It’s been a very painful few months for holders of tech stocks, and that means one should be actively thinking through an action plan o what do if once-hot momentum names in a portfolio are down 40%, 50%, 60%.
Part of that plan, pros argue, should include raising cash by selling losers while also eyeing potential buying opportunities amid steep drops.
“I think you should have a cash hoard,” tech investor and portfolio manager Paul Meeks of Independent Solutions Wealth Management said on Yahoo Finance Live (video above). “If you go into the sector at all, please, please be long-term focused. Say you wanted to invest a $1,000, maybe you go in five tranches of $200 each because I am not going to be able to pinpoint the recession.”
The selling pressure in the markets have been most acute in the tech space for a few reasons.
A man uses an Apple iPhone with a cracked screen to photograph the news Samsung Galaxy Watch during a Samsung product launch event in Brooklyn, New York, U.S., August 9, 2018. REUTERS/Lucas Jackson
For one, tech stocks tend to trade at richer valuation multiples relative to other areas of the market. With recession fears abound, traders are apt to sell high multiple tech stocks on fear future earnings and cash flow won’t justify heady valuations.
“I think it’s still too early to call the bottom in tech,” Meeks said. “If you’re a long-term tech investor, that’s pretty cool. But I would go in slowly and deliberately, maybe in four or five tranches over time. And I think we’re also entering a new era in which you really have to focus on more valuation-sensitive tech names versus some of the heroes of yesteryear in which valuations, frankly, didn’t matter.”
To that point, a rising interest rate environment effectively raises the cost of capital for tech companies that in many cases aren’t making money. Hence, losses often widen and that hits the stock prices.
Taken together, these factors give us the current tech wreck.
The Nasdaq Composite has now lost more than a third of its value since its all-time closing peak back in November and has shed 9.9% in the last month alone.
The former high-flying FAANG (Facebook, Amazon, Apple, Netflix and Google) complex has been hammered so far in 2022. All of the acronym’s components have shed more than double-digit percentages this year, led lower by a stunning 70% crash in Netflix.
“Unfortunately, it has been grizzly and I would like to tell a nice tale about a quick turnaround,” Meeks said about tech stocks, “but I can’t do that with all honesty.”