Why a 20% Plunge In Tech Stocks Is a Buying Opportunity

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Tech stock valuations have reached such high levels that the sector may be due for a sharp pullback of 20%, says Paul Meeks, a veteran of more than 30 years in the tech field as an analyst, portfolio manager, and chief investment officer (CIO), in remarks on CNBC. “Because they’re so volatile high beta [risk] stocks, when they correct they don’t just go down 2 percent. They go down 20 percent,” as he told CNBC, adding, “It could happen at any time.”

Meeks nonetheless remains bullish on the sector despite these stocks’ wild swings. He says he would use a selloff of 10% or more as a buying opportunity to scoop up shares of Facebook, Inc. (FB) and others. “I’ve been covering the tech sector for a very long time, and I can say in my heart of hearts that the fundamentals relative to the other 10 sectors in the S&P 500 are as good as they’ve ever been,” he told CNBC, adding, “Fundamentally I like it.”

Big Advance

The S&P 500 Information Technology Index (S5INFT) has advanced by a robust 491% from its bear market low on March 3, 2009 through the close on March 12, 2018, versus a 300% gain for the S&P 500 Index (SPX) over the same time period, per S&P Dow Jones Indices. Given that the S&P 500 tech stocks are up by 37.5% over the past year, per the same source, a 20% pullback would leave investors with one-year gains of about 10%.

Meeks’ Shopping List

“Valuations are extended for some of the names, and everybody’s favorite names particularly the FANGs,” Meeks told CNBC. As mentioned, he indicated that FANG member Facebook is on his shopping list if prices decline though he did not say at what price. He already holds shares of Apple Inc. (AAPL), CNBC notes. (For more, see also: Amazon, Netflix Selling At ‘Crazy’ Prices Poised For Big Selloff.)

“I think some of the semiconductors have fallen and they haven’t gotten back up. But I think they’re some good opportunities,” Meeks also said. He mentioned Advanced Micro Devices Inc. (AMD) and Micron Technology Inc. (MU) in this vein. Technology fund manager Paul Wick is among those who see semiconductor stocks as a cheap way to ride some of the big secular trends in technology, even at current prices. Meanwhile, a number of companies in the sector may be acquisition targets. (For more, see also: Chip Stocks At Record Highs Still a Bargain.)

‘1990s Bubble Was MUCH, MUCH Bigger’

The tech-heavy Nasdaq Composite Index reached a new all-time high on March 12, but investors should note key differences with the Dotcom Bubble, according to Justin Walters, co-founder of research firm Bespoke Investment Group, as quoted by Barron’s. Looking instead at the Nasdaq 100 Index, Walters reminded readers that its trailing P/E ratio soared to an incredible 80 times earnings in 2001, while its valuation has remained below 30 during its current rally. In fact, as of March 9, its trailing P/E ratio was 27.25, versus 25.79 for the S&P 500, per The Wall Street Journal.

The S&P 500 tech sector had a forward P/E ratio of 18.6 as of March 1, compared to 17.0 for the entire S&P 500, per analysis by Yardeni Research Inc. The recent bottom for tech valuations was a forward P/E of about 11 in late 2008, at which time the S&P 500 had bottomed out at a forward multiple of about 10. During the Dotcom bubble, the S&P 500 tech sector’s forward P/E topped out at just below 50, according to Yardeni’s charts.

As far as price gains go, Walters also indicated that the Nasdaq 100 advanced by 1,223% during the Dotcom Bubble, more than double the 584% advance from its trough during the financial crisis through last week. “This isn’t to say that the current rally isn’t a bubble itself, but it does show that the 1990s bubble was MUCH, MUCH bigger,” he wrote, as quoted by Barron’s.