Nasdaq bargains: Now is the time to dive into tech titans

The world’s greatest technology stocks are in the bargain bin … it won’t be for long.

The Nasdaq is down 13 per cent from its November 19 high. Picture: Bloomberg

Investors have sold US technology stocks in droves. Scooping up some of those shares now might be a good move for those looking beyond the immediate term.

Institutional investors haven’t held such a small position in technology in more than a decade. According to a February survey by Bank of America, the share of fund managers that are underweight tech outstripped the percentage that were overweight by 10 percentage points. It was the lowest allocation to tech from survey ­respondents since August in 2006.

The net overweight percentage – the share of respondents who said they have more money in tech stocks than in the benchmarks used to track their performance – is down 10 points from last month’s survey, indicating investors have kept selling tech stocks.

They have been in sell mode for months. The tech-heavy Nasdaq Composite is down 13 per cent from its November 19 record high.

The main force behind the selling has been this year’s rise in the yields on long-dated US bonds, the result of expectations among investors that the US Federal Reserve will soon raise interest rates and start to reduce its bondholdings. Higher long-dated bond yields cut into the current discounted value of future profits – and many tech companies are valued on the basis of the earnings they are expected to pump out years from now.

It wouldn’t be a surprise if investors reallocate some money into the tech sector. Not only is a relatively small portion of investors’ portfolios concentrated in tech stocks, fund managers have raised cash as they reduced those holdings. Cash holdings are now 5.3 per cent of the average portfolio, up from 5 per cent last month, says Bank of America. That could make fund managers more tolerant of taking risk in tech stocks.

“Go long US tech,” Bank of America chief investment strategist Michael Hartnett wrote, suggesting the move as a “contrarian trade”.

One reason for investors to allocate their cash to tech over other sectors has arguably emerged. Tech valuations are now much lower: the Nasdaq is now priced at 27.4 times the aggregate per-share earnings the companies in the index are expected to bring in over the next year, compared with 32.7 times on November 19.

That interest would make sense at this point in the economic cycle. The expected Fed rate increases would be part of an effort to slow down inflation by reducing economic demand.

That plays to tech’s strength because many companies in the sector don’t rely much on strong economic demand for earnings growth.

Since 1994, S&P 500 tech stocks have outperformed – such as Apple, Alphabet (Google) Microsoft, Amazon and Meta (Facebook) – the broader index by an average of eight percentage points in the six months after the Fed makes its first rate increase in an economic cycle, according to Evercore investment bank advisory. They beat the index by an average of 13 percentage points in the 12 months following those first ­increases.

To be sure, bond yields could still rise a bit from here, so more selling in tech wouldn’t surprise anyone. But it may not be long before investors start getting interested in tech again.

This is an edited version of a feature which appeared in Barron’s.