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Tech stocks are out of favor — 5 reasons to buy alongside the contrarians

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By Michael Brush

Todd Lowenstein is the equity strategist with The Private Bank at Union Bank.

Life may be returning to normal for most people. But not for die-hard tech stock fans.

Their stocks are among the least liked by other investors, according to a recent Bank of America fund manager survey . It found that fund managers have the lowest level allocation toward tech since 2003.

How can this be?

Tech has a growth issue. That seems odd, but it makes sense if you think it through. Cyclical companies in areas like energy, industry and basic materials caught in the doldrums during the pandemic are now seeing a Phoenix-like reversal of fortune.

In contrast, sales and earnings at a lot of tech held up OK during the pandemic. So the updraft they get from a rebounding economy looks sort of ho-hum, relatively speaking.

“Because of COVID, a lot of tech companies saw a lot of growth,” says Vlad Rom, a senior investment analyst at Thrivent, a Minnesota-based money manager. He noted that the pandemic pulled forward tech spending as companies looked for new ways to reach consumers and run meetings.

“This was not the case for non-tech companies,” he says. Now, as the economy picks up, those non-tech companies are seeing a big growth rebound. “A tech company growing at 30% last year will grow 30% this year. A non-tech company with zero growth last year will grow 50% this year. That is what a lot of investors are focused on.”

In other words, it’s all about the cyclical trade you’ve been hearing so much about. “The incremental change for a more cyclical business looks better,” says Joseph Chin an analyst at Cambiar Investors in Denver.

Another problem is that emerging tech companies – think recent initial public offerings – expect their big payoff in profits in the distant future. So they get hit hard when investors fear rapid inflation will send interest rates higher. This reduces the present value of future profits in valuation models.

In short, tech is out of favor, which makes it a place to shop for contrarians like myself. Indeed, tech has already been putting in a rebound over the past several trading days. The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.25% was down 8.5% peak to trough, in its recent pullback. As the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.41% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.29% flirt with all-time highs, the Nasdaq is still off over 3%.

“Big tech looks very attractive today especially given the recent underperformance,” says Todd Lowenstein, equity strategist with The Private Bank at Union Bank. “It’s a unique opportunity to upgrade your portfolio to quality in big tech, it’s where some of the best value is in the market today.”

Here are five reasons why.

1. Insiders are buying

For my stock letter (Brush Up on Stocks, link in bio below), I’ve tracked insiders daily for over a decade, and one thing is always clear: Insider buying at tech companies is exceedingly rare. But that’s changed in the past few weeks – which brought an unusually high volume of tech insider buying.

I just published an issue of my stock letter focusing solely on tech for the first time ever and featured 10 names that look very attractive. I highlighted several others in my letter earlier this month. I single a few out below. Bottom line: The widespread insider interest tells me tech is a buy.

2. Tech’s ‘growth problem’ will go away

The pandemic pulled forward a lot of tech adoption among companies. That makes year-over-year comparisons at tech look challenging as we move through 2021, says Matt Miskin, the co-chief investment strategist at John Hancock Investment Management. ‘But as we go into 2022, we believe the street is underestimating the growth in technology relative to the overall market. We would look opportunistically at tech in the next couple of months.”

3. Tech looks reasonably priced

The chart below shows the relative value of S&P 500 tech stocks compared to the valuation of the S&P 500 itself. As you can see, tech’s price earnings ratio was recently traded at its average 1.24 times the price earnings multiple of the comp.

/zigman2/quotes/210598365/realtime
US : Nasdaq
15,264.35
+37.64 +0.25%
Volume: 5.38M
Oct. 26, 2021 3:06p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
4,585.42
+18.94 +0.41%
Volume: 1.40B
Oct. 26, 2021 3:06p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
35,844.74
+103.59 +0.29%
Volume: 219.50M
Oct. 26, 2021 3:06p
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