{"id":8263,"date":"2019-09-30T15:37:03","date_gmt":"2019-09-30T15:37:03","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8263"},"modified":"2022-02-26T13:07:09","modified_gmt":"2022-02-26T13:07:09","slug":"the-case-for-long-term-tech-stock-ownership","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/the-case-for-long-term-tech-stock-ownership\/","title":{"rendered":"The Case for Long-term Tech Stock Ownership"},"content":{"rendered":"\n

It\u2019s no secret that technology stocks, led by FAANG,1<\/sup>\nhave been posting strong positive gains in this bull market. Investors probably\nhear about the outperformance all the time, which might lead you to reasonably\nconclude that technology stocks are not cheap. <\/p>\n\n\n\n

You\u2019d be right \u2013 technology stocks trade at more than a 10%\npremium to the broader market, which is significantly higher than the\npost-crisis 4% average. <\/p>\n\n\n\n

But in my view, a closer look shows that maybe technology\nstocks should <\/em>be trading at a higher\npremium, given that companies in the tech space are more profitable than the\nS&P 500 average. The current return-on-equity (ROE) for tech names is over\n30%, which is nearly double the average ROE for S&P 500 companies.2<\/sup>\nIf you look at technology companies through a lens of price-to-cash flow versus\nthe traditional price-to-earnings, the premium starts to make more sense. <\/p>\n\n\n\n

Because technology stocks are in high demand and trading at\na premium, they also tend to get beat up badly during market pullbacks. The\nsignificant market drawdown late last year \u2013 which was technically a bear\nmarket for a single day \u2013 wreaked disproportionate havoc on the FAANG names. The\nS&P 500 fell around -20%, but Facebook plunged -28.4%, Amazon -36.3%, Apple\n-37.2%, Netflix -40.2%, and Alphabet -20.2%. With the exception of Alphabet\n(Google), these declines are more in line with what we\u2019d expect from big bear\nmarkets.3<\/sup><\/p>\n\n\n\n

But that\u2019s also precisely why market pullbacks can boost the\ncase for long-term ownership of quality tech stocks. <\/p>\n\n\n\n

As I write, the S&P 500 is up approximately +20% for\n2019, but technology stocks as measured by the exchange traded fund IYW is up\nnearly +30%.4<\/sup> In short: Getting beaten up on the way down can often\ngive long-term investors attractive entry points. If you believe that there is\na strong case for secular growth in the technology sector \u2013 which I do \u2013 then\nit follows that high-quality technology companies with competitive advantages\nhave an opportunity to potentially deliver strong earnings growth for several\nyears to come. Market pullbacks just make them temporarily cheaper.<\/p>\n\n\n\n

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My Recommendation: Instead of Chasing Heat, Focus on Fundamentals!<\/a><\/strong><\/p>\n\n\n\n

Strong gains like those we see with\nFAANG and the tech sector can push some investors to \u201cchase heat\u201d and\nover-allocate to top-performing asset classes. In times like these, I still think it is best to stick a well-diversified\nportfolio. So instead of just focusing\non tech, focus on the hard data. To help you do this, we are offering all\nreaders a first look into our just-released October 2019 Stock Market\nOutlook report.<\/strong>
\n<\/strong> 
\nThis report will provide you with our forecasts\nalong with additional factors to consider:<\/p>\n\n\n\n