Is it time to pare back on tech stocks?

With Facebook dominating headlines, what should be investors' late-cycle strategy?

Is it time to pare back on tech stocks?

Mark Zuckerburg’s performance in the face of some probing – and often confusing – joint Senate committee questions gave Facebook stocks a welcome fillip yesterday.

The social media giant has been under fire since political analysis firm Cambridge Analytica managed to acquire the data of approximately 87 million Facebook users, causing its shares to drop 11% over the past month. However, according to investors, its much-lauded creator came out on top after day two of questioning, with stocks surging 4.5% to close at $166.32.

The recent headlines fed into the broader question of where investors stand on tech stocks at this stage of the expansion given controversies over user privacy and President Donald Trump’s targeting of Amazon.

Rob Edel, chief investment officer at Nicola Wealth Management, speaking before Zuckerberg’s interrogation, said tech plays into the strategic late-cycle thinking of moving from growth names to value. He believes that means investors should be wary of how much you have in technology despite the fact it’s done so well in the past.

This does not mean dismissing such heavyweights as Facebook and Amazon, Edel said, but it does mean investors should be paring back in this area.

He said: “It’s a valuation versus growth issue and then you start to look at specific names. Even a company like Facebook, its margins are 50% and it grows at 30% each year, and if you look at its valuation, it’s not a particular expensive stock.

“If you look at Apple, it’s actually quite cheap. So it’s not like it was in the late ‘90s. You look at what these companies are earning versus how much of the S&P the sector has, it’s more of an alignment now - and they have dominant franchises.

“We always debate Amazon and I think what they do is criminal; they put other retailers out of business by not making money and they get a free pass on that. But you look at what they’ve got and the franchise they’ve got, it’s persuasive and it’s a very attractive situation, so I certainly wouldn’t dismiss them. I think you certainly still need exposure in this area but I do think you have to be paring it back.”

Determining value, said Edel, is often a case of doing the math and the tech sector throws up some expensive options to shy away from.

He said: “There are some names that you look at and you just work out the math. This is what you had in the late 1990s as well.

“What would it take for them to justify that valuation compared to other normal sectors? They’d have to own the entire space and the math just doesn’t work; the valuation doesn’t make sense. They can’t possibly earn that much money.  So I think those are the names we look at and we just wouldn’t be there; it doesn’t make sense.”

 

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