Tech is under the spotlight. FAANGMT capitulation has already started. Which means anything tech associated could come under selling pressure. And may I say the ones that have gone up leaps and bounds.
The tech downdraft has the potential to bring the other sectors down in unified correlation, but this is where what I previously told you about Fundamentals come into play. In the short term, fundamentally strong growth stocks that have great forward outlook may suffer a drawback but they bounce back strongly soon after. You cannot hold a fundamentally strong growth stock down if (1) it is not overvalued in the first place and (2) it is not directly associated as being a tech play in the first place.
The market is wiser now, I believe market participants are now more discerning. They are seeing what I said about the distinction between gold producers and gold juniors. While the former is more price sensitive to variation in daily gold price movements , the latter is not because its production is at best a year or two away from now and what is more important in determining a gold junior price outlook is the gold bull market staying intact and getting stronger from here into the years forward and in the shorter term, its mineralogy prospects.
Let us see if the tech beat up will bring down the other sectors in Wall St or market participants there are more discerning to let the overvaluation in tech to resolve itself without impacting the entire market. On Friday, bank stocks held pretty well while techs were beaten down, so if that is a gauge, we may not see an out-of-control spiral down, despite indices looking weak.
Again, FORGET THE DAMN INDICES, its the stocks you hold that count. If the indices fall and gold and selected growth stocks go higher, BBOZ will do well alongside the individual stocks I have and I would be smiling.
The 10 Most Beaten-Up Technology Stocks This Month
Sep. 19, 2020 4:58 AM ET
Harrison Schwartz
Conviction Dossier
Maximize returns and minimize risks with a powerful multi-asset strategy.
Summary
Technology stocks have been the big winners this year, but are now showing considerable signs of weakness.
The boom in technology may not be due to fundamentals, but a rise in Nasdaq-centric speculative interest in the options market.
Apple, Microsoft, and AMD are among the top 10 worst technology performers this month.
There are some potential pullback opportunities in technology, but high valuations make most a risky bet.
KLA Corporation may be the diamond in the rough with both a low valuation and strong growth.
Technology stocks have been all the rage most of this year with the Nasdaq 100 up nearly 25% since the year began and names like Apple (NASDAQ:AAPL) and AMD (NASDAQ:AMD) being 40-50% higher. There has also been a growing interest in speculation among many investors which may be partially driving technology companies. This is demonstrated through the rise in Google Trends relative search volume for the terms "QQQ" (the main vehicle used to trade Nasdaq) and "options trading".
See below:
(Google Trends)
As you can see, the search volumes for both terms are closely correlated. This gives weight to the theory that the bulk of option speculation is in fact in technology and growth stocks. Search volumes for both terms saw a large spike during the March crash and have stayed at a high level since. There has been a notable decline in search volumes for both terms in recent weeks corresponding to the sell-off in the Nasdaq 100.
Since September 2nd, the Nasdaq 100 has declined around 12% from its all-time high and recently broke below its support level of 11,000. Importantly, the weighted-average breakeven price of all call options on QQQ is currently at this level, meaning many of these options may expire worthless. This may mean an end to the growing speculation around technology stocks. The Top 10 Technology Losers
Regardless of whether or not we've seen the "big top" in technology, many once-expensive technology giants are trading at much lower prices than they were two weeks ago. I've found the top 10 worst performers among large-cap technology stocks from the popular tech ETF (XLK).
Without further ado, here are the ten biggest losers:
Overall, it is the subindustries that have seen the best performance this year such as software and semiconductors that are seeing the greatest losses. The software ETF (IGV) has had a great year with a 29% return YTD as well as the semiconductor ETF (SMH) at 21%.
Of course, with both software and semiconductors, it is those tied to new technologies such as 5G, cloud computing, and internet of things that are seeing the "best of the best" performance. This includes most of the companies above. Particularly, Apple, Advanced Micro Devices, and Synopsys.
Most of these stocks are considerably cheaper than they were two weeks ago, but that does not make them cheap. As you can see below, all but two have forward "P/E" ratios below 20X with some ranging above 50X:
Column 1
Column 2
Column 3
Column 4
0
{colgroup}
1
{col}{/col}{col}{/col}{col}{/col}{col}{/col}
2
{/colgroup}
3
Ticker
Forward EPS
Price
Forward Price-to-Earnings
4
AAPL
$3.25
$107.81
33.2
5
AMD
$1.10
$75.08
68.3
6
PYPL
$3.72
$174.65
46.9
7
CRM
$3.73
$241.89
64.8
8
KLAC
$11.35
$179.07
15.8
9
INTU
$8.44
$298.08
35.3
10
ADBE
$9.93
$463.59
46.7
11
NLOK
$1.35
$20.80
15.4
12
MSFT
$6.45
$199.66
31.0
13
SNPS
$5.55
$196.96
35.5
14
Average (Harmonic)
31.25
The average forward "P/E" in the fund is a high 31X. This is 50% higher than the forward "P/E" ratio of the S&P 500 as a whole. The most extreme are Salesforce and AMD which both have sky-high valuations, above 60X. Indeed, these companies have strong historical growth and are major players in ongoing technological innovation, but even Apple never had a forward "P/E" ratio that high.
As you can see below, both of those two companies saw large spikes over summer and are now slipping back down:
Data by YCharts
On the cheaper side, we have the semiconductor manufacturer KLA Corporation and the security software company NortonLifeLock. As you can see below, KLA corporation has had strong performance while Norton's has been very weak:
Data by YCharts
Norton is at a "cheap" valuation today, but the company has been struggling with growth for years, and it may be the case that its days as a security software leader are simply behind it. On the other hand, there may be a strong value opportunity in KLA Corporation which has both strong performance and a low valuation.
Looking Forward
The major question technology investors ought to ask is whether or not the years of outperformance are ending. Indeed, if the technology is removed from major indices, performance is considerably worse as seen in the Russell 2000 ETF (IWM), which holds much less of that sector than the major indices. Indeed, the price ratio of the technology large-cap ETF XLK and IWM signals that we are back in the 2000 tech bubble territory:
Data by YCharts
Looking closer, we can see that technology's outperformance record over the Russell 2000 has been awfully low over the past three months than in years prior. Indeed, the March crash in stocks may have been the peak period of technology's outperformance.
Sifting through the top 10 most beaten-down large technology stocks, we can see a few potential short-term pullback opportunities. Most notably in KLA Corporation and perhaps Microsoft. Still, my overall long-term view on technology is bearish. This is not because I don't love the new products, but because too many people love them and have pushed their stock prices to unreasonably high levels.
Overall, I firmly believe this is a good time for investors to be defensive and avoid technology companies with rampant speculative interest. They could continue higher, but as we've begun to see over the past two weeks, they also have tremendous downside potential.
Data by YCharts
Data by YCharts
Data by YCharts
