? Amid some chaff, plenty of tech’s current crop of companies embody genuine megatrends like cloud computing, green technology and health information technology. It’s nice if they also have cheap shares, but for truly disruptive or dominant companies, “cheap” is relative.
Here are picks that play on ideas that will still matter when the market stops panicking. If they’re expensive, there’s good reason. Some are getting downright reasonable.
The consumer rebound: Priceline
It’s hard to name two bigger consumer trends than the recovery from the financial crisis and developing nations’ move into the middle class. As a play on both, Priceline at less than 23 times earnings (after a 15% drop) is actually cheap. No major U.S. stock will gain more from a European consumer-confidence recovery than Priceline, which gets more than 80 percent of its earnings internationally. Rival online-commerce leaders Netflix and Amazon /zigman2/quotes/210331248/composite AMZN +2.49% are far pricier.
The green revolution: Tesla
There aren’t many bigger ideas than slashing fossil-fuel use. And with Tesla able to sell high-end cars faster than they can make them, especially in China, estimates that it will sell 35,000 cars this year are just the beginning.
Its stock is still at 115 times this year’s earnings, so skepticism is fair. But imagine Tesla selling 100,000 cars yearly for $50,000 each, rolling out cheaper models to expand their market and complement the Model S. Plug in the company’s target for margins in the low to mid-teens as a percentage of revenue, and my math says pre-tax cash profit hits $750 million in four years, probably less. In that light, the $25 billion valuation looks intelligently aggressive.
Promotional materials for Tesla’s giga factory to make electric-car batteries estimate that Tesla will sell 500,000 cars a year by 2020, so betting on 100,000 by 2017 is pretty conservative. Figure Model S sales near the current 1,000 a week, Model X sport-ute sales about the same (CEO Elon Musk recently endorsed those numbers, and both those cars will cost more than $50,000). Then figure that the Model E sedan, due around 2017, will target a segment where Audi, BMW and Mercedes sell almost a million A4s, 3 series and C classes a year. Pick Tesla’s share of that market — 10 percent, 25, whatever — and the case explains itself.
Health-IT: Castlight Health
I’ll stick up for a call from before the March 14 IPO of this health-care data company, which lets self-insuring companies contain health costs. I said Castlight /zigman2/quotes/201298689/composite CSLT +3.77% was worth more than the then-proposed $1 billion valuation. I was thinking $2 billion. Castlight zoomed to $4 billion after its IPO, and is now worth $1.5 billion. Right where I like it.
The horse Castlight is riding is tax penalties on so-called expensive, premium health plans, which take effect in 2018. The deadline will make Castlight grow as companies scramble to keep premiums under the “Cadillac tax” threshold, just as a similar legal deadline has propelled electronic medical-records companies.
Castlight may not work out: It’s very young and had only $13 million of reported revenue last year. But it has a $100 million contract backlog, health-care reform is a huge idea, and Castlight has much more room to grow than more mature EMR companies like Cerner /zigman2/quotes/209885277/composite CERN +2.71% .