The tech bubble is real, and it might affect your investment strategy
Just last week, I wrote a piece on the question "are tech stocks overvalued?" I came to the conclusion that there isn't a bubble in the tech sector, but that there doesn't seem to be much value either. In this interview, Vunani Capital's Gary Booysen argues that the tech sector is, in fact, looking pretty bubbly. According to him, valuations on tech companies look a little crazy, and analysts' recommendations are too uniformly positive to be grounded in reality.
If Booysen is right, and the tech sector is in bubble territory, then South African investors might be advised to think twice about whether or not they want to invest in US equities. The NASDAQ board is dominated by tech companies, and is thus probably a bad choice, and the S&P 500, while more diversified, is nevertheless home to a number of major tech companies. If you want exposure to US equity, but you want to avoid overvalued tech stocks, you might want to consider ETFs that track non-tech based indices. – FD
ALEC HOGG: Tech Stocks have seen a rebound on Wall Street but worries over inflated evaluations remain as the first quarter earnings kick off. Gary Booysen, from Vunani Capital is with us in the studio, again. We've just spoken to you a moment ago. Gary, before we go into Tech Stocks, what do you think of this recent interview? I know you were watching it.
GARY BOOYSEN: No, no, it seems very convincing but CEOs are always convincing. It's their job to sell their company and their vision; I think he did a good job of it.
ALEC HOGG: And the family is good at it and Phoevos was extremely interesting.
GARY BOOYSEN: It's nice to see, I mean obviously, opencast mining, platinum mining especially it does well. It does well; I mean if you look at Amplats, Mogalekwena. It does well. It's a fantastic asset for them to have. It's, like I said, if you've got a platinum price strike because of supply constraints. So, for underground mines it's the opencast ones that are going to make all the money, so it's probably one to watch. I'm going to go and, like I said, we looked at it very briefly but I mean it's one, I think I'm going to go and dig into and see if there maybe is an opportunity there.
ALEC HOGG: You want to look at the platinum side of the media sector, which is social media and technology stocks; this whole raft of new listings, we are now starting to see the results. What do you make of it?
GARY BOOYSEN: Yes, that, like I said earlier on, I think that is, you know specifically taking advantage of very-very extended valuations. I mean if you look at the NASDAQ, as a whole, it's not, you know which is obviously, pretty much tech and pharmaceutical, very heavy weight. I mean it's actually not particularly expensive, if you look at the median. So, if you look at the PE of the NASDAQ, the forward PE is only about eighteen times. You know, the current PE is only around 20, so it's not, I mean that's almost comparable with our Market. It's not necessarily massively inflated. But it's, if you look at those, in that…if you look at the NASDAQ, in the sort of top hundred Index, six of those have PEs of above a hundred. And when you're looking at Amazon on a PE of five-hundred, and, you know, sort of mid-five-hundreds, I mean now that, you were mentioning earlier, you know, "Can the human mind actually price in exponentiality?" That tells me it must be true because to go and pay, you know, five-hundred times earnings for Amazon, I mean you've got to assume that those are going to be pretty spectacular when they come through.
ALEC HOGG: But how do people do that? If you're an analysis and you're looking at Amazon now, you've got to say, "At this price it's worth buying." What kind of calculations do you put into your Excel spreadsheet?
GARY BOOYSEN: Yes, that's the thing; it becomes almost more art than science, because you don't have earnings to work with. You've got to say, "They could, potentially, buy this. They've got a massive amount of cash that they can invest and that would improve our recommendation." But it is interesting to look at the analysis, and then again, it is sort of I just did a quick quantum and ranked by analysis expectations, so these are sell-side analysis that come out with official target prices, etc. I mean, out of a hundred stocks there are only two companies in the NASDAQ 100 that have more sells than buys on it, so you can see that the analysis community is incredibly positive about the sector. I mean there's a huge amount of positive recommendation coming out. You know, that in itself, if you actually look at the med targets that those analysts are posting, I mean you're only looking at probably, you know, those are price targets; I mean over the next twelve months I think the stuff that's going to sort of accelerate the most. You're looking at probably six or seven stocks that are going to appreciate, share price wise, forecast, about thirty-five percent. So, I mean that's not, that's not enormous. It's not a huge share price appreciation for something that's valued at, you know, five-hundred times earnings. So for me it does, the Market does work fairly bubbly and I think that's why you're seeing these IPOs coming down. Obviously now as a trader, looking at that Market, it becomes very difficult because you suddenly, you don't have those fundamentals to say, "Oh, this is going to continue to make money." You're pricing in your future earnings. So when the Market does start to slide you start seeing the panic as investors just dump the stocks and I mean that's why I think the recent slide that we're talking about here, I think it was the worst since 2011, lost sort of six/seven percent in three days. But I mean some of the stocks are really getting slammed; you've seen Naspers sort of down twenty percent off its highs as well.
GUGULETHU MFUPHI: But having said that though Gary, are there any particular sweet Stocks that you've identified them?
GARY BOOYSEN: Yes, looking at, you know, it depends; it depends on your earnings. For us, I mean generally, it's the SAA trade, you know. It's the Samsung, Apple, Amazon, and all the… that's what a Hedge Fund Manager; there was a whole theme about those are the three Tech Stocks to sort of look at, and because of the rising incomes and how much are they going to have the access to the consumer. And it is something, you know, it's a theme you can look at and it's the reason that Amazon is trading on that crazy price earnings because it's a good story behind it.
ALEC HOGG: What about Google?
GARY BOOYSEN: Google, I mean also, you know, like Google, it's again; the actual median forecast for it is not particularly extent. I think it's about sixteen percent that you can expect from Google for the year. Overall, you know, it depends, android devices, I mean they're incredibly popular and it's about how these companies almost put their capital to work at the moment. I mean I also read an article, when you look at the likes of Apple and Google, and the amount of cash that they just have lying around, it's more than most countries. It's how they invest that that is how your investment is going to do.
ALEC HOGG: SAA Trade isn't that interesting. Not to be confused with the airline.
GUGULETHU MFUPHI: No, no Samsung, Amazon and Apple.
ALEC HOGG: The Government of South Africa seems to think it's a good investment, in SAA, because we keep putting taxpayers' money into it, don't they?
GUGULETHU MFUPHI: Unfortunately, but very quickly Gary, Naspers on a whole?
GARY BOOYSEN: Dangerous, because looking at the whole tech sector, you've had a breakdown through a long-term support line, or a Tech Line would look at it and say, "Kiss goodbye," which is it's come to a retest at break level, so that means the next movement down. Naspers, I think it's a good business but I think it's extended and I think if it does start to fall you are going to see a lot of panic, a lot of money pulling out of it very quickly. It can collapse as well, is what I'm saying, so for me, I mean, we were buying into the momentum. On this break, we're steering clear at the moment.
ALEC HOGG: High risk.
GARY BOOYSEN: High risk, definitely.
GUGULETHU MFUPHI: Well, we learnt a few things, "Kiss goodbye, SAA," gosh, Gary, you keep them coming.
GARY BOOYSEN: All jargon.
GUGULETHU MFUPHI: Thanks so much to Gary Booysen from Vunani.