Summary List Placement
What began as a sell-off among tech stocks on Monday spilled over into the rest of the market on Tuesday, with the Nasdaq down 2% at the market’s open and the Dow Jones Industrial Average following closely behind.
The headlines will tell you that the cause of the sell-off is rampant fear of inflation, and there’s certainly some truth to that. The big miss in the April jobs report last week, rising commodity prices, and growing concern over Wednesday’s forthcoming consumer price index report have all reignited the discussion around inflation and spurred investors to take profits.
But according to David Bahnsen, the sell-off has less to do with inflationary pressure and far more to do with the widespread overvaluation of tech stocks.
Bahnsen is the chief investment officer of The Bahnsen Group, a wealth-management firm with $2.8 billion in assets under management. He said he doesn’t believe that the recent sell-off is driven by inflation or any macroeconomic challenges but has rather been a “healthy re-rating of risk” that is just the latest in a long-running story in the tech sector.
“I think if we take a fuller perspective here, with value outperforming growth, the growth struggles in big and little tech, it’s really a six-month story,” he said.
Bahnsen notes that a lot of the well-known, high-growth names like Peloton, Salesforce, and Zoom that did very well during the pandemic have been falling off of their highs for the past few months. The same goes for Cathie Woods’ ARK Innovation ETF, which enjoyed impressive returns thanks to investments in high-growth tech stocks that exploded during the pandemic but has since pared back its gains.
In short, Bahnsen said, this isn’t some two-day outlier. This week’s sell-off, which took the Nasdaq 100 to its lowest level since March 31, is “part of a bigger story that is nowhere near over.”
Bahnsen said the sell-off is driven by overvaluation of high-growth stocks, and it will continue to play out until “valuations revert to the mean.” But given the extremely high valuations of many stocks, particularly in the tech sector, the reversion could take longer than anyone expects. The Nasdaq Composite traded at 26 times its projected earnings for the next 12 months even after the sell-off, according to Bloomberg data.
“Risk levels were too high, too complacent. This is not just healthy. The better word I’d use is inevitable. It had to happen.”
Bahnsen’s tips for investors
So what should investors do in the meantime?
Bahnsen says it depends on the investor. For the long-term investors holding high-growth tech stocks, he hopes they know that periods like this are the “price of admission,” and that “in order to stay invested long-term they have to ride out these different periods.”
As for investors with more of a moderate risk profile, Bahnsen warns that the tech sector is an area he’d want to be “very, very minimally exposed to right now.”
That’s not to say that Bahnsen doesn’t see any prospective investments in the tech sector — but his picks might not fit the to-the-moon style of investing that’s been so popular recently.
One company he likes is Cisco, mainly because “it’s hard to find a better balance sheet, business model, and cash-flow generation.”
Cisco’s success comes from a core business of providing Big Tech companies with the servers, switches, and routers, among other products, that they need to operate. But Bahnsen is particularly optimistic about the company’s recent conversion into an enterprise software subscription story.
Bahnsen says that companies like Cisco and IBM, with “billions of dollars in cash on the balance sheet and very healthy debt ratios” are the sort of stocks he’s looking for. Sure, Bahnsen said, these are “much older, less cool-type companies” than what most investors love to hear about.
“They’re not high-growth earnings stories, but they’re very dependable, boring stories that won’t let investors down over time.”